<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 MARCH 31, 2000
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 73,688,379 shares of Common Stock of the registrant issued and
outstanding as of May 12, 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 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
MARCH 31, 2000
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 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 44
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 45
Item 2. Changes in Securities and Use of Proceeds 45
Item 3. Defaults Upon Certain Securities 45
Item 4. Submission of Matters to a Vote of Security Holders 45
Item 5. Other Information 45
Item 6. Exhibits and Reports on Form 8-K 46
SIGNATURE PAGE 47
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF JANUARY 18, 2000)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------------------- ------------------------------
2000 1999 2000 1999
----------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Net revenues $ 541,514 $ 614,710 $ 1,078,720 $ 1,287,390
Costs and expenses:
Salaries and wages 256,350 261,715 514,090 538,387
Employee benefits 56,544 62,185 112,751 110,287
Nursing, dietary and other supplies 31,427 30,528 64,848 63,880
Ancillary services 65,941 103,663 130,587 231,183
General and administrative 56,736 68,437 117,347 133,578
Insurance expense 23,681 13,482 43,145 32,908
Rent 23,586 26,723 46,275 53,719
Depreciation and amortization 14,807 32,525 25,637 63,109
Provision for bad debts 6,695 42,139 15,095 78,623
Indirect merger and other expenses 416 5,099 8,411 7,114
Loss (gain) on disposal of assets (793) -- 130 --
----------- ----------- ------------ --------------
535,390 646,496 1,078,316 1,312,788
----------- ----------- ------------ --------------
Operating income (loss) 6,124 (31,786) 404 (25,398)
Interest expense, net (Contractual interest
for the three and six months ended
March 31, 2000 was $62,093 and
$119,336, respectively) 6,903 46,927 60,014 91,213
----------- ----------- ------------ --------------
Loss before reorganization items,
income taxes and minority interest (779) (78,713) (59,610) (116,611)
Reorganization items 12,437 -- 12,437 --
----------- ----------- ------------ --------------
Loss before income taxes and minority interest (13,216) (78,713) (72,047) (116,611)
Provision for income taxes -- 500 -- 1,000
----------- ----------- ------------ --------------
Loss before minority interest (13,216) (79,213) (72,047) (117,611)
Minority interest (1,013) 460 (223) (165)
----------- ----------- ------------ --------------
Net loss $ (14,229) $ (78,753) $ (72,270) $ (117,776)
=========== =========== ============ ==============
Loss per share - basic and diluted $ (0.19) $ (1.07) $ (0.98) $ (1.61)
=========== =========== ============ ==============
</TABLE>
The accompanying notes are an integral part of these financial statements
1
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF JANUARY 18, 2000)
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
----------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 128,024 $ 71,817
Receivables, net of allowances of $94,796 and $87,066 324,420 307,571
Notes receivable, net 3,358 3,259
Supplies 20,607 22,866
Prepaid and other current assets 39,361 36,143
---------- ---------
Total current assets 515,770 441,656
Property and equipment, net of accumulated depreciation of $350,249 and $333,708 458,598 459,553
Goodwill, net 238,866 247,353
Restricted investments 51,409 69,188
Other assets, net 21,957 57,221
---------- ----------
$1,286,600 $1,274,971
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities of long-term debt $ -- $2,028,226
Accounts payable 81,658 134,829
Accrued compensation 139,691 111,395
Other current liabilities 83,362 113,121
---------- ----------
Total current liabilities 304,711 2,387,571
Liabilities subject to compromise 2,360,252 --
Long-term debt, net -- 113,618
Long-term insurance reserves 29,425 80,899
Other liabilities 50,681 78,902
---------- ----------
Total liabilities 2,745,069 2,660,990
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 5,000,000 shares authorized;
no shares issued -- --
Common stock, $.01 par value; 500,000,000 shares authorized;
73,688,379 shares issued 737 737
Capital surplus 980,952 980,952
Accumulated deficit (2,433,663) (2,361,393)
Accumulated other comprehensive loss (6,495) (6,315)
---------- ----------
Total stockholders' equity (deficit) (1,458,469) (1,386,019)
---------- ----------
$1,286,600 $1,274,971
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF JANUARY 18, 2000)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH 31,
-------------------
2000 1999
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(72,270) $(117,776)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Depreciation and amortization 25,637 63,109
Interest accretion on Senior Notes 11,282 10,408
Equity earnings/minority interest 223 165
Provision for bad debts 15,095 78,623
Loss on disposal of assets 130 -
Changes in operating assets and liabilities:
Receivables (31,944) (34,893)
Supplies 2,259 (7,400)
Prepaid and other current assets (3,218) 25,902
Accounts payable 17,422 (23,551)
Accrued liabilities and other current liabilities 94,553 (2,664)
Long-term insurance reserves (7,615) (14,693)
Other 140 (10,733)
-------- ---------
Net cash provided by (used in) operating activities 51,694 (33,503)
Cash flows from investing activities:
Purchases of property and equipment (19,605) (35,135)
Disposals of property, equipment and other assets 4,945 810
Restricted investments 17,779 13,063
Net collections on notes receivable 154 4,471
Other (382) (7,733)
-------- ---------
Net cash provided by (used in) investing activities 2,891 (24,524)
Cash flows from financing activities:
Net draws under prepetition credit line 12,702 125,619
Repayment of prepetition long-term debt (10,272) (8,382)
Deferred financing fees - (6,688)
Other (808) -
-------- ---------
Net cash provided by financing activities 1,622 110,549
-------- ---------
Increase in cash and cash equivalents 56,207 52,522
Cash and cash equivalents, beginning of period 71,817 3,314
-------- ---------
Cash and cash equivalents, end of period $128,024 $ 55,836
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR IN POSSESSION AS OF JANUARY 18, 2000)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
Mariner Post-Acute Network, Inc. (the "Company") provides post-acute health
care services, primarily through the operation of its skilled-nursing
facilities. As of March 31, 2000, the Company's significant operations consist
of (i) approximately 390 inpatient and assisted living facilities containing
approximately 46,000 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 and physician management operations, the majority of which
the Company plans to exit in the near future. The Company operates in 28 states
with significant concentrations of facilities and beds in seven states and
several metropolitan markets.
On January 18, 2000 (the "Petition Date"), the Company and substantially
all of its subsidiaries, including Mariner Health Group, Inc. ("Mariner Health")
and its subsidiaries, filed voluntary petitions (collectively, the "Chapter 11
Filings") in the United States Bankruptcy Court for the District of Delaware
(the "Bankruptcy Court") under Chapter 11 of Title 11 of the United States Code
(the "Bankruptcy Code"). The Company is presently operating its business as a
debtor-in-possession and is subject to the jurisdiction of the Bankruptcy Court
while a plan of reorganization is formulated (see Note 2). The Company's need to
seek relief afforded by the Bankruptcy Code is due, in part, to the significant
financial pressure created by the implementation of the Balanced Budget Act of
1997 (the "Balance Budget Act").
The accompanying condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and disclosures normally included in the
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the financial information included
herein reflects all adjustments considered necessary for a fair presentation of
interim results, and, except for the costs described in Notes 2 and 6, all such
adjustments are of a normal and recurring nature. Operating results for interim
periods are not necessarily indicative of the results that may be expected for
the entire year.
The accompanying condensed consolidated financial statements have been
prepared on a going concern basis which assumes continuity of operations and
realization of assets and liquidation of liabilities in the ordinary course of
business. The financial statements do not include any adjustments reflecting the
possible future effects on the recoverability and classification of assets or
the amount and classification of liabilities that may result from the outcome of
uncertainties discussed herein. The accompanying condensed consolidated
financial statements have also been presented in conformity with the American
Institute of Certified Public Accountants Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7").
The statement requires a segregation of liabilities subject to compromise by the
Bankruptcy Court as of the Petition Date and identification of all transactions
and events that are directly associated with the reorganization of the Company.
Pursuant to SOP 90-7, prepetition liabilities are reported on the basis of the
expected amounts of such allowed claims, as opposed to the amounts for which
those claims may be settled. Under an approved final plan of reorganization,
those claims may be settled at amounts substantially less than their allowed
amounts.
The Company's recent operating losses, liquidity issues and the
reorganization proceedings raise substantial doubt about the Company's ability
to continue as a going concern. The ability of the Company to continue as a
going concern and the appropriateness of using the going concern basis of
accounting is dependent upon, among other things, the ability to comply with the
terms of the Company DIP Financing (as defined), confirmation of a plan of
reorganization, success of future operations after such confirmation and the
ability to generate sufficient cash from operations and financing sources to
meet obligations.
4
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR IN POSSESSION AS OF JANUARY 18, 2000)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current period presentation.
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 quarter 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 and $2.6
million or $0.02 per share, respectively, and $0.04 per share for the three and
six months ended March 31, 2000, respectively, which is included in the income
statement classification "Depreciation and amortization expense."
NOTE 2 - PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
REORGANIZATION
As previously disclosed, on January 18, 2000, the Company, Mariner Health
and certain of their respective subsidiaries filed voluntary petitions for
relief under Chapter 11 of the Bankruptcy Code. The Company is presently
operating its business as a debtor-in-possession and is subject to the
jurisdiction of the Bankruptcy Court while a plan of reorganization is
formulated. As a debtor-in-possession, the Company is authorized to operate its
business but may not engage in transactions outside its ordinary course of
business without the approval of the Bankruptcy Court.
While the Chapter 11 Filings constituted a default under the Company's and
such subsidiaries' various financing arrangements, Section 362 of the Bankruptcy
Code imposes an automatic stay that generally precludes any 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.
In addition, under the Bankruptcy Code the Company may assume or reject
executory contracts, including lease obligations. Parties affected by these
rejections may file claims with the Bankruptcy Court in accordance with the
reorganization process. The Company is actively engaged in the process of
reviewing its executory contracts and final decisions with respect to assuming
or rejecting the contracts and the approval of the Bankruptcy Court are still
pending. In connection with the Chapter 11 Filings, the Company hopes to develop
a plan of reorganization that must be confirmed by the Bankruptcy Court
overseeing the Company's Chapter 11 Filings. However, no assurance can be given
regarding the timing of such a plan of reorganization, the liklihood that such a
plan will be developed, or the terms on which such a plan must be conditioned.
In connection with the Chapter 11 Filings, the Company obtained a
commitment for $100 million in debtor-in-possession 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") (see Note 4).
On January 19, 2000, the Company received approval from the Bankruptcy
Court to pay prepetition and postpetition employee wages, salaries, benefits and
other employee obligations. The Bankruptcy Court also approved orders granting
authority, among other things, to pay prepetition claims of certain critical
vendors, utilities and patient obligations. All other prepetition liabilities
are classified in the condensed consolidated balance sheet as liabilities
subject to compromise. The Company intends to pay postpetition claims of all
vendors and providers in the ordinary course of business.
5
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR IN POSSESSION AS OF JANUARY 18, 2000)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As previously disclosed, the Company and Mariner Health intend to develop
separate plans of reorganization (respectively, the "Company Plan of
Reorganization" and the "Mariner Plan of Reorganization" and collectively, the
"Plans of Reorganization") through negotiations with their respective key
parties including their respective senior bank lenders (the "Senior Lenders"). A
substantial portion of prepetition liabilities are subject to settlement under
each of the Plans of Reorganization to be submitted respectively by the Company
and Mariner Health. Each of the Plans of Reorganization must be voted upon by
each impaired class of creditors of the Company for the Company Plan of
Reorganization and Mariner Health for the Mariner Plan of Reorganization and
approved by the Bankruptcy Court for both Plans of Reorganization. There can be
no assurances that the Plans of Reorganization will be approved by requisite
holders of claims, confirmed by the Bankruptcy Court, or that either or both
Plans of Reorganization will be consummated. If the Company Plan of
Reorganization is not accepted by the required number of impaired creditors and
equity holders and the Company's exclusive right to file and solicit acceptance
of a plan of reorganization ends, any party in interest may subsequently file
its own plan of reorganization for the Company; the same is true for Mariner
Health if the Mariner Plan of Reorganization is not accepted by the required
number of impaired creditors and equity holders and Mariner Health's exclusive
right to file and solicit acceptance of a plan of reorganization ends. A plan of
reorganization must be confirmed by the Bankruptcy Court after certain findings
required by the Bankruptcy Code are made by the Bankruptcy Court. The Bankruptcy
Court may confirm a plan of reorganization notwithstanding the non-acceptance of
the plan by an impaired class of creditors or equity holders if certain
requirements of the Bankruptcy Code are met.
LIABILITIES SUBJECT TO COMPROMISE
"Liabilities subject to compromise" refers to liabilities incurred prior to
the commencement of the Chapter 11 Filings. These liabilities, consisting
primarily of long-term debt and certain accounts payable and accrued
liabilities, represent the Company's estimate of known or potential prepetition
claims to be resolved in connection with the Chapter 11 Filings. Such claims
remain subject to future adjustments based on negotiations, actions of the
Bankruptcy Court, further developments with respect to disputed claims, future
rejection of executory contracts or unexpired leases, determination as to the
value of any collateral securing claims, treatment under the Plans of
Reorganization and other events. Payment terms for these amounts will be
established in connection with the Plans of Reorganization.
A summary of the principal categories of claims classified as liabilities
subject to compromise at March 31, 2000 are as follows (in thousands):
Long-term debt:
Senior credit facilities:
Revolving Credit Facility $ 168,732
Term Loans 743,000
Mariner Health Senior Credit Facility 233,834
Mariner Health Term Loan Facility 192,439
Deficiency Note 26,486
Mortgage Notes 47,626
Other notes payable 81,774
Subordinated debt:
Senior Subordinated Notes 274,039
Senior Subordinated Discount Notes 215,285
Mariner Health Senior Subordinated Notes 103,130
---------
2,086,345
6
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR IN POSSESSION AS OF JANUARY 18, 2000)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Capital lease obligations 66,707
---------
2,153,052
Accounts payable 70,593
Accrued interest 84,616
Other accrued liabilities 83,480
Deferred loan costs (31,489)
---------
$2,360,252
==========
Approximately $2.4 billion of liabilities subject to compromise would have
been classified as current liabilities if the Chapter 11 Filings had not been
filed.
In accordance with SOP 90-7, the Company has discontinued accruing interest
relating to its debt facilities currently classified as liabilities subject to
compromise effective January 18, 2000. Contractual interest for the three month
and six month periods ended March 31, 2000 was $62.1 million and $119.3 million,
respectively, which is $49.9 million in excess of interest expense included in
the accompanying financial statements.
NOTE 3 - INDIRECT MERGER AND OTHER EXPENSES
For the six months ended March 31, 2000, indirect merger and other expenses
totaled approximately $8.4 million and included approximately $5.5 million of
costs incurred to outside professionals related to the Company's defaults in
connection with its indebtedness prior to the Petition Date, approximately $2.2
million of costs incurred and paid related to the Mariner Health Merger and $0.7
million of other expenses.
For the six months ended March 31, 1999, indirect merger and other costs
totaled approximately $7.1 million related to the Mariner Health Merger.
NOTE 4 - DEBT
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."
As of March 31, 2000, outstanding indebtedness under the Revolving Credit
Facility was $168.7 million which excluded approximately $5.2 million of letters
of credit. In addition, $271.4 million of the Tranche A Term Loan
7
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR IN POSSESSION AS OF JANUARY 18, 2000)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Facility, $235.8 million of the Tranche B Term Loan Facility, and $235.8 million
of the Tranche C Term Loan Facility were outstanding.
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.
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 is 2.75% for loans under the ABR and 3.75% for Eurodollar
loans. The applicable interest rate margin for Tranche C Term Loans is 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 ended December 31, 1999. As of
March 31, 2000, the interest rates for loans made under the Senior Credit
Facility were 10.75% for Revolving Loans and Tranche A Term Loans, 11.75% for
Tranche B Term Loans, and 12.00% for Tranche C Term Loans. Any interest owing
after January 18, 2000 is subject to allowance under the Bankruptcy Code.
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. At March 31, 2000, 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. Based on the financial covenant defaults and the
Chapter 11 Filings described in Note 2 the Senior Credit Facility is classified
as a current obligation at September 30, 1999. At March 31, 2000, the Senior
Credit Facility is classified as an liability subject to compromise. Due to the
covenant violations, the Company is not permitted to borrow additional cash
under the Senior Credit Facility.
SENIOR SUBORDINATED NOTES
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 September 30, 1999. At
March 31, 2000, the Notes have been classified as a liability subject to
compromise.
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. 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) provide additional financial covenant flexibility for Mariner
Health and its subsidiaries, (c) increase the applicable interest rate
8
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR IN POSSESSION AS OF JANUARY 18, 2000)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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) modify certain of the
operating covenants, and (e) 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%. As of March 31, 2000, approximately $233.8 million of loans and $8.1
million of letters of credit were outstanding under the Mariner Health Senior
Credit Facility.
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 March 31, 2000, the interest rate for loans made under the Mariner Health
Senior Credit Facility was 12.25%.
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 collateral to secure the Company's obligations in connection with the
Senior Credit Facility and the Synthetic Lease (as defined).
Contemporaneously with the effectiveness of the Mariner Health Senior
Credit Facility Amendment, Mariner Health entered into a term loan agreement
(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"). 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 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 March 31, 2000,
approximately $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. 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.
Since March 31, 1999, Mariner Health has been in default of certain of the
financial covenants contained in the Mariner Health Senior Credit Facility and
in the Mariner Health Term Loan Facility. 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
9
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR IN POSSESSION AS OF JANUARY 18, 2000)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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. 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. Based on the covenant
defaults and the Chapter 11 Filings described in Note 2 the Mariner Health
Senior Credit Facility and the Mariner Health Term Loan Facility are classified
as current obligations at September 30, 1999. At March 31, 2000, the Mariner
Health Senior Credit Facility and Mariner Health Term Loan Facility are
classified as liabilities subject to compromise.
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. Accordingly, the Mariner Health Senior Subordinated
Notes are classified as current obligations at September 30, 1999. At March 31,
2000, the Notes have been classified as an liability subject to compromise.
Approximately $46.7 million of the Mariner Notes are owned by the Company (see
"-Deficiency Note" below).
DEFICIENCY NOTE
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
10
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR IN POSSESSION AS OF JANUARY 18, 2000)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 September 30, 1999. At March 31, 2000, the
Deficiency Note has been classified as an liability subject to compromise.
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 March 31, 2000.
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 due 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. Any interest owing on account of the Omega Note
after January 18, 2000 is subject to allowance under the Bankruptcy Code.
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
11
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR IN POSSESSION AS OF JANUARY 18, 2000)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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
March 31, 2000, the Omega Note is classified as a liability subject to
compromise.
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 the
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
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.
On May 10, 2000, the Bankruptcy Court entered an order approving a
settlement agreement (the "HRPT Settlement") that provided for a further
restructuring of the HRPT relationship. Under the terms of the HRPT Settlement:
(a) the Company will obtain fee simple ownership of five of the HRPT facilities;
(b) the leases with respect to the other facilities and related personal
property will be assigned to affiliates of SPTMNR; (c) a note with a balance of
approximately $0.9 million will be extinguished; (d) SPTMNR will retain the $15
million deposit and the shares of HRPT and SPTMNR stock; and (e) the Company
will manage the facilities transferred to the SPTMNR affiliates during a
transition period that is expected to last less than six months. Upon
termination of the management arrangement, the Company will have no further
relationship with or obligations to HRPT or SPTMNR with respect to the HRPT
Agreements. In addition, the HRPT Settlement releases the Company and the
subsidiaries of the Company having an ownership interest in Tenant Entities from
its unlimited guaranty to HRPT. Instead, HRPT is allowed to make a claim of up
to $1.2 million, which amount may be offset against payments made to the Company
in relation to the management arrangement under the HRPT Settlement.
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.
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
12
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR IN POSSESSION AS OF JANUARY 18, 2000)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
in principal amount at any time outstanding under the Company DIP Financing
established pursuant to that certain Revolving Credit and Guaranty Agreement
dated as of January 18, 2000 (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") approving up to $50.0 million of the Company DIP
Financing. On March 20, 2000 the Bankruptcy Court approved a final order (the
"Final Company DIP Order,") increasing the approved portion of the Company DIP
Financing to the full $100.0 million amount. As of March 31, 2000 the Company
had no amounts outstanding 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 Final DIP, 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. 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 Final 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 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 Final 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 are 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 "Final 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
13
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR IN POSSESSION AS OF JANUARY 18, 2000)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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
Final DIP Order, the Final 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 or 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 and to operate as a going
concern.
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 up to $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 time
exceed the maximum borrowing amounts established for the Mariner Health Debtors
under the February 16 Mariner Health DIP Order entered on February 16, 2000 by
the Bankruptcy Court. 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 March 31, 2000, there was no amounts
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.
14
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR IN POSSESSION AS OF JANUARY 18, 2000)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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, or (vi) 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 accounts 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 February 16 Mariner Health DIP Order, 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 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 February 16 Mariner Health DIP Order 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
February 16 Mariner Health DIP Order, 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
15
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR IN POSSESSION AS OF JANUARY 18, 2000)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 and to operate
as a going concern.
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.
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.
NOTE 6 - REORGANIZATION ITEMS
Reorganization items consist of income, expenses and other costs directly
related to the reorganization of the Company since the Chapter 11 Filings.
Reorganization items included in the statements of operations for the three and
six months ended March 31, 2000 consist of the following (in thousands):
Professional fees $ 8,442
DIP financing fees 2,852
Other reorganization costs 1,425
Gain on settlement of prepetition accounts payable (189)
Interest earned on accumulated cash resulting from
Chapter 11 Filings (93)
-------
$12,437
=======
16
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR IN POSSESSION AS OF JANUARY 18, 2000)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 7 - EARNINGS PER 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":
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ --------------------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Numerator for basic and diluted loss per share:
Net loss $(14,229) $(78,753) $(72,270) $(117,776)
======== ======== ========= =========
Denominator:
Denominator for basic loss per share -
Weighted average shares 73,688 73,333 73,688 73,319
Effect of dilutive securities - stock options - - - -
-------- -------- --------- ---------
Denominator for diluted loss per share -
Adjusted weighted average shares and
Assumed conversions 73,688 73,333 73,688 73,319
======== ======== ========= =========
Basic and diluted loss per share:
Net loss per share $ (0.19) $ (1.07) $ (0.98) $ (1.61)
======== ======== ========= =========
</TABLE>
The effect of dilutive securities for the three and six months ended
March 31, 2000 and 1999, respectively, has been excluded because the effect is
antidilutive as a result of the net loss for the period.
NOTE 8 - 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
17
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR IN POSSESSION AS OF JANUARY 18, 2000)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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
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, ss. 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
18
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR IN POSSESSION AS OF JANUARY 18, 2000)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 Chapter 11 of the United States Bankruptcy Code and more
particularly, ss. 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. ss. 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
19
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR IN POSSESSION AS OF JANUARY 18, 2000)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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-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 filed the necessary
motion with the Bankruptcy Court seeking approval to assume this contract on a
postpetition basis. On March 30, 2000, the Bankruptcy Court approved the
assumption of the leases and the Agreement.
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.
20
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR IN POSSESSION AS OF JANUARY 18, 2000)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 9 - SEGMENT INFORMATION
The following tables exhibit the segment reporting of the Company for the
three and six months ended March 31, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ----------------------
2000 1999 2000 1999
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues from external customers:
Nursing home services $472,861 $478,456 $ 944,290 $ 983,629
Pharmacy services 62,554 70,180 128,397 147,916
Other 6,099 13,787 6,033 28,460
Therapy (segment disposed of) - 52,287 - 127,385
-------- -------- ---------- ----------
$541,514 $614,710 $1,078,720 $1,287,390
======== ======== ========== ==========
Intersegment revenues:
Nursing home services $ 6,057 $ - $ 6,057 $ -
Pharmacy services 12,920 14,979 26,261 24,870
Other 72 (1,244) 143 1,332
Therapy (segment disposed of) - 37,607 - 77,928
-------- -------- ---------- ----------
$ 19,049 $51,342 $ 32,461 $ 104,130
======== ======== ========== ==========
Net income (loss):
Nursing home services $ 49,520 $ 28,126 $ 84,718 $ 53,727
Pharmacy services (155) 5,099 (2,866) 12,218
Other 590 (666) (985) 183
Therapy (segment disposed of) (423) 1,625 (1,371) 984
-------- -------- ---------- ----------
$ 49,532 $ 34,184 $ 79,496 $ 67,112
======== ======== ========== ==========
MARCH 31,
2000
----------
Assets:
Nursing home services $1,053,831
Pharmacy services 117,791
Other 98,444
Therapy (segment disposed of) 30,638
----------
$1,300,704
==========
</TABLE>
21
<PAGE>
MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
(DEBTOR IN POSSESSION AS OF JANUARY 18, 2000)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following tables reconcile the Company's segment reporting to the
totals on the Company's condensed consolidated financial statements for the
three and six months ended March 31, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- ----------------------
2000 1999 2000 1999
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
External revenues for reportable segments $541,514 $ 614,710 $1,078,720 $1,287,390
Intersegment revenues for reportable segments 19,049 19,049 32,461 104,130
Elimination of intersegment revenue (19,049) (19,049) (32,461) (104,130)
--------- --------- ---------- ----------
Consolidated revenues $541,514 $ 614,710 $1,078,720 $1,287,390
========= ========= ========== ==========
Net income (loss):
Net income (loss) for reportable segments $ 49,532 $ 34,184 $ 79,496 $ 67,112
Corporate overhead (63,761) (112,937) (151,766) (184,888)
--------- --------- ---------- ----------
Consolidated net income (loss) $(14,229) $ (78,753) $ (72,270) $ (117,776)
========= ========= ========== ==========
MARCH 31,
2000
----------
Assets:
Assets for reportable segments $1,300,704
Corporate overhead 1,414,250
Elimination of intersegment assets (1,428,354)
----------
$1,286,600
==========
</TABLE>
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FIANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
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 March 31, 2000, the Company's significant operations consist
of (i) approximately 390 inpatient and assisted living facilities containing
approximately 46,000 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 and physician management operations, the majority of which
the Company plans to exit in the near future. The Company operates in 28 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 had exited this line of business
as of March 31, 2000), and (iv) operated more than thirty home health, hospice
and private duty nursing branches in seven states (only one of which is still
operated by the Company and is in the process of being divested)(the "Divested
Businesses"). 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.
On January 18, 2000, the Company and substantially all of its
subsidiaries, including Mariner Health and its subsidiaries, filed voluntary
petitions under Chapter 11 of the Bankruptcy Code . The Company currently is
operating its business as a debtor-in-possession subject to the jurisdiction of
the Bankruptcy Court. The Company's recent operating losses, liquidity issues
and the Chapter 11 Cases raise substantial doubt about the Company's ability to
continue as a going concern.
The ability of the Company to continue as a going concern and the
appropriateness of using the going concern basis of accounting is dependent
upon, among other things, the ability to comply with the terms of the Company
DIP Financing, confirmation of a plan of reorganization, success of future
operations after such confirmation and the ability to generate sufficient cash
from operations and financing sources to meet obligations. Any plan of
reorganization and other actions during the Chapter 11 Cases could change
materially the amounts currently recorded in the condensed consolidated
financial statements (see Note 3 of the Notes to Condensed Consolidated
Financial Statements).
At March 31, 2000, working capital was approximately $211.1 million as
compared to a working capital deficiency of approximately ($1.9) billion at
September 30, 1999. The increase in working capital is primarily attributable to
the reclassification of the Company's debt facilities, accrued interest and
other related liabilities from current liabilities at September 30, 1999 to
liabilities subject to compromise at March 31, 2000 in accordance with the
requirements of SOP 90-7.
The following discussion and analysis should be read in conjunction with
the business segment data in Note 9 of the Condensed Consolidated Financial
Statements.
GENERAL
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 24.9% and 49.2%, respectively, for the
quarter ended March 31, 2000. Government payors, such as state-administered
23
<PAGE>
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 25.9% of the Company's total
net patient revenues for the quarter ended March 31, 2000.
The administrative procedures associated with the Medicare cost
reimbursement program, with respect to facilities and periods not subject to the
Prospective Payment System ("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
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 (see
"-Liquidity and Capital Resources"). 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 $472.9 million and
$944.3 million of the Company's $541.5 million and $1,078.7 million total
revenues for the three and six months ended March 31, 2000, respectively.
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 increased by 1.6% and 0.2% over the comparable three and six
month periods from 1999 to 2000.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ----------------
2000 1999 2000 1999
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Weighted average licensed bed count 45,949 48,206 46,572 48,918
Weighted average number of residents 39,759 40,916 39,866 41,150
Weighted average occupancy 86.5% 84.9% 85.6% 85.4%
</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 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 changes 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
24
<PAGE>
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ----------------
2000 1999 2000 1999
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Private and other 25.9% 32.7% 25.7% 32.5%
Medicare 24.9% 24.1% 24.6% 25.8%
Medicaid 49.2% 43.2% 49.7% 41.7%
</TABLE>
The combined mix of private/other and Medicare revenue was 50.8% and
50.3% for the three and six-month periods ended March 31, 2000, respectively, as
compared to 56.8% and 58.3% for the same periods in 1999. 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 and six-month periods ended March 31, 1999 and
2000. See "-Liquidity and Capital Resources".
Costs and expenses, excluding depreciation, amortization and indirect
merger and other expenses, primarily consist 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.
SECOND QUARTER OF FISCAL 2000 COMPARED TO SECOND QUARTER OF FISCAL 1999
Net revenues comprising nursing home and non-nursing home operations
totaled $541.5 million for the quarter ended March 31, 2000, a decrease of $73.2
million or 11.9%, as compared to the same period for fiscal 1999. Nursing home
operations accounted for $5.6 million of the revenue decrease mainly as a result
of facilities being closed or divested during the past year.
Revenues for non-nursing home operations, which consist principally of
pharmacy services for the three months ended March 31, 2000 and consisted
principally of pharmacy and therapy services for the three months ended March
31, 1999, decreased by $67.6 million consisting of $60.0 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 Divested
Buisnesses. In addition there was a $7.6 million revenue decrease for pharmacy
services compared to the same period for fiscal 1999. The pharmacy revenue
decrease was primarily the result of a reduction in the number of beds being
served.
25
<PAGE>
Costs and expenses excluding depreciation and amortization expenses totaled
$520.6 million for the quarter ended March 31, 2000, a decrease of $93.4 million
or 15.2% 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 $11.0 million, while ancillary expenses decreased by $ 37.7 million. The
decrease in these two cost categories was primarily attributable to the Company
significantly reducing overhead costs and the loss of the Divested Buisnesses.
Provision for bad debts totaled $6.7 million, a decrease of $35.4 million
for the quarter ended March 31, 2000. The decrease is attributed to a charge of
approximately $29.6 million in the quarter ended March 31, 1999 to increase the
reserve for the Mariner Health subsidiary receivables.
For the three months ended March 31, 2000, depreciation and amortization
costs were $14.8 million, a decrease of $17.7 million from the prior year
quarter ended March 31,1999. 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 March 31, 2000, interest expense totaled
approximately $6.9 million, a decrease of $40.0 million. The Company stopped
recording interest expense relating to its debt facilities effective January 18,
2000 in accordance with the requirements of SOP 90-7.
Reorganization items related to the Chapter 11 proceedings of $12.4 million
includes $8.4 million in professional fees, $2.8 million in financing costs
primarily related to the DIP Financings and $1.2 million of other reorganization
costs partially offset by interest income and gains on settlement of prepetition
accounts payable.
FISCAL 2000 YEAR TO DATE COMPARED TO FISCAL 1999 YEAR TO DATE
Net revenues comprising nursing home and non-nursing home operations
totaled $1,078.7 million for the six months ended March 31, 2000, a decrease of
$208.6 million or 16.2%, as compared to the same period for fiscal 1999. Nursing
home operations accounted for $39.3 million of the revenue decrease mainly as a
result of implementing the PPS beginning July 1, 1998, causing significantly
reduced Medicare revenues. Also a decline in average census, and facilities
being closed or divested during the past year contributed to the revenue
decrease.
Revenues for non-nursing home operations, which consist principally of
pharmacy services for the six months ended March 31, 2000 and consisted
principally of pharmacy and therapy services for the six months ended March 31,
1999, decreased by $169.3 million consisting of $149.8 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 Divested
Businesses. In addition there was a $19.5 million revenue decrease for pharmacy
services compared to the same period for fiscal 1999. The pharmacy revenue
decrease was the result of a reduction in the number of beds being served as
well as lower revenues attributable to the loss of a contract to provide
respiratory services.
Costs and expenses excluding depreciation and amortization expenses totaled
$1,052.7 million for the quarter ended March 31, 2000, a decrease of $197.0
million or 15.8% 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 $20.8 million, while ancillary expenses decreased by $ 100.6
million. The decrease in these two cost categories was primarily attributable to
the Company siginificantly reducing overhead costs and the loss of the Divested
Businesses.
Provision for bad debts totaled $15.1 million, a decrease of $63.5 million
for the quarter ended March 31, 2000. The decrease is attributed to a charge of
approximately $53.9 million in the quarter ended March 31, 1999 to increase the
reserve of the Mariner Health subsidiary receivables.
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For the six months ended March 31, 2000, depreciation and amortization
costs were $25.6 million a decrease of $37.5 million from the prior year six
months ended March 31,1999. 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 six months ended March 31, 2000, interest expense totaled
approximately $60.0 million, a decrease of $31.2 million. The Company stopped
recording interest expense relating to its debt facilities effective January 18,
2000 in accordance with the requirements of SOP 90-7.
Reorganization items related to the Chapter 11 proceedings of $12.4 million
includes $8.4 million in professional fees, $2.8 million in financing costs
primarily related to the DIP loan and $1.2 million of other reorganization costs
partially offset by interest income and gains on settlement of prepetition
accounts payable.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
Cash and cash equivalents were $128.0 million at March 31, 2000. At March
31, 2000, working capital was approximately $211.1 million as compared to a
working capital deficiency of approximately ($1.9) billion at September 30,
1999. The increase in working capital is primarily attributable to the
reclassification of the Company's debt facilities, accrued interest and other
related liabilities from current liabilities at September 30, 1999 to
liabilities subject to compromise at March 31, 2000 in accordance with the
requirements of SOP 90-7. Cash provided by operating activities was $51.7
million in the six months ended March 31, 2000, as compared to $33.5 million
used in operating activities for the six months ended March 31, 1999.
Receivables increased by $31.9 million, primarily as a result of increased
revenues during the six months ended March 31, 2000 as compared to the six
months ended September 30, 1999. Accounts payable increased by $17.4 million,
primarily as a result of delays in vendor payments during the filing of
bankruptcy. Accrued expenses and other current liabilities increased by $94.5
million, primarily as a result of an increase in accrued insurance resulting
from increased anticipated exposures per actuarial studies.
Cash provided by investing activities was $2.9 million in the six months
ended March 31, 2000, as compared to $24.5 million used in investing activities
for the six months ended March 31, 1999. Investing activities included the use
of $19.6 million related to capital expenditures for the six months ended March
31, 2000.
Cash provided by financing activities was $1.6 million in the six months
ended March 31, 2000, as compared to $110.5 million for the six months ended
March 31, 1999. Cash provided by financing activities included $12.7 million in
net draws under the Company's credit line and principal repayments of $10.3
million for the six months ended March 31, 2000.
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. All of the Company's
skilled nursing facilities are currently reimbursed under PPS. The prospective
payment system provides acuity-based rates that are established at the beginning
of the Medicare reporting year.
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 "-Healthcare Regulatory Matters."
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PPS reduced the cash flows of both the pharmacy and therapy businesses'
customers, which resulted in an increased aging and uncollectable accounts in
both businesses' accounts receivable due to the multiple complexities involved
with the customers' 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.). All facilities are now being paid by Medicare under PPS and revenue
recorded for the prior six 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 Company has a commitment to training and compliance and has
established procedures to address PPS issues as they arise.
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
affect 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.
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. 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.
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 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 that are debtors in the Chapter 11 Filings.
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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 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."
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
acquisition of Mariner Health by the Company (the "Mariner Merger"). As of
March 31, 2000, there was $168.7 million borrowed under the Revolving Credit
Facility and approximately $5.2 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.)
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
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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.
The Company obtained a waiver under the Senior Credit Facility with respect
to certain financial covenant defaults existing at March 31, 1999. At March 31,
2000, the Company was in violation of all financial covenants and as a result
has not been able to make additional borrowings 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
make 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. 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 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.
On May 10, 2000, The Bankruptcy Court entered an order approving The "HRPT
Settlement" that provided for a further restructuring of the HRPT relationship.
Under the terms of the HRPT Settlement: (a) the Company will obtain fee simple
ownership of five of the HRPT facilities; (b) the leases with respect to the
other HRPT facilities and
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related personal property will be assigned to affiliates of SPTMNR; (c) a note
with a balance of approximately $0.9 million will be extinguished; (d) SPTMNR
will retain the $15 million deposit and the shares of HRPT and SPTMNR stock; and
(e) the Company will manage the facilities transferred to the SPTMNR affiliates
during a transition period that is expected to last less than six months. Upon
termination of the management arrangement, the Company will have no further
relationship with or obligations to HRPT or SPTMNR with respect to the HRPT
Agreements. In addition, the HRPT Settlement releases the Company and the
subsidiaries of the Company having an ownership interest in Tenant Entities from
its unlimited guaranty to HRPT. Instead, HRPT is allowed to make a claim of up
to $1.2 million, which amount may be offset against payments made to the Company
in relation to the management arrangement under the HRPT Settlement.
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 March 31, 2000.
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.
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. Due to the Company's
Chapter 11 Filing and the operating results of certain facilities within the
Omega portfolio, the Company and Omega are in the process of attempting to
negotiate a restructuring of their relationship. However, no assurances can be
given regarding the timing of such a restructuring, the likelihood that such a
restructuring will occur or the terms on which such a restructuring may be
conditioned.
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 (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"). 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
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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 Final DIP Order, 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 May 15, 2000, there were no amounts 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. 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 Final 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 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. A final order approving the full $100.0 million amount of the
Company DIP Financing was entered by the Bankruptcy Court after the final
hearing on March 20, 2000.
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 Final 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 are 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 Final DIP Order and the related cash collateral orders entered by the
Bankruptcy Court (the "Final 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 Final DIP Order, the
Final 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
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expenditures, and minimum patient census. 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 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 and
to operate as a going concern.
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.
As of March 31, 2000, 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
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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 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.
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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 up to $50.0 million of the Mariner Health DIP
Financing.
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. 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
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businesses of the Mariner Health Debtors. As of May 15, 2000, there was no
amount 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, or (vi) 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 accounts 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 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 February 16 Mariner Health DIP Order, 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 February 16 Mariner Health DIP Order 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
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paragraph is qualified in its entirety by reference to the February 16 Mariner
Health DIP Order, 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 and to operate as a going concern.
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 of 1997 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 of 1997 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 of 1997 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 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 30,
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 of 1997. While the CAA is expected to ameliorate somewhat
the adverse effects of
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the Balanced Budget Act of 1997, the Company believes the CAA will have only a
nominal positive effect on its operating results. 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 (which have been preliminarily
issued). 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 were scheduled to 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 of 1997 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 of 1997 will
constrain these types of changes. Pending the publication of a final rule
implementing the procedural limitations of the Balanced Budget Act of 1997, 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 of 1997 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
of 1997 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 of 1997 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.
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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 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
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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 ten 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 prepetition 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 $46.3 million was paid in the
six months ended March 31, 2000. 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 $19.6 million was spent in the six months ended
March 31, 2000.
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 March 31, 2000,
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 exist
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.
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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. 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 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
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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.
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 $100.0 million 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.
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
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information concerning the Company's plan to restructure its debt obligations
and other financial commitments. 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.
(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
43
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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) 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:
(a) The Company's ability to access capital markets will likely be
limited;
(b) 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;
(c) The Company may be unable to retain top management and other key
personnel;
(d) The Company may experience a reduction in the census at its
skilled nursing facilities and hospitals; and
(e) 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 DISCLOSURES 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
converted 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.
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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.
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 SECUTIRY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Final Order Authorizing Debtors to Obtain Post-Petition
Financing and to Utilize Cash Collateral and Granting Adequate
Protection to Pre-Petition Secured Parties (entered 3/20/00).
10.2 Order Approving Assumption of Unexpired Leases and Lease
Amendment Agreement With Mid-South Health Care Associates
(entered 3/30/00)
10.3 Order on Motion for Order Approving Assumption of Unexpired
Leases, Lease Guaranty and Lease Amendments, as Consensually
Amended, with Premier Properties of South Carolina and Village
Green Convalescent Center, Inc.(entered 3/30/00)
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: May 15, 2000
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EXHIBIT 10.1
CONFORMED
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
FINAL ORDER AUTHORIZING DEBTORS TO OBTAIN
POST-PETITION FINANCING PURSUANT TO 11 U.S.C. SS.SS.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. SS.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"),
(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. ss.ss.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
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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
502(d), 544, 545, 547, 548, 549, 550 or 551 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
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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
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(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 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")
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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 (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")
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(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 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 (the "FIRST DAY 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
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Borrower and the Guarantors as set forth in the Credit Agreement and
(b) cover overdrafts and related liabilities arising from treasury,
depository and cash 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 the First Day 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 a final order
(the "FINAL 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 Final Hearing 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
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a request for notices with this Court, the First Day Hearing having been
conducted on January 18 and 19, 2000 and the First Day Order authorizing such
borrowings having been entered by this Court, and the Interim Hearing having
been held on January 28, 2000 and the Interim Order having been entered by this
Court at the conclusion of the Interim Hearing, and upon all the pleadings filed
with this Court, and notice of the Final Hearing having been 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), and THE NEW YORK TIMES
(national edition), and upon the record made by the Debtors at the First Day
Hearing, the Interim Hearing and the Final Hearing, and after due deliberation
and consideration and sufficient cause appearing therefor;
IT 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. ss.ss.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
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<PAGE>
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 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
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<PAGE>
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 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
10
<PAGE>
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 502(d), 544, 545, 547, 548, 549, 550 or 551 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 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
11
<PAGE>
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 are 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 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) and the Financing are hereby
approved as set forth in this Order 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 $100,000,000
inclusive of amounts borrowed and letters of credit of credit issued pursuant to
the First Day Order and the Interim 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).
12
<PAGE>
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, it being
understood that borrowings and Cash Collateral may be used to investigate such
matters.
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
13
<PAGE>
Sections 502(d), 544, 545, 547, 548, 549, 550 or 551 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 such continuance in an aggregate amount not in excess of
$3,000,000, in each case by the Borrower, the Guarantors, any statutory
committee (each, a "COMMITTEE") appointed in the Debtors' Chapter 11 cases (the
"CASES") and any Chapter 7 or Chapter 11 trustee hereafter appointed or elected
for the estate of any of the Debtors, and allowed by an order of the Court and
(y) the payment of fees pursuant to 28 U.S.C. ss.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
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<PAGE>
future proceeding or case which may result therefrom, including liquidation in
bankruptcy or other proceedings under the Code, shall 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 (subject to
the last sentence of this paragraph) 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. As
to any creditor in existence at the time of publication, 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 11. Notwithstanding the foregoing provisions of this paragraph 11,
each of (x) MCI WorldCom, Inc. and its affiliates, (y) Entergy Gulf States,
Inc., Entergy Louisiana, Inc., Entergy Mississippi, Inc. and their affiliates,
and (z) Holiday Lodge, L.P., Jacinto City, L.P., Lynn Lodge, L.P., Retama Manor,
L.P., Southfield, L.P., Spring Branch, L.P., and Village, L.P. reserves its
right, if any, to assert a claim pursuant to Section 506(c) of the Code against
the Collateral, and the Debtors, the Agent and the Banks reserve their rights
and defenses with respect to any such claim.
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 entry of the First Day 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
15
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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 502(d), 544, 545, 547, 548,
549, 550 or 551 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
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
16
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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.
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
17
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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 other
members of the Pre-Petition Steering Committee under the Existing Agreements (in
an aggregate amount not in excess of $25,000 in any month for all of such
members), 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
18
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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
3Secured 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 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
19
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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 make, 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
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
20
<PAGE>
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 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.
21
<PAGE>
22. This Order shall be deemed the order of a court of competent
jurisdiction for purposes of 42 U.S.C. ss. 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. ss. 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.
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
22
<PAGE>
paragraph 8) by no later than the date that is 120 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. Any adversary proceeding or contested matter
initiated by the Committee of Unsecured Creditors pursuant to this paragraph
shall be deemed authorized and properly filed and commenced, without need for
further order of the Court.
23
<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 limited purpose of validating the priority of 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
24
<PAGE>
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 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 Final
Hearing constitutes due and sufficient notice of the Motion and of the Final
Hearing.
30. Notwithstanding anything in this Order to the contrary
(including, without limitation, the findings herein and the definition of the
term "Financing"), the claims (including superpriority administrative claims),
liens, and protections that are granted or provided by this Order to the Agent
and the Banks (including pursuant to paragraphs 10 and 12 hereof) against: (i)
the Guarantors that are listed on Schedule 1-A hereto (collectively, the "PHCMI
DEBTORS"), and (ii) the assets of the PHCMI Debtors (including, but not limited
to, any cash of such PHCMI Debtors in which Omega has, as of the Filing Date, a
valid, perfected, nonavoidable, first priority security interest, and which is
held, as of the Filing Date, in accounts of other Debtors) shall be limited to
the amount that is
25
<PAGE>
equal to, and shall apply only to the extent that, the amount by which the cash
flow of the PHCMI Debtors from and after January 1, 2000, taken as a whole, and
determined on a cash basis, but after deducting amounts specified in clauses (i)
and (ii) below whether paid in cash or accrued (the "PHCMI DEBTORS' CASH FLOW"),
is negative. In calculating the PHCMI Debtors' Cash Flow, expenses shall include
operating expenditures and capital expenditures directly incurred by the PHCMI
Debtors, and shall further include, without duplication: (i) a management fee
payable to the Borrower by the PHCMI Debtors in an amount equal to five percent
(5%) of the net inpatient revenues of the facilities of the PHCMI Debtors; and
(ii) all other expenses fairly allocable to the PHCMI Debtors (other than
expenses which would fairly be covered by a five percent (5%) management fee),
but including in any event legal, regulatory, insurance, and self-insurance
charges fairly allocable to the PHCMI Debtors.
31. Notwithstanding anything in this Order to the contrary (including,
without limitation, the findings herein and the definition of the term
"Financing"), the claims (including superpriority administrative claims), liens,
and protections that are granted or provided by this Order to the Pre-Petition
Agent and the Pre-Petition Secured Lenders (including pursuant to paragraph 14
hereof) against: (i) the PHCMI Debtors, and (ii) the assets of the PHCMI Debtors
(including, but not limited to, any cash of such PHCMI Debtors in which Omega
has, as of the Filing Date, a valid, perfected, nonavoidable, first priority
security interest, and which is held, as of the Filing Date, in accounts of
other Debtors) shall be subject to the limitations set forth in paragraph 30
above, provided that the Pre-Petition Agent and Pre-Petition Secured Lenders
shall not be entitled to recover on such claims or realize on such liens to the
extent that the Agent or the Banks have realized on their claims and/or liens
against the PHCMI Debtors or the assets of the PHCMI Debtors.
26
<PAGE>
32. This Order shall supersede and govern over the terms of the
Documents, to the extent that such terms are inconsistent with this Order.
33. Except as otherwise specifically provided herein, all rights of
parties-in-interest are hereby preserved and shall not be prejudiced by anything
that is not explicitly addressed herein.
Dated: Wilmington, Delaware
March 20, 2000
/S/ MARY F. WALRATH
----------------------------------------
UNITED STATES BANKRUPTCY JUDGE
27
<PAGE>
SCHEDULE I TO DIP FINANCING ORDER
LIST OF GUARANTORS WHO HAVE FILED CHAPTER 11 PETITIONS
[THE LIST OF GUARANTORS IS NOT CURRENTLY AVAILABLE
IN ELECTRONIC FORM; CASE NUMBERS 00-00113
THROUGH 00-00214 HAVE BEEN ASSIGNED TO THE
CHAPTER 11 CASES OF MARINER POST-ACUTE NETWORK, INC.
AND THE GUARANTORS, RESPECTIVELY]
<PAGE>
Annex A
Management Protocol1/1/
(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 Section 5.13(c)(i) of the MHG DIP Financing Agreement 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
- -----------------------
/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.
<PAGE>
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 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.
<PAGE>
SCHEDULE 1-A
(LIST OF "PHCMI DEBTORS")
Cambridge Bedford, Inc.
Cambridge East, Inc.
Cambridge North, Inc.
Cambridge South, Inc.
ClintonAire Nursing Home, Inc.
Crestmont Health Center, Inc.
Frenchtown Nursing Home, Inc.
Heritage Nursing Home, Inc.
International Health Care Management, Inc.
International X-Ray, Inc.
Living Centers - PHCM, Inc.
Madonna Nursing Center, Inc.
Middlebelt NursingHome, Inc.
Middlebelt-Hope Nursing Home, Inc.
Nightingale East Nursing Center, Inc.
Professional Health Care Management, Inc.
St. Anthony Nursing Home, Inc.
<PAGE>
EXHIBIT 10.2
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re ) Chapter 11
)
MARINER POST-ACUTE ) Case No. 00-00113 (MFW)
NETWORK, INC., )
A Delaware corporation, )(Jointly Administered
) Case Nos. 00-00113 (MFW)
and affiliates, ) through 00-00214 (MFW)
) inclusive)
Debtors.
ORDER APPROVING ASSUMPTION OF UNEXPIRED
LEASES AND LEASE AMENDMENT AGREEMENT
WITH MID-SOUTH HEALTH CARE ASSOCIATES
Upon review and consideration of the motion dated March 7, 2000 (the
"Motion"), filed by Mariner Post-Acute Network, Inc. ("MPAN") and National
Heritage Realty, Inc. ("NHR" (MPAN and NHR being hereinafter referred to
collectively as the "Debtors"), for an Order Approving the Assumption by the
Debtors of the Leases (1) and the Lease Amendment Pursuant to section 365 of the
Bankruptcy Code, 11 U.S.C. Section 365, all as more fully set forth in the
Motion; and the Court having jurisdiction to consider the Motion and the relief
requested therein in accordance with 28 U.S.C. Sections 157 and 1334; and notice
of the motion having been given to the United States Trustee for the District of
Delaware, counsel to the Official Committee of
- ------------------
(1) Capitalized terms used in this Order which are not defined in this Order
<PAGE>
Unsecured Creditors, Chase Manhattan Bank and its counsel, in its capacity as
Agent for the Debtors' senior secured prepetition lenders and as Agent for the
Debtors' postpetition debtor in possession lenders; the Internal Revenue
Service; the Office of the United States Attorney; the United States Department
of Justice; Mid-South Health Care Associates; and all parties that are on the
Debtors' general service list pursuant to this Court's prior order limiting
notice, and it appearing that such notice is adequate and that no other or
further notice need to provided; and the Court having determined that the relief
sought in the Motion is in the best interests of the Debtors, their creditors,
and all parties in interest; and upon the Motion and all of the proceedings had
before the court; and sufficient cause appearing therefore;
NOW, THEREFORE, IT IS HEREBY ORDERED that:
1. The Motion is GRANTED.
2. There are no defaults under the leases or the Lease
Amendment, other than defaults of a type which are rendered unenforceable by
section 365(b) of the Bankruptcy Code, 11 U.S.C. Section 365(b);
3. The assumption of the leases and the Lease Amendments
under section 365 of the Bankruptcy Code is hereby approved.
- --------------------------------------------------------------------------------
have the meaning specified in the Motion
2
<PAGE>
4. The assumption of the Leases pursuant to this Order shall
not in any way affect or impair the Debtors' right to hereafter assign and
sell the Leases pursuant and subject to the provisions of the Bankruptcy Code,
including without limitation, section 365 of the Bankruptcy Code.
DATED: March 30, 2000
------------------------------
United States Bankruptcy Judge
3
<PAGE>
EXHIBIT 10.3
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re ) Chapter 11
)
MARINER POST-ACUTE ) Case No. 00-00113(MFW)
NETWORK, INC., )
a Delaware corporation, ) (Jointly Administered
) Case Nos. 00-00113(MFW)
and affiliates, ) through 00-00214(MFW),
) inclusive)
Debtors. )
ORDER ON MOTION FOR ORDER APPROVING ASSUMPTION OF UNEXPIRED
LEASES, LEASE GUARANTY AND LEASE AMENDMENTS, AS CONSENSUALLY
AMENDED, WITH PREMIER PROPERTIES OF SOUTH CAROLINA AND
VILLAGE GREEN CONVALESCENT CENTER, INC.
Upon review and consideration of the motion (the "Motion"), dated
February 17, 2000 of Mariner Post-Acute Network, Inc. ("MPAN") and its wholly
owned subsidiaries, GCI Springdale Village, Inc., a South Carolina corporation
("Springdale"), GCI Prince George, Inc., a South Carolina corporation ("Prince
George"), GCI Jolley Acres, Inc., a South Carolina corporation ("Jolley Acres"),
GCI Faith Healthcare, Inc., a South Carolina corporation ("Faith Healthcare"),
and GCI Village Green, Inc., a South Carolina corporation ("Village Green")
(collectively, the "Debtors"), for an order pursuant to Section 365 of the
United States Bankruptcy Code (the "Bankruptcy Code"), 11 U.S.C. Section 365,
approving the assumption by the Debtors of the Leases(1) for five facilities
located in South
- ------------------
(1) Each capitalized term not defined herein shall have the same meaning
specified in the Motion.
<PAGE>
Carolina, the Lease Amendments (the Leases and the Lease Amendments are
collectively referred to herein as the "Amended Leases"), and the Lease Guaranty
provided by MPAN; and the Court having jurisdiction to consider the Motion and
the relief requested therein in accordance with 28 U.S.C. Sections 157 and 1334;
and notice of the Motion having been provided to the United States Trustee for
the District of Delaware; counsel to the official Committee of unsecured
creditors; Chase Manhattan Bank and its counsel, in its capacity as Agent for
the Debtors' senior secured prepetition lenders and as Agent for the Debtors'
postpetition debtor in possession lenders; the Internal Revenue Service; the
Office of the United States Attorney; the United States Department of Justice;
Premier Properties of South Carolina, LLC ("Premiere") and its counsel; and all
parties that are on the Debtors' general service list, pursuant to this Court's
prior order limiting notice, and it appearing that such notice is adequate and
that no other or further notice need be provided; and the Court having
determined that the relief sought in the Motion is in the best interests of the
Debtors, their creditors and all parties in interest; and the Court having found
that there are no defaults under the Amended Leases, other than alleged defaults
regarding the Debtors' failure to pay state and local property taxes pursuant to
the terms of the Amended Leases (which will be cured pursuant to paragraph 4 of
this Order), and defaults of a type which are rendered unenforceable by section
365(b) of the Bankruptcy Code, 11 U.S.C. Section 365(b); and upon the Motion and
all of the proceedings
2
<PAGE>
had before the Court; and sufficient cause appearing therefor;
NOW, THEREFORE, IT IS HEREBY ORDERED THAT:
1. The Motion is GRANTED;
2. The terms of the Amended Leases and the Lease Guaranty are
approved;
3. Pursuant to section 365(a) of the Bankruptcy Code and Rule 9019
of the Bankruptcy Rules, to the extent such provision is applicable, the Debtors
are authorized to assume the Amended Leases and Lease Guaranty;
4. Within five business days after the entry of this Order, the
Debtors shall pay any and all past-due state and local property taxes which the
Debtors are required to pay pursuant to the terms of the Amended Leases;
5. Within five business days after the entry of this Order, the
Debtors shall pay $1,500 to Premier in full satisfaction of any and all claims
for attorneys' fees incurred by Premier prior to the assumption of the Amended
Leases;
6. Premier waives any and all claims it may have for late charges
which it has asserted for late-payment by the Debtors of the March, 2000 rents
owed to Premier;
7. The Debtors are further authorized and empowered to take such
actions as may be reasonably necessary to implement and effectuate the terms and
conditions of the Amended Leases, the Lease Guaranty, and this Order;
8. Nothing in this Order shall be construed as an assumption of any
other leases or agreements to which any Debtor is a party;
3
<PAGE>
9. This Order shall be binding upon the Debtors, their creditors,
all other parties in interest and any successors of the Debtors, including any
trustee or examiner appointed in these cases or any subsequent or converted
cases of the Debtors under chapter 7 or chapter 11 of the Bankruptcy Code; and
10. The Court retains jurisdiction over any and all disputes,
controversies, claims or to other matters arising under or otherwise relating to
this Order including, without limitation, the terms of the Amended Leases and
Lease Guaranty incorporated herein.
Dated: Wilmington, Delaware
March 30, 2000 /S/ Mary F. Walrath
---- ------------------------------
THE HONORABLE MARY F. WALRATH
UNITED STATE BANKRUPTCY JUDGE
4
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