9. Intercompany
Claims of the Subsidiary Debtors (Class I)
19
10. Securities
Litigation (Class J)
20
11. Equity
Interests (Class K)
20
E. Securities
to be Issued or Authorized Under the Plan of Reorganization
20
1. New
Series A Common Stock
20
2. New
Redeemable Preferred Stock
21
3. New
Warrants
21
4. Management
Shares - New Series B Common Stock
21
F. Administrative
Expenses
21
1. Debtor
in Possession Financing
22
2. Federal
Medicare Claims
22
3. State
Medicaid Claims
22
4. Fees
and Expenses of Professionals
23
5. Payments
to Employees
23
G. Deemed
Consolidation for Distribution Purposes
23
H. Securities
Law Matters
24
1. Issuance
and Resale of New Securities Under the Plan of Reorganization
24
2. Public
Reporting
25
i
3. Registration Rights
Page
25
I. Reservation
of "Cram Down" Rights
26
III. Voting Procedures and
Requirements
26
A. Vote
Required for Acceptance by a Class
26
B. Classes
Not Entitled to Vote
27
C. Voting
27
IV. Financial Information,
Projections and Valuation Analysis
28
A. Introduction
28
B. Operating
Performance
28
C. Five
Year Projections
30
D. Going
Concern Valuation
31
1. Valuation
Methodology
33
2. Comparable
Public Company Analysis
33
3. Discounted
Cash Flow Approach ("DCF")
34
4. Precedent
Transactions Analysis
35
V. Business Description and
Reasons for Chapter 11
36
A. The
Debtors' Businesses
36
1. Inpatient
Services (SunBridge)
36
2. Rehabilitation
Therapy Services (SunDance) and Respiratory Therapy
Supplies
(SunCare)
37
3. Pharmaceutical
Services (SunScript)
37
4. Other
Services
37
B. Events
Leading to the Commencement of the Chapter 11 Cases
38
1. Leverage
and Debt Coverage (prior to the Prospective Payment System)
38
2. Medicare
Reimbursement
38
3. Prospective
Payment System
39
4. Cost
Cutting Efforts and Leverage Under PPS
40
5. Subsequent
Adjustments to Medicare Reimbursement
40
6. Medicaid
Reimbursement
41
7. Lack
of Liquidity
41
8. Prepetition
Restructuring Negotiations
42
9. Prepetition
Facility Transfers
42
ii
C. Pending Litigation and Other Proceedings
Page
42
1. Securities
Litigation
42
2. Qui
Tam Suits
42
3. Insured
Claims/Insurance Coverage
43
4. Class
Action Employment Litigation
43
5. Uninsured
Litigation or Other Proceedings
44
VI. Significant Events During the
Chapter 11 Case
44
A. Filing
and First Day Orders
44
B. Appointment
of the Creditors' Committee
45
C. DIP
Credit Agreement
46
D. Cash
Collateral Stipulation
48
E. Facility
Transactions
48
1. Assisted
Living Facilities
48
2. Omega
Healthcare Investors, Inc.
49
3. Karrell
Capital
50
4. LTC
Properties Inc.
50
5. THCI
(Meditrust)
51
6. Other
Facilities; Negotiations with the Government
52
F. Key
Employee and Key Executive Retention Program
53
G. Scutieri
Claims
53
H. Claims
Process and Bar Date
54
1. Schedules
and Statements
54
2. Bar
Date
54
3. Omnibus
Claims Objection Motions
54
I. Sale
of International Operations
55
J. Miscellaneous
Assets Sales
55
1. Medical
Supply Businesses
55
2. ACP
56
3. SunCare
56
4. NeuroFlex
56
5. SunAlliance
57
6. Corporate
Office Buildings
iii
57
Page
K. Alternative
Dispute Resolution Procedures
57
L. Shared
Healthcare System Loans
58
M. Request
for Appointment of an Equity Committee
58
N. Appointment
of Examiner
58
VII. Governance of Reorganized Sun
59
A. Board
of Directors of Reorganized Sun
59
B. Management
of Reorganized Sun
59
VIII. Other Aspects of the Plan of
Reorganization
59
A. Distributions
59
1. Timing
and Conditions of Distributions
60
2. Procedures
for Treating Disputed Claims Under the Plan or Reorganization
61
B. Treatment
of Executory Contracts and Unexpired Leases
61
1. Contracts
and Leases Not Expressly Assumed are Rejected
61
2. Cure
of Defaults
62
3. Rejection
of Claims
62
C. Exit
Facility
62
D. Effect
of Confirmation
63
1. Discharge
of Claims and Termination of Equity Interests
63
2. Indemnification
63
3. Exculpation
63
E. Releases
63
F. Management
Incentive Plan
64
G. Preservation
of Avoidance Actions
64
H. Miscellaneous
Provisions
64
IX. Certain Factors to Be
Considered
64
A. Certain
Bankruptcy Considerations
64
B. Risks
Relating to the Plan Securities
65
1. Variances
from Projections
65
2. Substantial
Leverage; Ability to Service Debt
65
3. Significant
Holders
66
4. Lack
of Trading Market
iv
66
Page
5. Dividend
Policies
66
6. Restrictions
on Transfer
66
C. Risks
Associated with the Business
67
X. Confirmation of the Plan
of Reorganization
67
A. Confirmation
Hearing
67
B. General
Requirements of Section 1129
68
C. Best
Interests Tests
69
D. Liquidation
Analysis
70
1. Notes
to Liquidation Analysis
71
2. Major
Assumptions
72
3. Key
Limitations
73
4. Notes
to Liquidation Analysis
73
E. Feasibility
76
F. Section
1129(b)
76
1. No
Unfair Discrimination
76
2. Fair
and Equitable Test
76
XI. Alternatives to Confirmation
and Consummation of this Plan of Reorganization
77
A. Liquidation
Under Chapter 7
77
B. Alternative
Plan of Reorganization
77
XII. Certain Federal Income Tax
Consequences of the Plan of Reorganization
78
A. Introduction
78
B. Consequences
to Holders of Claims
79
1. Realization
and Recognition of Gain or Loss in General
79
2. Holders
of Allowed Administrative Expense Claims (Unclassified) and
Allowed
Priority Non-Tax Claims (Class A)
79
3. Holders
of Allowed Other Secured Claims (Class B)
80
4. Holders
of Allowed Senior Lender Claims (Class D)
80
5. Holders
of Allowed General Unsecured Claims (Class E)
80
6. Holders
of Allowed Senior Subordinated Claims (Class F)
81
7. Holders
of Convertible Subordinated Debenture Claims (Class G), C-TIPS
Claims
(Class H) and Equity Interests (Class K)
82
8. Allocation
of Consideration to Interest
82
9. Tax
Treatment of Gain Recognized on Subsequent Sale of Certain Stock
v.
82
Page
10. Exercise
of New Warrants; Conversion of New Series Class A Common
Stock
into New Redeemable Preferred Stock
82
11. Withholding
83
C. Consequences
to Debtors or Reorganized Debtors
83
1. Discharge-of-indebtedness
Income Generally
83
2. Attribute
Reduction
83
3. Utilization
of Net Operating Loss Carryovers
84
4. Consolidated
Return Items
85
5. Alternative
Minimum Tax
85
XIII. Conclusion
86
vi
GLOSSARY
Administrative Expense Claim
Any expense relating to the administration of
the chapter 11 cases, including actual and necessary costs and expenses of preserving the
Debtors' estates and operating the Debtors' businesses, any indebtedness or obligations
incurred or assumed during the chapter 11 cases, allowances for compensation and
reimbursement of expenses to the extent allowed by the Bankruptcy Court, claims arising
under the DIP Credit Agreement and certain statutory fees chargeable against the Debtors'
estates.
Bankruptcy Code
Title 11 of the United States Code.
Bankruptcy Court
The United States Bankruptcy Court for the
District of Delaware.
Convertible Subordinated Debenture Claim
Any claim arising under Sun's 6% Convertible
Subordinated Debenture due 2004 or 6.5% Convertible Subordinated Debenture due 2003.
C-TIPS
The 7% Convertible Trust Issued Preferred
Securities issued by Sun Financing I.
C-TIPS Claim
Any claim against or equity interest in Sun or
Sun Financing I arising under the C-TIPS or the 7% Convertible Junior Subordinated
Debenture due 2028.
Credit Agreement
The Credit Agreement, dated as of October 8,
1997, as amended, among Sun and Bank of America, N.A., as administrative agent, certain
co-agents named therein, and the lender parties thereto, as amended, and the guaranties of
those obligations executed by each of the other Debtors (other than HoMed).
Creditors' Committee
The Official Committee of Unsecured Creditors
appointed in these chapter 11 cases.
Debtors
Sun and the entities listed on Exhibit A to
the Plan of Reorganization.
DIP Credit Agreement
The Revolving Credit Agreement, dated as of
October 14, 1999, as amended, among Sun and each of its subsidiaries named therein (all of
its domestic debtor-subsidiaries other than HoMed), the lenders thereto, The CIT
Group/Business Credit, Inc., as Lenders Agent (as defined in the DIP Credit Agreement),
and Heller Healthcare Finance, Inc., as Collateral Agent.
Disclosure Statement
This document together with the annexed
exhibits and schedules.
Effective Date
A business day selected by the Debtors on or
after the date of confirmation of the Plan of Reorganization on which the conditions to
the effectiveness of the Plan have been satisfied or waived and on which there is no stay
of the order confirming the Plan in effect. The Debtors expect that the Effective Date
will be no later than 120 after entry of an order confirmation the Plan.
General Unsecured Claim
Any general unsecured claim against the
Debtors.
HoMed
HoMed Convalescent Equipment, Inc.
HHS
The United States Department of Health and
Human Services.
HHS Claims
Any claims of HHS against any Debtor.
New Series A Common Stock
New common stock of Reorganized Sun to be
issued under the Plan of Reorganization as described in section II.E of this Disclosure
Statement. These shares may be converted to shares of New Redeemable Preferred Stock.
New Redeemable Preferred Stock
New redeemable preferred stock of Reorganized
Sun to be authorized under the Plan of Reorganization and which may be issued upon
conversion of the New Series A Common Stock, the terms of which are described in II.E of
this Disclosure Statement.
New Warrants
Warrants to purchase up to 500,000 shares of
New Series A Common Stock.
Other Secured Claims
Any claim secured by collateral that is not a
Senior Lender Claim.
Petition Date
The date the Debtors' chapter 11 cases were
commenced ( October 14, 1999, for all the Debtors other than HoMed, whose Petition Date is
February 3, 2000).
Plan
or
Plan of Reorganization
The Debtors' Joint Plan of Reorganization
Under Chapter 11 of the Bankruptcy Code annexed as Exhibit A to this Disclosure Statement.
2
Plan Securities
The New Redeemable Preferred Stock, the New
Series A Common Stock and the New Warrants.
PPS
The prospective payment system for the payment
of medical costs for Medicare recipients, established under the Balanced Budge Act of 1997
and the regulations of the Centers for Medicare and Medicaid Services of HHS.
Priority Non-Tax Claim
Any claim entitled to priority under the
Bankruptcy Code other than Administrative Expense Claims and Priority Tax Claims.
Priority Tax Claim
A claim of a governmental entity for taxes
that are entitled to priority in payment under the Bankruptcy Code.
Reorganized Sun
Sun Healthcare Group, Inc. as reorganized as
of the Effective Date in accordance with the Plan of Reorganization.
Securities Litigation Claim
Any claims against the Debtors, whether or not
the subject of an existing lawsuit, arising from the rescission of a purchase or sale of
securities of the Debtors.
Senior Lender Claim
Any claim against Sun arising under the Credit
Agreement or against any of the other Debtors (other than HoMed) arising under their
guaranties of Sun's obligations under the Credit Agreement.
Senior Subordinated Note Claim
Any claim arising under Sun's 9.375% Senior
Subordinated Notes due 2008, 9.5% Senior Subordinated Notes due 2007, or 11.75% Senior
Subordinated Notes due 2002 or against any of the other Debtors (other than CareerStaff
and HoMed) arising under their guaranties of Sun's obligations under such securities.
Sun or the Company
Sun Healthcare Group, Inc.
Voting Agent
See section I of this Disclosure Statement for
contact information.
Voting Deadline
January [__], 2002, is the last date for the
receipt
of ballots to accept or reject the Plan.
3
I.
Introduction
Sun Healthcare Group, Inc.
and its subsidiaries listed on Exhibit A to the Plan are soliciting votes to accept or
reject the Plan. A copy of that plan is attached as Exhibit A to this Disclosure
Statement. Sun Healthcare Group, Inc. and the companies listed on Schedule 1 are referred
to as the "Debtors."
Please refer to the attached Glossary for definitions of
other terms used in this Disclosure Statement
.
The purpose of the
Disclosure Statement is to provide sufficient information to enable the creditors of the
Debtors who are entitled to vote to make an informed decision on whether to accept or
reject the Plan of Reorganization. The Disclosure Statement describes:
the new capital structure for the Reorganized Sun, how creditors and shareholders of the
Debtors are treated, and the terms of the securities to be issued under the Plan of
Reorganization (part II)
how to vote on the Plan of Reorganization and who is entitled to vote (part III)
certain financial information about the Debtors, including their 5-year cash flow
projections, a range of potential enterprise valuations, and a liquidation analysis (part
IV)
the businesses of the Debtors and the reasons why they commenced their chapter 11 cases
(part V)
significant events that have occurred in the Debtors' chapter 11 cases (part VI)
how the Debtors will be governed when the Plan of Reorganization becomes effective (part
VII)
how distributions under the Plan of Reorganization will be made and the manner in which
disputed claims are resolved (part VIII)
certain factors creditors should consider before voting (part IX)
the procedure for confirming the Plan of Reorganization (part X)
alternatives to confirmation of the Plan (part XI)
and certain tax and securities laws issues (part XII)
Please note that if there is any inconsistency between the Plan and the descriptions in
the Disclosure Statement, the terms of the Plan will govern.
Additional financial
information about the Debtors can be found in the annual report on Form 10-K for the year
ended December 31, 2000, which was filed by Sun with the Securities and Exchange
Commission on April 2, 2001, and the quarterly reports on Form 10-Q for the quarters ended
June 30, 2001, and September 30, 2001, which were filed by Sun on August 14, 2001, and
[November 14,] 2001, respectively. Copies of these SEC filings are included in the Plan
Supplement and may be obtained over the internet at www.sec.gov.
4
This Disclosure Statement
and the Plan are the only materials creditors should use to determine whether to vote to
accept or reject the Plan.
The
last day
to vote to accept or reject the
Plan of Reorganization is [January __, 2002]. To be counted, your ballot must be actually
received
by the Voting Agent by this date.
The
record date
for determining which creditors
may vote on the Plan of Reorganization is [date].
The Plan of Reorganization
was developed over several months and through extensive negotiations with the holders of
the Debtors' largest claims and the Creditors' Committee. The Debtors believe that
approval of the plan is their best chance for emerging from chapter 11 and returning the
Debtors to profitability. The Creditors' Committee supports the Plan of Reorganization.
Recommendation:
The Debtors and the Creditors'
Committee urge creditors to vote to accept the Plan of Reorganization.
Additional copies of this
Disclosure Statement are available upon request made to the Voting Agent, at the following
address:
For Voting Classes B-2, B-5, B-17, C, D, and E:
Bankruptcy
Services, LLC
70 E. 55th Street
New York, NY 10022
(Attn: Sun Healthcare)
For Voting Class F:
Innisfree M&A Inc.
501 Madison Avenue, 20th Floor
New York, NY 10022
(Attn: Sun Healthcare)
The summaries of the Plan
and other documents related to the restructuring of the Debtors are qualified in their
entirety by the Plan, its exhibits, and the documents and exhibits contained in the Plan
Supplement. The Plan Supplement will be filed with the Bankruptcy Court within 10 days
prior to the hearing to confirm the Plan, but no later than 5 days before the last day to
vote to accept or reject the Plan. Documents to be included in the Plan Supplement will
also be posted at www.sunh.com
5
as they become available, but no later than 5 days before the last day to vote to
accept or reject the Plan. The financial and other information included in this Disclosure
Statement are for purposes of soliciting acceptances of the Plan and are being
communicated for settlement purposes only.
The Bankruptcy Code
provides that only creditors who vote on the Plan will be counted for purposes of
determining whether the requisite acceptances have been attained. Failure to timely
deliver a properly completed ballot by the voting deadline will constitute an abstention
(will not be counted as either an acceptance or a rejection), and any improperly completed
or late ballot will not be counted.
II.
Treatment of Creditors and Shareholders
Under the Plan of Reorganization
The Plan
of Reorganization governs the treatment of claims against and interests in each of the 186
separate Debtors in the chapter 11 cases. The two tables in section II.A below summarize
the treatment for each class. The tables are followed by a description of the types of
claims or interests in each class and a description of the property to be distributed
under the Plan of Reorganization. The last part of section II discusses certain legal
issues affecting the trading of Plan Securities.
A. New Capital Structure
The following table
summarizes the proposed capital structure for Reorganized Sun, including the
post-Effective Date financing arrangements Sun expects to execute to fund Administrative
Expense Claims and the working capital needs of the ongoing business operations of the
restructured companies. The post-Effective Date financing arrangements are anticipated to
include a revolving credit facility in the amount of up to $200 million. Except as
otherwise provided in the Plan and described herein, unless the underlying property is
sold or surrendered, the Debtor that is the current obligor on a mortgage will continue as
the mortgagee. The securities to be issued to creditors are described in section II.E,
below.
Instrument
Description
Comments
Revolver
Up to $200.0 million
(exit financing)
Mortgages
$68.0 million
(reinstated or amended)
HHS Note
$10.0 million
(restructuring security)
New Redeemable Pref. Stock
Up to 10.0 million shares
(restructuring securities)
New Common Stock
Series A: 10.0 million shares, convertible
into New Redeemable Preferred Stock
Series B: [ ] million shares
(restructuring securities)
(management comp.)
New Warrants
To purchase up to 5.0% of the New Series A
Common Stock (issued only if Class F votes to accept the Plan)
(restructuring securities)
6
B. Summary of Classification and Treatment
The following tables divide
the claims against and equity interests in the Debtors into separate classes and summarize
the treatment for each class. The tables also identify which classes are entitled to vote
on the Plan, based on rules set forth in the Bankruptcy Code. Finally, the tables indicate
an estimated recovery for each class.
Important Note:
As described in section V.B,
below, the long-term care industry is affected by numerous uncertainties, including
changes in Medicare and Medicaid reimbursement, labor costs, professional liability
exposure and the ability and increasing costs to insure those risks, and regulatory
enforcement. Those uncertainties and other risks related to the Debtors make it difficult
to determine a precise value for the Debtors and the equity interests to be distributed
under the Plan of Reorganization. The recoveries described in the following tables
represent the Debtors' best estimates of those values given the information available at
this time. These estimates do not predict the potential trading prices for securities
issued under the Plan. Unless otherwise specified, the information in the following tables
and in the sections below are based on calculations as of October 31, 2001. The estimation
of recoveries makes the following assumptions:
- The new debt instruments
to be issued or reinstated under the Plan of Reorganization are worth their face value.
- The enterprise value for
the Debtors is between $[385,000,000] and $[480,000,000] - See the valuation discussion in
section IV.
- The aggregate amount of
General Unsecured Claims against the Debtors is $[270,000,000] million - See the
discussion below on the estimated amounts and types of claims making up these classes.
- For purposes of the
recovery estimate in the table below, no current value is included for the New Warrants
because they are priced above the approximate projected value of the New Series A Common
Stock. However, under a Black-Scholes analysis, the New Warrants would have a value
between $[1,600,000] and $[3,100,000].
Class
Description
Treatment
Entitled to Vote
Estimated Recovery
--
Debtor in Possession Credit Agreement Claims
Payment in full (outstanding letters of credit
either replaced or collateralized).
No
100%
--
Administrative Expense Claims
Payment in full.
No
100%
--
Priority Tax Claims
Payment in full on Effective Date or over six
years from the date of assessment of the tax, with interest.
No
100%
A
Priority Non-Tax Claims
Payment in full of the allowed amount of such
claim.
No
100%
B
Other Secured Claims
See separate descriptions in section II.D.2
below.
See below
See below
C
HHS Claims
$1,000,000 in cash
$10,000,000 note.
Yes
NA
D
Senior Lender Claims (and intercompany claims
against Subsidiary Debtors)
$6,651,557 in cash
89% to 91% of the New Series A Common Stock (depending on amount of allowed Class E
claims).
Yes
29% to 38%
7
E
General Unsecured Claims
9% to 11% of the New Series A Common Stock
(depending on amount of allowed Class E claims).
Yes
9% to 12%
F
Senior Subordinated Note Claims
New Warrants (for 5% of the New Series A
Common Stock) (no distribution if class rejects the Plan)
Yes
0% to 1%
G
Convertible Subordinated Debentures Claims
No distribution.
No
None
H
C-TIPS Claims
No distribution.
No
None
I
Subsidiary Debtor Intercompany Claims
No distribution.
No
None
J
Securities Litigation Claims
No distribution.
No
None
K
Equity Interests
No distribution.
No
None
C. Allocation of Value
The Senior Subordinated
Note Claims (Class F), the Convertible Subordinated Debenture Claims (Class G), and the
C-TIPS Claims (Class H) are all contractually subordinated to the Senior Lender Claims
(Class D). Similarly, the Convertible Subordinated Debenture Claims and the C-TIPS Claims
are contractually subordinated to the Senior Subordinated Note Claims. These subordination
provisions require that any property that such subordinated classes would be entitled to
receive under the Plan must be distributed to the holders of the senior claims until those
claims have been paid in full (including postpetition interest). The following table
summarizes the strict application of those principles in connection with allocation of the
New Series A Common Stock.
Claim
% Before Subordination
% After Subordination
% Allocation
Under the Plan
Senior Lender Claims
$843,318,000
23.90%
92.35%
89.0% - 91.0%
Intercompany Claims
1,600,000,000
45.34%
0.00%
0.0%
General Unsecured Claims
270,000,000
7.65%
7.65%
9.0% - 11.0%
Senior Subordinated Notes
431,800,518
12.24%
0.00%
0.0%
Conv. Subordinated Notes
87,869,380
2.49%
0.00%
0.0%
C-TIPS
296,100,000
8.39%
0.00%
0.0%
$3,529,087,898
The intercompany claims are included in the analysis because such claims have been
pledged as collateral for the Senior Lender Claims. Therefore any recovery of Sun against
its subsidiaries under those claims would be for the benefit of the holders of the Senior
Lender Claims. In addition, the Senior Lenders assert priority treatment with respect to
approximately $25 million of claims that could be treated as secured claims and which
would increase their percentage share but which are ignored in the foregoing calculations.
Pursuant to a negotiated settlement between representatives of the holders of the Senior
Lender Claims and the holders of General Unsecured Claims on the Creditors' Committee,
those parties
8
and the Debtors have agreed to allocate the New Series A Common Stock as indicated in
the last column in the table. This negotiated settlement is a comprehensive settlement
resolving issues relating to the amount and allowability of the intercompany claims, the
amount of the General Unsecured Claims, and certain other issues related to the Senior
Lender Claims.
In addition, as an
accommodation to the holders of the Senior Subordinated Note Claims, and solely as an
incentive to vote to accept the Plan, the Debtors have provided for the distribution of
New Warrants to the holders of such claims.
D. Description of the Classes For the Debtors
Unless otherwise indicated,
the characteristics and amount of the claims or interests in the following classes are
based on the books and records of the Debtors. Each Subclass is treated as a separate
class for purposes of the Plan of Reorganization and the Bankruptcy Code. However, the
following discussion may refer to a group of Subclasses as a single Class for ease of
reference.
1.
Priority Non-Tax Claims
The claims in Class A are
the types identified in section 507(a) of the Bankruptcy Code that are entitled to
priority in payment (other than Administrative Expense Claims and Priority Tax Claims).
For the Debtors, these claims relate primarily to prepetition wages and employee benefit
plan contributions that had not yet been paid as of the Petition Date. Most of these
claims have already been paid by the Debtors pursuant to an order entered by the
Bankruptcy Court on the Petition Date. The Debtors estimate that the aggregate allowed
amount of the claims in these classes will be $477,490.
1.
Other Secured Claims
The Debtors estimate that,
as of September 30, 2001, the aggregate amount of the claims in these classes was
approximately $109,040,855. These classes consist of the claims of various mortgagees and
other secured creditors of the Debtors. The largest of those claims include:
9
Sub-Class
Description
Collateral (lender or guarantor)
Treatment
Entitled to Vote
Estimated Recovery
B-1
Receivables of Retirement Care Associates and
certain subsidiaries (Heller Healthcare Finance, Inc.)
Paid in full.
No
100%
B-2
San Leandro, CA [1612]
Willows, CA [1695]
Temple City, CA [1576]
Calistoga, CA [1674]
Meridian, ID [1091]
Moses Lake, WA [1069]
(Sumitomo)
New mortgage note:
Tranche A: LIBOR plus
2.5% interest, payable monthly over two years, for $16,554,163.49 secured by five
properties.
Tranche B: LIBOR plus 2.5% interest, payable quarterly over two years, for outstanding
amount attributable to Calistoga, after applying proceeds of that facility's sale plus
unpaid rent calculated at the non-default rate.
Yes
100%*
B-3
Denver, CO (THCI) [1033]
Return of collateral.
No
100%*
B-4
Brookline, MA (THCI) [1336]
Return of collateral.
No
100%*
B-5
East Boston, MA (THCI) [1337]
New 8% mortgage note in principal amount of
$10,789,000, payable over 15 years.
Yes
100%*
B-6
Stamford, CN (THCI) [1534]
Return of collateral.
No
100%*
B-7
Grand Terrace, CA (Sunset Convalescent Corp.)
[1582]
Defaults cured and debt reinstated.
No
100%
B-8
Carmichael, CA (PFC Corp./HUD) [1692]
Defaults cured and debt reinstated.
No
100%
B-9
Griffin, GA (LTC Properties) [1767]
Defaults cured and debt reinstated.
No
100%
B-10
Columbus, GA (LTC Properties) [1841]
Defaults cured and debt reinstated.
No
100%
B-11
Masthead Buildings (Sun Life Assurance Co. of
Canada) [3002]
Debt reinstated.
No
100%
B-12
Certain escrow funds in the amount of
$3,604,356
(Braswell Mgt, et al.)
Defaults cured and debt reinstated.
No
100%
B-13
Circleville (Home Health) [6416 6424]
Defaults cured and debt reinstated.
No
100%
B-14
New Lexington, OH (SunTrust Bank/Perry County,
OH IRBs) [1123]
Defaults cured and debt reinstated.
No
100%
B-15
Harriman, TN (Sentinel Trust/Roane County
IRBs) [1724]
Defaults cured and debt reinstated.
No
100%
B-16
Rome, GA (Sentinel Trust/Rome-Floyd County
IRBs) [1783]
Defaults cured and debt reinstated.
No
100%
B-17
West Toledo, OH [1122]
New Martinsville, WV [1147]
(Sun Trust Bank)
New mortgage notes in principal amount of
$7,400,000, bearing interest at prime plus 2.5%.
Yes
100%
10
* Based on an analysis by the Debtors of the value of the
collateral securing these claims. Section 506(a) of the Bankruptcy Code provides that a
claim is secured only to the extent of the value of the underlying collateral. Any
deficiency claims of the holders of claims in Subclasses B-3, B-4, and B-6 are part of
Class E (General Unsecured Claims). To the extent the Bankruptcy Court determines that any
of the proposed interest rates do not meet the standards set forth in section 1129 of the
Bankruptcy Code, the Debtors will adjust such rates accordingly.
Subclass
B1 - HCFP Revolver.
Heller Healthcare Finance, Inc., formerly known as HCFP Funding
Inc., and Debtors Retirement Care Associates, Inc. and certain of its subsidiaries are
parties to a secured revolving credit facility dated as of December 8, 1998. As of the
Petition Date, the aggregate amount of claims under this revolver was approximately $12.76
million and such claims were secured by the accounts receivable and certain intangibles of
those Debtors. As part of the cash collateral stipulation, the Debtors have paid this
claim in full.
Subclass
B-2 - Sumitomo Synthetic Lease.
SunBridge Healthcare Corporation, one of the Debtors,
and Sumitomo Bank Leasing and Finance, Inc. are parties to a synthetic lease agreement,
pursuant to which Sumitomo financed the acquisition or construction of certain facilities
by SunBridge. The outstanding balance owed to Sumitomo as of the petition Date was
$21,551,966. Under the Plan, the Calistoga property will be sold, with the net proceeds of
sale paid to Sumitomo to reduce the outstanding liability. The remaining five properties
will be retained by the Debtors under a new mortgage note, which is cross-defaulted and
cross-collateralized, that contains two tranches. Tranche A will be in the principal
amount of $16,554,163.49, secured by the five remaining Sumitomo properties (San Leandro,
CA, Willows, CA, Temple City, CA, Meridian, ID, and Moses Lake, WA). Tranche A will be
payable monthly, with interest at LIBOR plus 2.5%, for a term of two years with a balloon
payment at maturity. Tranche B will be in the amount attributable to the divested
Calistoga property, after application of any proceeds from sale, plus any unpaid rent on
the properties calculated at the non-default rate. Tranche B principal, with interest
calculated at LIBOR plus 2.5%, will be due quarterly from excess cash flow first paying
accrued interest then outstanding principal. All remaining principal and interest will be
due as a balloon payment at the maturity of the two year term. In the event the Debtors
obtain a 100% refinancing of the Sumitomo loan through HUD, any unpaid principal and
interest under Tranche B will be forgiven after applying the proceeds from such
refinancing as follows: first, to Tranche A; second, to accrued interest under Tranche B;
and third to Tranche B principal.
Subclass
B-3 - THCI Mortgage Holding Company (Denver, Colorado facility).
Mediplex of Colorado,
Inc. and Valley View Psychiatric Services, Inc., two of the Debtors, and Meditrust
Mortgage Investments, Inc. are parties to a promissory note and a loan agreement dated as
of June 23, 1994 pursuant to which Meditrust financed the acquisition or construction of
the above facility.. As of the Petition Date, the aggregate amount of claims under this
note was approximately $10,930,230, secured by the property listed above. The Debtors will
surrender the collateral securing the claims in this subclass to THCI. The Debtors will
ask the Bankruptcy Court to determine the value of the collateral. Any deficiency claim by
THCI shall be treated as part of Class E.
Subclass
B-4 - THCI Mortgage Holding Company (Brookline, Massachusetts facility).
Mediplex of
Massachusetts, Inc., one of the Debtors, and Meditrust Mortgage Investments, Inc. are
parties to an amended and restated promissory note and a loan agreement dated as of June
23, 1994 pursuant to which Meditrust financed the acquisition or construction of the above
facility. As of the Petition Date, the aggregate amount of claims under this note was
approximately $4,725,706, secured by the property listed above. The Debtors will surrender
the collateral securing the claims in this subclass
11
to THCI. The Debtors will ask the Bankruptcy Court to determine the value of the
collateral. Any deficiency claim by THCI shall be treated as part of Class E.
Subclass
B-5 - THCI Mortgage Holding Company (East Boston, Massachusetts facility).
Mediplex
Rehabilitation of Massachusetts, Inc., one of the Debtors, and Meditrust Mortgage
Investments, Inc. are parties to an amended and restated promissory note and a loan
agreement dated as of June 23, 1994 pursuant to which Meditrust financed the acquisition
or construction of the above facility. As of the Petition Date, the aggregate amount of
claims under this note was approximately $10,320,520, secured by the property listed
above. The Debtors will issue a new note in the principal amount of the aggregate allowed
claims in this subclass. The principal amount is expected to approximate $10,789,000,
depending on the date the Debtors emerge from chapter 11. The new note will be secured by
the East Boston, Massachusetts facility, will bear 8% interest or at such other market
interest rate, as determined by the Bankruptcy Court, and will amortize over 15 years.
Subclass
B-6 - THCI Mortgage Holding Company (Stamford, Connecticut facility).
G-WZ of
Stamford, Inc., one of the Debtors, and Meditrust Mortgage Investments, Inc. are parties
to an amended and restated promissory note and a loan agreement dated as of June 23, 1994
pursuant to which Meditrust financed the acquisition or construction of the above
facility. As of the Petition Date, the aggregate amount of claims under this note was
approximately $11,438,948, secured by the property listed above. The Debtors will
surrender the collateral securing the claims in this subclass to THCI. The Debtors will
ask the Bankruptcy Court to determine the value of the collateral. Any deficiency claim by
THCI shall be treated as part of Class E.
Subclass
B-7 - Sunset Convalescent Corp. (Grand Terrace, California facility).
Regency Health
Services, Inc., one of the Debtors, and Sunset Convalescent Corp. are parties to a
$675,000 promissory note dated June 1, 1984 (as amended, assigned and assumed) which is
secured by a deed of trust dated August 28, 1993 encumbering the Grand Terrace facility.
As of the Petition Date, the aggregate amount of claims under this note was approximately
$549,816. The Debtors will cure defaults and reinstate the loans underlying the claims in
this class in accordance with section 1124 of the Bankruptcy Code.
Subclass
B-8 - PFC Corporation/HUD (Carmichael, California facility).
Carmichael Convalescent
Hospital, one of the Debtors, and PFC Corporation. are parties to a security agreement and
a deed of trust note dated as of November 20, 1992 and modified as of August 24, 1995
pursuant to which PFC Corporation financed the acquisition or construction of the above
facility. As of the Petition Date, the aggregate amount of claims under this agreement was
approximately $5,344,336, secured by the property listed above. The Debtors will cure
defaults a reinstate the loans underlying the claims in this class in accordance with
section 1124 of the Bankruptcy Code.
Subclass
B-9 - LTC Properties, Inc. (Griffin, Georgia facility).
LTC Properties, Inc. and
Retirement Care Associates, Inc., one of the Debtors, are parties to a Loan Agreement
dated as of April 28, 1995 (as amended), pursuant to which LTC made a secured loan in the
principal amount of $5,150,000. The Debtors have cured defaults and reinstated the loans
underlying the claims in this class pursuant to the Bankruptcy Court's Order dated June
22, 2000 entitled "Order Pursuant to (i) Bankruptcy Rules 9019 approving a Settlement
Agreement with LTC Properties, Inc. and (ii) Section 363(b) and 363(f) of the Bankruptcy
Code and Bankruptcy Rule 6004 establishing sale procedures and authorizing the debtors to
sell, free and clear of liens, claims and encumbrances, but subject to higher and better
offers, certain healthcare facilities in accordance with the Settlement Agreement."
Subclass
B-10 - LTC Properties, Inc. (Columbus, Georgia facility).
LTC Properties, Inc. and
Summers Landing, Inc., one of the Debtors, are parties to a Loan Agreement dated as of
November 22, 1996 (as amended), pursuant to which
12
LTC made a secured loan in the principal amount of $1,300,000. The Debtors have cured
defaults and reinstated the loans underlying the claims in this class pursuant to the
Bankruptcy Court's Order dated June 22, 2000 entitled "Order pursuant to (i)
Bankruptcy Rules 9019 approving a Settlement Agreement with LTC Properties, Inc. and (ii)
Section 363(b) and 363(f) of the Bankruptcy Code and Bankruptcy Rule 6004 establishing
sale procedures and authorizing the Debtors to sell, free and clear of liens, claims and
encumbrances, but subject to higher and better offers, certain healthcare facilities in
accordance with the Settlement Agreement."
Subclass
B-11 - Sun Life of Canada (Masthead Bldgs, Albuquerque, New Mexico).
Masthead
Corporation, one of the Debtors, and Sun Life Assurance Company of Canada are parties to a
promissory note in the original principal amount of $8.3 million, repayment of which is
secured by a first priority mortgage on Sun's headquarters. The balance of the note as of
the Petition Date was $7,183,223. Amounts equal to regularly scheduled payments of
principal and interest on the existing note have been paid as adequate protection
throughout the cases.
Subclass
B-12 - Braswell Management et al. (Pomona and Pico Rivera, California buildings).
A
promissory note (secured by deeds of trust) in the amount of $4,375,000 was issued by
Regency Health Services, Inc. on November 8, 1993 as consideration in addition to cash for
the purchase of six healthcare facilities and one office building from Braswell management
Inc. Through an arbitration award the note was reduced and re-amortized retroactively to
the original date of the note in the amount of $4,114,036. As of September 30, 2001 the
balance on the note per the reduction and new amortization schedule is $3,527,794.51. In
order to complete a sale-leaseback of the secured properties without Braswell's consent,
Regency deposited cash with Chicago Title Company for an agreement to indemnify around the
title insurance exceptions. The current cash balance on deposit with Chicago Title is
approximately $3,600,000. The monthly note payments are made by Chicago Title directly to
Braswell.
Subclass
B-13 - The Park National Bank (Circleville, Ohio).
Regency Health Services, Inc., one
of the Debtors, and The Park National Bank are parties to a promissory note in the
original principle amount of $187,500. The balance of the note as of the Petition Date was
$160,152. [to be supplied]
Subclass
B-14 - New Lexington Industrial Revenue Bonds.
New Lexington Health Care Corp.., one
of the Debtors, and County of Perry, Ohio with Sun Trust Bank, Central Florida, National
Association, as trustee are parties to nursing facility refunding revenue bonds dated as
of September 1, 1996 pursuant to which County of Perry, Ohio financed the acquisition or
construction of the above facility. As of the Petition Date, the aggregate amount of
claims under these bonds were approximately $2,255,000, secured by the property listed
above. Amounts equal to interest and principal due on the bonds have been paid as adequate
protection throughout the case by the drawing of the trustee on the related letter of
credit. The Debtors will cure defaults and reinstate the loans underlying the claims in
this class in accordance with section 1124 of the Bankruptcy Code.
Subclass
B-15 - Marshall Voss Industrial Revenue Bonds.
The Health, Educational & Housing
Facility Board of the County of Roane, Tennessee issued First Mortgage Revenue Bonds, in
the original principal amount of $4,845,000, for the benefit of National Assistance
Bureau, Inc., which was later replaced by Maplewood Health Care Center of Jackson,
Tennessee, on of the Debtors. As of the Petition Date, the balance due under such bonds,
which are secured by a mortgage on the Marshall Voss Health & Rehabilitation Center in
Harriman, Tennessee, was $4,070,000 Pursuant to the Cash Collateral Stipulation, the
Debtors have continued to make scheduled payments on the bonds during the pendency of
their chapter 11 cases. The Debtors will cure defaults and reinstate the loans underlying
the claims in this class in accordance with section 1124 of the Bankruptcy Code.
13
Subclass
B-16 - Riverside, Georgia Industrial Revenue Bonds.
Retirement Care Associates, Inc.,
one of the Debtors, and the Rome-Floyd County Development Authority with Sentinel Trust
Company, as trustee are parties to a loan agreement and a trust indenture related to first
mortgage revenue refunding bonds dated as of March 1, 1996 pursuant to which Rome-Floyd
County financed the acquisition or construction of the above facility. As of the Petition
Date, the aggregate amount of claims under these bonds were approximately $2,095,000,
secured by the property listed above. Amounts equal to interest and principal due on the
note have been paid as adequate protection throughout the case. The Debtors will cure
defaults and reinstate the loans underlying the claims in this class in accordance with
section 1124 of the Bankruptcy Code.
Subclass
B-17 - Sun Trust Synthetic Lease.
Sun Healthcare Group, Inc., one of the Debtors, and
Atlantic Financial Group, Ltd. are parties to a synthetic lease agreement, pursuant to
which SunTrust financed the acquisition or construction of certain facilities by
SunBridge. The outstanding balance owed to Atlantic Financial Group, Ltd. as of the
Petition Date was $10,666,821. Amounts equal to interest due on the synthetic lease have
been paid throughout the case. Under the Plan, the Debtors will issue two new notes to
SunTrust Bank, Inc. in the principal amounts of $1,000,000 and $6,400,000. The new notes
will bear interest at prime plus 2.5% and will be secured by the collateral as secures the
claims in this class. The new notes will have standard covenants and events of default.
Other
miscellaneous secured claims.
The balance of the secured claims against the Debtors
consist of obligations under equipment leases, mechanics and tax liens, liens of landlords
on the accounts, general intangibles, or inventory related to the facilities leased by
them to the Debtors, or contingent insurance carrier claims. The Debtors estimate that the
aggregate amount of capital lease claims is $698,934. An additional $52 million of secured
claims in this category have been filed, most of which the Debtors intend to dispute. In
each case, the Debtors reserve the right to pay the secured claim in full, reinstate the
debt, return the collateral, or provide periodic cash payments having a present value
equal to the value of the secured creditor's interest in the Debtors' property. To the
extent the claim of a creditor exceeds the value of the collateral in which it has an
interest, such excess will become part of Class E (General Unsecured Claims).
3.
HHS Claims (Class C
HHS has asserted claims
against the Debtors for overpayments in connection with Medicare reimbursement for
services performed prior to the implementation of the Medicare prospective payment system
(see section V.B). HHS has also asserted claims against the Debtors for violation of the
False Claims Act, 31 U.S.C. Sections 3729-3733. The Debtors have denied any
violations and have asserted claims against HHS for underpayments in connection with
services performed for Medicare beneficiaries for the same periods which HHS disputes.
After several months of negotiation, the Debtors and HHS have reached a global settlement
which resolves all the claims of the parties. The global settlement provides for a release
of substantially all the claims of HHS against the Debtors through and including October
13, 1999 for suppliers, and through and including the end of the final cost reporting
period which ends after October 13, 1999. The settlement agreement also provides for
release of substantially all the claims of the Debtors against HHS for the same period.
The Debtors will be seeking Bankruptcy Court approval of the global settlement, a copy of
which is set forth in the Plan Supplement, prior to Confirmation. In accordance with that
court order, the Plan of Reorganization implements portions of the global settlement,
including the distribution of $1,000,000 of cash and a new note for $10,000,000 on the
Effective Date. The HHS note will have a fixed maturity of the fifth anniversary of the
Effective Date and bear interest at the rate specified in section 1961 of title 28 of the
United States Code. Interest will be payable quarterly. Principal will be repayable in
annual installments on the anniversary of the Effective Date as follows: $1,000,000 (first
anniversary); $1,000,000 (second anniversary); $2,000,000 (third anniversary); $3,000,000
(fourth anniversary); and $3,000,000 (fifth anniversary). As part of the
14
settlement, Sun has entered into a corporate integrity agreement with HHS which
provides, among other things, for the review of certain of Sun's operations by third
parties.
4.
Senior Lender Claims (Class D)
The claims in these classes
aggregate approximately $843,318,000 (not counting the intercompany claims of Sun against
the other Debtors that have been pledged as security) and are the largest claims against
the Debtors. The claims are based on amounts owed by Sun under the Credit Agreement. The
obligations of the Debtors are secured by, among other things, (i) setoff rights of
certain of the lenders under the Credit Agreement against bank accounts of Sun and certain
of the other Debtors, (ii) the intercompany claims of Sun against the other Debtors, (iii)
a pledge by Sun of the stock of the other Debtors and certain non-Debtors, (iv) accounts
receivable with respect to approximately 80 facilities, (v) certain notes owed to the
Debtors and preferred stock in Liberty Management Group, Inc., and various notes owed to
CareerStaff Management, Inc. (one of the Debtors). Pursuant to a Stipulation Regarding Use
of Cash collateral and Adequate Protection dated as of October 20, 1999 (the "Cash
Collateral Stipulation"), the Debtors' paid the Senior Lenders $40 million, with an
agreement to make additional payments to reflect the correct amount of collections on
accounts payable subject to the Senior Lenders' liens and the amount of deposit accounts
subject to their rights of setoff. Based on a reconciliation of these collections and the
amounts held in bank accounts with the Senior Lenders on the Petition Date, the Debtors
are obligated to pay the Senior Lenders $4,121,557 additional in cash. In addition, the
Debtors realized approximately $2.53 million from the sale of their Germany subsidiary on
account of intercompany debt and stock pledged to the Senior Lenders. In addition, the
Senior Lenders assert that they are entitled to approximately $25 million of secured
claims related to the pledge of stock and debt of CareerStaff Management, Inc. and the
receipt by the Debtors of approximately $1 million related to the disposition of their
Australian operations, which also were pledged to the Senior Lenders. Due to the pledge by
Sun of its claims against the other Debtors, Class D includes approximately $1.6 billion
of such intercompany claims (see section II.B.10 for a description of the intercompany
claims). The following table shows the calculation of the net claims in this Class
(exclusive of the intercompany claims pledged as security and the $25 million of asserted
secured claims):
Instrument
Amount
Principal (including drawn letters of credit
of $14.6 million and undrawn letters of credit of approximately $5.8 million not all of
which are to be replaced under the Exit Facility)
$841,210,000
Prepetition interest and letter of credit fees
46,985,000
Subtotal
888,195,000
Less:
Adequate protection payments
($40,000,000)
Replacement of letters of credit
($4,877,000)
Total
$843,318,000
Based on the Debtors'
determination of the value of the collateral described above, the claims in Class D are
partially secured and partially unsecured. For the secured portion of such claims, the
Plan of Reorganization provides a cash payment of $46,651,557, of which $40,000,000 has
already been paid pursuant to the cash collateral stipulation described in section VI
15
below. The balance of the cash represents $4,121,557 required to be paid to the Senior
Lenders pursuant to the Cash Collateral Stipulation based on final collections on accounts
receivable and reconciliations of deposit accounts, and proceeds from the sale of the
Company's German subsidiary which was subject to the Lenders' liens. The amounts set forth
above are net of approximately $19,000,000 of prepetition letters of credit that expired
or were replaced under the debtor in possession credit agreement.
The claims in Class D have
the benefit of subordination provisions in the various instruments representing the claims
in Classes F (Senior Subordinated Note Claims), G (Convertible Subordinated Debenture
Claims), and H (C-TIPS Claims). The effect of these subordination provisions is to require
that distributions that would otherwise be made to those classes be made instead to the
holders of claims in Class D. The Plan of Reorganization gives effect to those provisions,
although any distribution of New Warrants to the holders of claims in Class F (Senior
Subordinated Note Claims) represents an accommodation by the holders in Class D to the
holders in Class F.
For the secured portion of
the Senior Lender Claims, holders will receive their pro rata portion of $6,651,557. For
the unsecured portion, holders will receive their pro rata portion of between 89% and 91%
of the shares of New Series A Common Stock. The actual percentage will be determined based
on the total amount of General Unsecured Claims (Class E). The following table illustrates
the calculation:
Allowed Amount of
General
Unsecured Claims
% of New Series A Common
Stock for Senior
Lender Claims
$297,000,000 or more
89.0%
283,500,000
89.5%
270,000,000
90.0%
256,500,000
90.5%
243,000,000 or less
91.0%
The percentages will be prorated between 89% and 91%, based on the actual amount of the
claims in Class E. The New Series A Common Stock distributed to the holders of claims in
Class D is subject to dilution, based on the issuance of additional shares of New Series A
Common Stock on the exercise of the New Warrants and the grant of restricted shares to
management. Mechanically, the Plan provides for 200,000 shares of New Series A Common
Stock to be reserved until the Debtors resolve the aggregate amount of allowed unsecured
claims. At that time, a formula in the Plan will allocate those shares between Class D and
Class E.
Class D is impaired and
entitled to vote to accept or reject the Plan of Reorganization.
5.
General Unsecured Claims (Class E)
The aggregate amount of
general unsecured claims timely filed against the Debtors exceeds $14 billion. However,
the Debtors estimate that the aggregate amount of allowed claims in Class E is actually
approximately $270,000,000, after deducting duplicate claims, claims not supported by the
Debtors' books and records, claims that have already been reduced by agreement of the
parties or order of the Bankruptcy Court, claims that are subject to other objections, and
claims covered by insurance. The claims in Class E consist of the claims of suppliers and
other vendors, landlords with prepetition rent claims
16
and/or claims based on rejection of leases, prepetition personal injury,
employment litigation, and/or property damage claimants to the extent not covered by
insurance, parties to contracts with the Debtors that are being rejected, and other
general unsecured claims. The following table lists the types of claims and the estimated
amount in these groups.
Type of claim
Amounts
(approximates)
Suppliers and vendors (estimated amount)
59,000,000
Mortgage deficiency claims
33,000,000
Professional liability claims*
21,000,000
Other litigation Claims*
79,000,000
Other (including estimate of rejection
damages)
78,000,000
Total
$270,000,000
* See section V.C for a description of the litigation against the
Debtors, including personal injury and wrongful death suits and corresponding insurance
coverage.
Each holder of an allowed
Class E claim will receive its pro rata share of between 9% and 11% of the shares of New
Series A Common Stock. The actual percentage will be prorated based on the total amount of
allowed claims in this class. The following table illustrates the calculation:
Allowed Amount of General
Unsecured Claims
% of New Series A
Common Stock for the
General Unsecured Claims
$297,000,000 or more
11.0%
283,500,000
10.5%
270,000,000
10.0%
256,500,000
9.5%
243,000,000 or less
9.0%
The New Series A Common Stock distributed to the holders of claims in Class E is
subject to dilution, based on the issuance of additional shares of New Series A Common
Stock on the exercise of the New Warrants and the grant of restricted shares to
management. Mechanically, the Plan provides for 200,000 shares of New Series A Common
Stock to be reserved until the Debtors resolve the aggregate amount of allowed unsecured
claims. At that time, a formula in the Plan will allocate those shares between Class D and
Class E.
Holders of allowed claims
in Class E that are covered by insurance will be paid in the ordinary course of the
Debtors' business. To the extent that a claim arises in this class due to the prosecution
of an avoidance action, the Debtors will credit [__%] of such claim against the amount to
be recovered in such avoidance action in full satisfaction of such claim. See section
VIII.G for a description of the procedure to be used.
17
Class E is impaired and
entitled to vote to accept or reject the Plan of Reorganization.
6.
Senior Subordinated Note Claims
(Class F)
The claims in these classes
total $431,800,518 and consist of the principal and interest accrued and unpaid through
the Petition Date under three separate series of senior subordinated notes. The following
table describes the notes:
Issue and Indenture
Obligors
Outstanding
Principal
9.375% Senior Subordinated Notes due 2008
Indenture,
dated as of May 4, 1998, between Sun and U.S. Bank Trust National Association, as trustee
Sun
Guarantied by all the Debtors (except
CareerStaff and HoMed)
$150,000,000
9.5% Senior Subordinated Notes due 2007
Indenture,
dated as of October 16, 1997, between Sun and U.S. Bank Trust National Association, as
trustee
Sun
Guarantied by all the Debtors (except
CareerStaff and HoMed)
$250,000,000
11.75% Senior Subordinated Notes due 2002
Indenture,
dated as of September 1, 1992, and amended and restated as of January 4, 1995, between
Sun, The Mediplex Group, Inc., and the Bank of New York, as trustee
The Mediplex Group, Inc. (one of the Debtors)
Guarantied
by Sun
$6,161,000
The claims in Class F are
contractually subordinated to the Senior Lender Claims in Class D. Except as provided in
the Plan of Reorganization, distributions that would otherwise be made to Class F are to
be made to holders of Class D claims.
If Class F accepts the
Plan, the holder of each claim in this class will receive its pro rata share of the New
Warrants. As described below, the New Warrants will be exercisable into 500,000 shares of
New Series A Common Stock. If Class F rejects the Plan, the holders will not receive any
distribution of property under the Plan in respect of such claim. Class F is impaired and
entitled to vote to accept or reject the Plan of Reorganization.
The claims in these two
classes total $87,869,380 and consist of the principal and interest accrued and unpaid
through the Petition Date under two separate series of convertible subordinated notes. The
following table describes the notes:
Issue and Indenture
Obligors
Outstanding
Principal
6% Convertible Subordinated Debentures due
2004
Indenture, dated as of March 1, 1994, between Sun and
the Bank of New York, as trustee
Sun
$83,300,000
6.5% Convertible Subordinated Debentures due
2003
Amended and restated Indenture, dated as of October
1, 1994, between Sun, The Mediplex Group, Inc., and State Street Bank and Trust Company,
N.A., as trustee
Sun and The Mediplex Group
$1,382,000
18
The claims in Class G are contractually subordinated to the claims in Classes D and F.
Distributions that would otherwise be made to Class G will be made instead to holders of
claims in Class D. The value of Reorganized Sun is not sufficient to provide for full
payment of the claims in Classes D and F. Accordingly, the Plan of Reorganization does not
provide for any distribution to the holders of claims in Class F. Holders of claim in
Class F are deemed to reject the Plan of Reorganization and are not entitled to vote to
accept or reject the Plan.
8.
C-TIPS Claims (Class H
In May 1998, Sun created
Sun Financing I for the purpose of issuing a hybrid debt/equity instrument. Sun Financing
I is a statutory business trust organized under the laws of the state of Delaware, all of
whose common equity is owned by Sun. Sun Financing I issued 13.8 million shares of its 7%
Convertible Trust Issued Preferred Securities ("C-TIPS"). The C-TIPS have a
liquidation preference of $25 for each share, for a total original liquidation preference
of $345 million. Each C-TIPS is also convertible into 1.2419 shares of Sun's common stock
equivalent to a conversion price of $20.13 per share of common stock. A portion of the
C-TIPS has been converted into common stock of Sun, leaving securities with a liquidation
preference of approximately $296,100,000 outstanding. The sole asset of Sun Financing I is
Sun's 7% Convertible Junior Subordinated Debenture due 2028, having an original principal
amount of approximately $355.7 million. The documents governing these instruments include
the Amended and Restated Declaration of Trust of Sun Financing I, dated as of May 4, 1998,
by Sun, Robert F. Murphy, and Robert D. Woltil, as Administrative Trustees, the Bank of
New York (Delaware), as Delaware Trustee, and the Bank of New York, as property trustee,
and the 7% Junior Convertible Subordinated Debenture Indenture, dated as of May 4, 1998,
between Sun and the Bank of New York, as trustee.
For purposes of exercising
remedial rights or asserting claims in a bankruptcy case, the holders of the C-TIPS have a
senior equity interest in Sun Financing I and, through that interest, a claim against Sun
under the 7% Convertible Junior Subordinated Debenture. The combination of senior equity
interest in Sun Financing I and junior claims against Sun are referred to in this
Disclosure Statement as the C-TIPS Claims. The 7% Convertible Junior Subordinated is
contractually subordinate to all indebtedness of Sun represented by securities,
debentures, bonds, and other instruments, including the Senior Lender Claims, the Senior
Subordinated Note Claims, and the Convertible Subordinated Debenture Claims.
The range of values for
Reorganized Sun (see section IV) are not large enough to provide any value to the holders
of the C-TIPS Claims (or to provide any distributions to the holders of the Convertible
Subordinated Debenture Claims which are senior to the C-TIPS Claims). Accordingly, the
Plan of Reorganization does not provide for any property to be distributed to the holders
of the C-TIPS Claims, and the holders of claims in this class are deemed to reject the
Plan.
9.
Intercompany Claims of the
Subsidiary Debtors (Class I)
Class I consists of intercompany claims of Sun's subsidiaries against Sun (as opposed
to the approximately $1.6 billion net of claims of Sun against its subsidiaries, which
claims have been pledged to the holders of the Senior Lender Claims and are included in
Class D). The Class I intercompany claims of the Subsidiary Debtors are contractually
subordinated to the Senior
19
Lender Claims. Those claims aggregate $[________]. These claims of the Subsidiary
Debtors that are in a net positive claim position against Sun are included in this Class
I. The claims in Class I will receive no property under the Plan of Reorganization. The
Debtors holding such claims are deemed to reject the Plan.
10.
Securities Litigation Claims (Class J)
Class J consists of all
claims under the securities laws that have been or could have been asserted against Sun or
any of the other Debtors. Claims under the securities laws include claims arising from
rescission of a purchase or sale of a security of any of the Debtors or for damages for
the purchase or sale of such a security. Such claims also include any claims for
reimbursement or contribution in connection with such claims for rescission or damages.
Securities of the Debtors includes any note, bond, debenture, or share of preferred or
common stock, whether or not outstanding on the Petition Date. The only claims in this
class of which the Debtors are aware are the claims of certain former officers and
directors of Retirement Care Associates, Inc.
Section 510(b) of the
Bankruptcy Code subordinates all the claims in this class to the claims represented by the
underlying securities. The Plan of Reorganization does not provide any distribution for
holders of claims in this class.
11.
Equity Interests (Class K)
This class consists of the
common equity interests in Sun represented by Sun's outstanding common stock. Holders of
equity interests in this class will receive no distribution under the Plan of
Reorganization and are deemed to reject the Plan.
E. Securities to Be Issued or Authorized Under the Plan of
Reorganization
1.
New Series A Common Stock
The Plan will authorize the
issuance of 25,000,000 shares of new common stock (series A), $0.01 par value, of
Reorganized Sun. Ten million shares will be issued on or after the Effective Date to the
holders of the Senior Lender Claims and the General Unsecured Claims. Five hundred
thousand shares will be reserved for the exercise of the New Warrants into shares of New
Series A Common Stock. The balance of the shares of New Series A Common Stock will be
available for other corporate purposes. The allocation of New Series A Common Stock is as
follows:
Amount of General
Unsecured Claims
% of New Series A Common Stock for the
Senior Lenders
% of New Series A
Common Stock for General Unsecured
Claims
$297,000,000 or more
89.0%
11.0%
283,500,000
89.5%
10.5%
270,000,000
90.0%
10.0%
256,500,000
90.5%
9.5%
243,000,000 or less
91.0%
9.0%
20
Until the third anniversary of the Effective Date, each share of New Series A Common
Stock will be convertible, at the option of the holder, into one share of New Redeemable
Preferred Stock. Each share of New Series A Common Stock will entitle the holder thereof
to one vote for the election of directors and in connection with all other matters
submitted to shareholders for vote.
2. New Redeemable Preferred Stock
The Plan will authorize the
issuance of up to 10,000,000 shares of New Redeemable Preferred Stock of Reorganized Sun.
The New Redeemable Preferred Stock will be issued only on conversion of shares of the New
Series A Common Stock, as described below.
The New Redeemable
Preferred Stock will have a liquidation preference of $25 per share (for an aggregate
liquidation preference of $250,000,000, assuming all shares of New Series A Common Stock
convert) and will accrue dividends at the annual rate of 7%. Dividends may be paid if Sun
has legally adequate capital and if such payment is permitted under then existing loan
obligations of the Reorganized Debtors. To the extent legally permissible, the New
Redeemable Preferred Stock will be subject to mandatory redemption at its liquidation
preference within 90 days after the end of any fiscal year in which EBITDA equals or
exceeds $250,000,000. In addition, on January 31, 2007, Reorganized Sun shall make a
payment equal to $5 for each share of New Redeemable Preferred Stock outstanding on such
date. After such date, the liquidation preference for the New Redeemable Preferred Stock
shall be $20 per share. Each share of New Redeemable Preferred Stock will entitle the
holder thereof to one vote on all matters subject to a vote by the holders of the New
Series A Common Stock, including the election of directors.
3.
New Warrants
On the Effective Date,
Reorganized Sun will issue warrants to purchase 500,000 shares of New Series A Common
Stock. This represents 5% of the New Series A Common Stock issued on the Effective Date,
subject to dilution for stock issuances or the exercise of options under a management
incentive plan established by the new board of directors for key employees. The New
Warrants will expire on the third anniversary of the Effective Date and will have an
exercise price of [$104.98] per share of New Series A Common Stock. The current valuation
of the New Warrants is between [$1,600,000] and [$3,100,000], based on (i) volatility of
62%, (ii) an estimated value of [$28.00] per share for the New Series A Common Stock,
(iii) the exercise price of [$104.98] for the New Warrants, (iv) a three-year expiration
for the New Warrants, and (v) a risk free rate of [3%].
4.
Management Shares - New Series B
Common Stock
As more fully described in
section VIII.F below, [ ] shares of common stock (Series B) will be authorized for
issuance to key employees as determined by the new board of directors (either as direct
grants or through the exercise of stock options) as part of a new management incentive
plan.
F. Administrative Expenses
In order to confirm the
Plan of Reorganization, allowed undisputed Administrative Expense Claims and allowed
Priority Tax Claims must be paid in full or in a manner otherwise agreeable to the holders
of those claims. Administrative expenses are the actual and necessary costs and expenses
of the Debtors' chapter 11 cases. Those expenses include, but are not limited to,
postpetition salaries and other benefits for employees, postpetition rent for facilities
and offices, amounts owed to vendors providing goods and services during the chapter 11
cases, tax obligations incurred after the commencement of the chapter 11
21
cases, and certain statutory fees and expenses. Other administrative expenses include
the actual, reasonable, and necessary professional fees and expenses of the professionals
retained by the Debtors and the Creditors' Committee, liquidated allowed personal injury
claims arising after the Petition Date to the extent not covered by insurance as well as
the obligations outstanding under Sun's debtor in possession financing agreements.
Consistent with the
requirements of the Bankruptcy Code, the Plan of Reorganization generally provides for
allowed Administrative Expense Claims to be paid in full on the later of the Effective
Date and the first business day after the date that is thirty (30) days after the date
such Administrative Expense Claim becomes allowed, except for Administrative Expense
Claims relating to ordinary course of business transactions or for money borrowed, both of
which will be paid in accordance with the past practice of the Debtors and the terms of
the agreements governing such obligations. Allowed Administrative Expense Claims relating
to compensation of the professionals retained by the Debtors or the Creditors' Committee,
or for the reimbursement of expenses for certain members of the Creditors' Committee will,
unless otherwise agreed by the claimant, be paid on the later of the Effective Date and
the date on which an order allowing such Administrative Expense Claim is entered.
Allowed Priority Tax Claims
entitled to priority under the Bankruptcy Code will be paid either in full on the later of
the Effective Date and the first business day after the date that is thirty (30) days
after the date such claim becomes allowed or with interest at a fixed annual rate equal to
[seven percent (7%)] over a period not exceeding six (6) years from the date of assessment
of the tax.
1.
Debtor in Possession Financing
The Debtors estimate that
there will be approximately $90,000,000 outstanding under their debtor in possession
financing agreements on the Effective Date. Of that amount, approximately $37,600,000 will
relate to outstanding letters of credit. With the exception of those letters of credit,
obligations under the debtor in possession financing agreements will be paid on the
Effective Date. On the Effective Date, outstanding letters of credit will either be
replaced or will remain outstanding and will be backed up with new letters of credit or
cash collateralized.
2.
Federal Medicare Claims
As part of the Plan, the
Debtors will assume the provider agreements with the federal government for all facilities
that are not being closed or transferred. For the postpetition period, any overpayments
asserted by the Medicare fiscal intermediaries for the Debtors have either been paid in
full or are subject to appeal in the ordinary course. All prepetition overpayments are
being resolved as part of the settlement with the federal government described in section
II.D.3.
3.
State Medicaid Claims
As part of the Plan, the
Debtors will assume the provider agreements with various state governments for all
facilities that are not being closed or transferred. Certain of the Debtors that operate
nursing facilities have accrued credits or overpayments which are due from or payable to
various state Medicaid programs. The net aggregate amount of such credits and overpayments
is approximately $15 million, of which approximately $10 million relates to prepetition
liabilities of retained facilities and $5 million relates to prepetition liabilities of
closed or transferred facilities. In addition, overpayments for the period after the
Petition Date aggregate approximately $2.5 million. As part of the assumption of certain
agreements and/or programs related to participation in the Medicaid programs in those
states, the Debtors expect to make such payments in the ordinary course of their
businesses. Prepetition claims related to closed facilities will be part of Class E, to
the extent the holders of such claims timely filed proofs of claim.
22
4.
Fees and Expenses of
Professionals
As of October 26, 2001, the
Debtors have paid the various professionals in their chapter 11 cases an aggregate of
approximately [$29.4] million since the Petition Date. Those professionals have filed fee
applications for an additional [$__] million. The Debtors estimate that various
professionals will file fee applications subsequent to October 26, 2001 for approximately
[$_] million, assuming the effective date of the Plan is February 28, 2002.
5.
Payments to Employees
The Bankruptcy Court has
approved retention programs for key employees of the Debtors. Under those programs, up to
approximately [$690,000] in plan of reorganization incentive payments may be made.
G. Deemed Consolidation for Distribution Purposes
For purposes of
distributions to Classes D, E, and F, the Debtors will be considered to be a single legal
entity. This "deemed" consolidation has three major effects. First, it
eliminates guaranties of the obligations of one Debtor by another Debtor. Second, each
claim filed in Classes D, E, and F against any of the Debtors will be considered to be a
single claim against the consolidated Debtors.
The deemed consolidation
will not affect the legal and organizational structure of the Debtors, the modification or
reinstatement of claims in Class B (with the legal, equitable, and contractual rights to
which the holder of any such claim in Class B being reinstated and unimpaired under the
Plan being left unaltered), or guaranties or the grants of collateral in connection with
any financing entered into on the Effective Date or pursuant to any contract or lease that
is assumed under the Plan, or distributions out of any insurance policies or proceeds of
policies. The foregoing deemed consolidation of the Debtors will result in the deemed
elimination of multiple and duplicative claims, joint and several liability claims and
guaranties, and the payment of allowed claims against each of the Debtors from a common
fund.
The Debtors believe that
the foregoing deemed consolidation of their respective estates is warranted in light of
the criteria established by the courts in ruling on the propriety of substantive
consolidation in other cases. The two critical factors considered in assessing the
entitlement to substantive consolidation are (i) whether creditors dealt with the Debtors
as a single economic unit and did not rely on their separate identity in extending credit
or (ii) whether the affairs of the Debtors are so entangled that consolidation will
benefit all creditors. With respect to the first factor, creditors who make loans on the
basis of the financial status of a separate entity expect to be able to look to the assets
of their particular borrower for satisfaction of that loan. The second factor involves
whether there has been a commingling of the assets and business functions and considers
whether all creditors will benefit because untangling is either impossible or so costly as
to consume the assets. The following is a discussion of these factors as they relate to
the Debtors.
There is an ample factual
basis for the deemed consolidation of the Debtors. First, the holders of the Senior Lender
Claims dealt with substantially all the Debtors as a single economic unit and did not rely
on their separate identity in extending credit. Specifically, almost all the Debtors are
guarantors under the credit agreement governing the Senior Lender Claims. In addition,
almost all the Debtors guarantied the second largest group of claims - the Senior
Subordinated Note Claims in Class F. This course of dealing and the expectations of the
holders of the Senior Lender Claims and the Senior Subordinated Note Claims together
justify consolidation for distribution purposes.
23
Second, the affairs of the
Debtors are entangled to the extent that consolidation will benefit all creditors. The
Debtors consist of Sun and 185 of its direct and indirect subsidiaries. Through the
subsidiary Debtors, Sun, among other things, (i) operates approximately 260 long-term,
subacute care and assisted living facilities, (ii) provides rehabilitation therapy and
oxygen and respiratory therapy supplies in 41 states, (iii) operates 32 regional
pharmacies, nine in-house long-term care pharmacies, and one pharmaceutical billing and
consulting center, (iv) has approximately 25 division offices providing temporary therapy
and nursing staffing services and (v) provides other health care services through multiple
locations. There is little correlation between the names the Debtors conduct business
under and the names of the legal entities that technically own such facilities. This fact
alone will make it very difficult for creditors to ascertain which Debtor they have a
claim against.
Third, the books and
records of the Debtors reflect a large amount of intercompany claims reflecting, among
other things, advances from Sun to fund and build its operations, upstreamed funds from
the other Debtors to enable Sun to make payments to creditors, the allocation of corporate
overhead, and the transfer of other property from one Debtor to another. In view of the
complexity of such transactions and the adjustments that have been made over time, it
would be difficult to reconcile intercompany claims without embarking on an enormous
effort that would diminish the return for all creditors.
Finally, the Debtors
participate in a unified cash management system (which includes non-Debtor subsidiaries)
which would make it extremely difficult to confirm a plan of reorganization for individual
Debtors.
In view of the foregoing,
the Debtors believe that creditors would not be prejudiced to any significant degree by
the deemed consolidation proposed in the Plan of Reorganization, which is consistent with
creditors' having dealt with the Debtors as a single economic entity. Further, the Debtors
believe that such deemed consolidation would best utilize the Debtors' assets and maximize
the potential of all of the Debtors to pay to the creditors of each entity the
distributions proposed in the Plan of Reorganization.
H. Securities Law Matters
Holders of allowed Senior
Lender Claims, allowed General Unsecured Claims, and allowed Senior Subordinated Note
Claims will receive Plan Securities pursuant to the Plan of Reorganization. Section 1145
of the Bankruptcy Code provides certain exemptions from the securities registration
requirements of federal and state securities laws with respect to the distribution of
securities under a plan of reorganization.
1.
Issuance and Resale of New
Securities Under the Plan of Reorganization
Section 1145(a) of the
Bankruptcy Code generally exempts from registration under the Securities Act of 1933 (the
"Securities Act") the offer or sale of a debtor's securities under a chapter 11
plan if such securities are offered or sold in exchange for a claim against, or an equity
interest in, such debtor, and in the case of warrants so issued under a chapter 11 plan,
also generally exempts the issuance of stock issued upon exercise of such warrants. In
reliance upon this exemption, the New Redeemable Preferred Stock and the New Series A
Common Stock will be issued on the Effective Date as provided in the Plan of
Reorganization, and the New Series A Common Stock to be issued upon the conversion of the
New Redeemable Preferred Stock generally will be exempt from the registration requirements
of the Securities Act. Accordingly, such securities may be resold without registration
under the Securities Act or other federal securities laws pursuant an exemption provided
by section 4(1) of the Securities Act, unless the holder is an "underwriter"
with respect to such securities, as that term is defined in
24
the Bankruptcy Code. In addition, such securities generally may be resold without
registration under state securities laws pursuant to various exemptions provided by the
respective laws of the several states. However, recipients of securities issued under the
Plan of Reorganization are advised to consult with their own legal advisors as to the
availability of any such exemption from registration under state law in any given instance
and as to any applicable requirements or conditions to such availability.
Section 1145(b) of the
Bankruptcy Code defines "underwriter" for purposes of the Securities Act as one
who (a) purchases a claim with a view to distribution of any security to be received in
exchange for the claim other than in ordinary trading transactions, or (b) offers to sell
securities issued under a plan for the holders of such securities, or (c) offers to buy
securities issued under a plan from persons receiving such securities, if the offer to buy
is made with a view to distribution of such securities, or (d) is a control person of the
issuer of the securities or other issuer of the securities within the meaning of Section
2(11) of the Securities Act. The legislative history of Section 1145 of the Bankruptcy
Code suggests that a creditor who owns at least ten percent (10%) of the securities of a
reorganized debtor may be presumed to be a "control person."
Notwithstanding the
foregoing, statutory underwriters may be able to sell their securities pursuant to the
resale limitations of Rule 144 promulgated under the Securities Act. Rule 144 would, in
effect, permit the resale of securities received by statutory underwriters pursuant to a
chapter 11 plan, subject to applicable volume limitations, notice and manner of sale
requirements, and certain other conditions. Parties who believe they may be statutory
underwriters as defined in section 1145 of the Bankruptcy Code are advised to consult with
their own legal advisors as to the availability of the exemption provided by Rule 144.
Whether any particular
person would be deemed to be an "underwriter" with respect to any security
issued under the Plan of Reorganization would depend upon the facts and circumstances
applicable to that person. Accordingly, the Debtors express no view as to whether any
particular person receiving distributions under the Plan of Reorganization would be an
"underwriter" with respect to any security issued under the Plan of
Reorganization.
In view of the complex,
subjective nature of the question of whether a particular person may be an underwriter or
an affiliate of the reorganizing Debtors, the Debtors make no representations concerning
the right of any person to trade in the New Redeemable Preferred Stock or New Series A
Common Stock to be distributed pursuant to the Plan of Reorganization. Accordingly, the
debtors recommend that potential recipients of Plan Securities consult their own counsel
concerning whether they may freely trade such securities.
2.
Public Reporting
Unless otherwise determined
by the new board of directors, Reorganized Sun will use its best efforts to continue to be
a reporting company under the Securities Exchange Act of 1934.
3.
Registration Rights
The Plan of Reorganization
provides for the execution of a registration rights agreement, under which Reorganized Sun
will have the obligation to register the Plan Securities. A copy of the registration
rights agreement is set forth in the Plan Supplement.
25
I. Reservation of "Cram Down" Rights
The Bankruptcy Code permits the Bankruptcy Court to confirm a chapter 11 plan of
reorganization over the dissent of any class of claims or equity interests as long as the
standards in section 1129(b) are met. This power to confirm a plan over dissenting classes
-- often referred to as "cram down" -- is an important part of the
reorganization process. It assures that no single group (or multiple groups) of claims or
interests can block a restructuring that otherwise meets the requirements of the
Bankruptcy Code and is in the interests of the other constituents in the case.
The Debtors each reserve the right to seek confirmation of the Plan, notwithstanding
the rejection of the Plan by any class entitled to vote. In the event a class votes to
reject the Plan, the Debtors will request the Bankruptcy Court to rule that the Plan meets
the requirements specified in section 1129(b) of the Bankruptcy Code with respect to such
class. The Debtors will also seek such a ruling with respect to each class that is deemed
to reject the Plan.
III.
Voting Procedures and Requirements
Detailed voting
instructions are provided with the ballot accompanying this Disclosure Statement. The
following classes are the only ones entitled to vote to accept or reject the Plan.
Class
Description
B-2
Sumitomo (synthetic lease)
B-5
East Boston (THCI)
B-17
Sun Trust Bank (synthetic lease)
C
HHS Claims
D
Senior Lender Claims
E
General Unsecured Claims
F
Senior Subordinated Note Claims
If your claim is not in one of these classes, you are not entitled to vote and you will
not receive a ballot with this Disclosure Statement. If your claim is in one of these
classes, you should read your ballot and follow the listed instructions carefully. Please
use only the ballot that accompanies this Disclosure Statement.
Ballot information number:
For Voting Classes B-5, C, D, and E: (212) 376-8494
For Voting Class
F:
(877) 750-2689
A. Vote Required for Acceptance by a Class
Under the Bankruptcy Code,
acceptance of a plan of reorganization by a class of claims is determined by calculating
the number and the amount of claims voting to accept, based on the actual total allowed
claims voting. Acceptance requires an
26
affirmative vote of more than one-half of the total allowed claims voting and
two-thirds in amount of the total allowed claims voting.
B. Classes Not Entitled to Vote
Under the Bankruptcy Code,
creditors are not entitled to vote if their contractual rights are unimpaired by the Plan
or if they will receive no property under the Plan. Based on this standard, for example,
the holders of Priority Non-Tax Claims and miscellaneous secured claims are not being
affected by the Plan. In addition, the holders of the Convertible Subordinated Debenture
Claims and the C-TIPS Claims are not receiving any property and are therefore deemed to
reject the Plan. Similarly, shareholders of Sun are not entitled to vote because they are
not receiving any property under the Plan. Shareholders are also deemed to vote to reject
the Plan. For a summary of the classes entitled to vote, see the charts in section II.A.
C. Voting
In order for your vote to
be counted, your vote must be actually
received
by the voting agent at the
following address before the voting deadline of __:__ _.m., Eastern time, on [January __],
2002:
Voting Agent:
For Voting Classes B-2, B-5, B-17, C, D, and E:
Bankruptcy Services, LLC
70 E. 55th Street
New York, NY 10022
(Attn: Sun Healthcare)
For Voting Class F:
Innisfree M&A Inc.
501 Madison Avenue, 20th Floor
New York, NY 10022
(Attn: Sun Healthcare)
If the instructions on your
ballot require you to return the ballot to your bank, broker, or other nominee, or to
their agent, you must deliver your ballot to them in sufficient time for them to process
it and return it to the voting agent before the voting deadline. If a ballot is damaged or
lost, you may contact the Debtors' voting agent at the number set forth above. Any ballot
that is executed and returned but which does not indicate an acceptance or rejection of
the Plan of Reorganization will not be counted.
27
IV.
Financial Information, Projections, and Valuation Analysis
A. Introduction
This section provides
summary information concerning the recent financial performance of the Debtors by major
line of business. It also sets forth below an estimate of a going concern valuation for
the Debtors, based on information available at the time of the preparation of this
Disclosure Statement.
The projections assume an
Effective Date of [December 31], 2001, with allowed claims treated in accordance with
those provided for in the Plan. Expenses incurred as a result of the reorganization cases
are assumed to be paid on the Effective Date. If the Debtors do not emerge from chapter 11
as currently scheduled, additional Administrative Expenses will be incurred until such
time as a plan of reorganization is confirmed and becomes effective. These Administrative
Expenses could significantly impact the Debtors' cash flows. The financial projections of
the Debtors were prepared on an unlevered basis.
It is important to note
that the projections and estimates of values described below may differ from actual
performance and are highly dependent on significant assumptions concerning the future
operations of these businesses. These assumptions include reimbursement levels under the
Medicare and state Medicaid programs, professional liability insurance costs, growth of
certain lines of business, labor and other operating costs, inflation, and the level of
investment required for capital expenditures and working capital. Please refer to section
IX, below, for a discussion of many of the factors that could have a material effect on
the information provided in this section.
The estimates of value are
not intended to reflect the values that may be attainable in public or private markets.
They also are not intended to be appraisals or reflect the value that may be realized if
assets are sold.
B. Operating Performance
The following are balance
sheets and income statements for the Debtors, shown on a consolidated basis. These
financial statements include the operations of non-Debtor subsidiaries, including Sun's
international operations which were divested in 2001. The statements also include results
of operations of facilities divested by Sun and facilities targeted for divestiture.
Balance Sheet for the Year Ended December 31, 2000 ($000)
Cash and equivalents
$ 37,589
Accounts receivable,
net
195,362
Other current assets
34,265
Current assets
267,216
Goodwill, net
188,005
Property and
equipment, net
180,285
Other long-term assets
214,482
Total assets
$ 849,988
=========
Current portion of
long-term debt
$ 86,039
28
Other current
liabilities
342,797
Current liabilities
428,836
Liabilities subject to
compromise
1,529,928
Other long term
liabilities
436,562
Stockholders' deficit
(1,545,338)
Total liabilities and
stockholders' deficit
$ 849,988
=========
Income Statement for the Year Ended December 31, 2000 ($000)
SunBridge (inpatient
services)
$ 1,718,177
SunScript (pharmacy
services)
228,716
SunDance (therapy
services)
184,294
Other revenue
327,741
Revenues, net
2,458,928
Operating expenses
2,174,173
EBITDAR
284,755
Lease expense
242,878
EBITDA
41,877
Depreciation and
amortization
45,881
Interest expense
34,269
Debt restructuring,
reorganization and other
charges
507,438
Net loss
$ (545,711)
=========
Balance Sheet as of June 30, 2001 ($000)
Cash and equivalents
$ 48,289
Accounts receivable,
net
157,592
Other current assets
31,907
Current assets
237,788
Goodwill, net
180,508
Property and
equipment, net
163,756
Other long-term assets
70,551
Total assets
$ 652,603
=========
Current portion of
long-term debt
$ 64,274
Other current
liabilities
294,360
29
Current liabilities
358,634
Liabilities subject to
compromise
1,526,733
Other long term
liabilities
337,892
Stockholders' deficit
(1,570,656)
Total liabilities and
stockholders' deficit
$ 652,603
=========
Income Statement for the Six Months Ended June 30, 2001 ($000)
SunBridge (inpatient
services)
$ 791,658
SunScript (pharmacy
services)
119,644
SunDance (therapy
services)
82,375
Other revenue
43,316
Revenues, net
1,036,993
Operating expenses
Operating expenses
931,118
EBITDAR
105,875
Lease expense
88,167
EBITDA
17,708
Depreciation and
amortization
16,343
Interest expense
7,227
Debt restructuring,
reorganization and other
charges
31,956
Net loss
$ (37,818)
=========
C. Five Year Projections
General
Operating Assumptions.
Sun will continue to operate its healthcare service businesses
through its three major lines of business: SunBridge, SunDance, and SunScript. SunBridge
operates long-term care nursing facilities and hospitals, SunDance operates the company's
rehabilitation therapy business, and SunScript is Sun's institutional pharmacy business.
Other operations include temporary therapy and nursing staffing services, mobile
radiology, medical laboratories, and home healthcare services.
The operation of Sun's
business will not change materially from that described in its Form 10-K as of and for the
year ended December 31, 2000. The financial projections generally assume inflationary rate
increases and relatively stable occupancy. The financial projections do not assume that
Sun acquires additional nursing facilities.
Year 2001 reflects actual
results through [August 31, 2001,] and projected results developed through a detailed
bottom-up budgeting approach. Fiscal years 2002-2005 have been projected using the year
2001 budget as a basis and adjusted for anticipated changes in government reimbursement,
patient mix, occupancy rates, insurance costs, and industry
30
trends. The following represents the highlights of the financial projections (which
assume the continued operation of [__] facilities):
- Revenue CAGR 2000-2005 of 1.8%
- EBITDA CAGR 2000-2005 of 14.7%
- EBITDA Margin % at 2.7% in 2000, decreasing to 2.5% in
2001, increasing to 5.0% in 2005
- Capital expenditures of $50.8 million in 2000,
decreasing to $26.3 million in 2001, and increasing to $28.3 million in 2005
Projections.
The following table presents summary projected financial information
for the Debtors:
Years ($ in
000's)
2000
2001
2002
2003
2004
2005
Revenue
[$ 2,179,900]
[$ 2,002,800]
[$ 2,040,900]
[$ 2,144,300]
[$ 2,262,200]
[$ 2,378,400]
EBITDA
[$ 59,600]
[$ 50,200]
[$ 74,900]
[$ 88,900]
[$ 103,700]
[$ 118,400]
EBITDA %
2.7%
2.5%
3.7%
4.1%
4.6%
5.0%
EBITDAR
[$ 261,200]
[$ 220,600]
[$ 244,300]
[$ 262,000]
[$ 281,500]
[$ 300,900]
EBITDAR %
12.0%
11.0%
12.0%
12.2%
12.4%
12.7%
Capital Exp.
$ 50,800
$ 26,300
$ 25,800
$ 26,800
$ 27,400
$ 28,300
Note: The Debtors and THCI are currently litigating whether the Debtors can reject
certain leases in this portfolio. In addition, the Debtors propose to transfer three of
the four buildings on which THCI has mortgages as part of this Plan. Generally, see
section II.D.2 and VI.E.5. The projections in the table above do not include the EBITDA
and EBITDAR effects of such rejections and transfers. If the Debtors are successful the
projections would increase by a material amount.
D. Going Concern Valuation
Sun has been advised by
Lazard Freres, its financial advisor, with respect to the estimated reorganization value
of Reorganized Sun on a going concern basis. Solely for purposes of the Plan, the analysis
performed by Lazard Freres indicates that the estimated reorganization values of
Reorganized Sun, after distributions of cash pursuant to the Plan, is within the range of
$[385] million to $[480] million (with a point estimate value of $[430] million) as of
October 31, 2001.
THE ASSUMED RANGE OF
REORGANIZATION VALUES, AS OF AN ASSUMED EFFECTIVE DATE OF FEBRUARY 15, 2002 REFLECTS WORK
PERFORMED BY LAZARD FRERES ON THE BASIS OF INFORMATION CONCERNING THE BUSINESS AND ASSETS
OF SUN AVAILABLE TO LAZARD FRERES AS OF OCTOBER 31, 2001. NEITHER LAZARD NOR SUN HAS
UPDATED THE ESTIMATED RANGE OF REORGANIZATION VALUES TO REFLECT INFORMATION AVAILABLE TO
SUN OR LAZARD SUBSEQUENT TO OCTOBER 31, 2001.
31
Based upon assumed total
debt (including capital lease and capitalized operating lease obligations) of
approximately $[150] million, the estimated imputed range of equity values of Reorganized
Sun is between $[235] million and $[330] million, with a point estimate value of $[280]
million. Assuming a distribution of 10 million shares of New Series A Common Stock, the
estimated imputed range of equity value is between $[23.50] and $[33.00] per share, with
an estimated point value of $[28.00] per share.
The
foregoing estimate of the value of Reorganized Sun is based on a number of assumptions,
including a successful reorganization of Sun's business and finances in a timely manner,
the implementation of Reorganized Sun's business plan, the achievement of the forecasts
reflected in the projections, market conditions as of October 31, 2001, continuing through
the assumed Effective Date of February 15, 2002, and the Plan becoming effective in
accordance with the estimates and other assumptions discussed herein.
In preparing its analysis
of the estimated reorganization value of reorganized sun, Lazard Freres, among other
analyses: (i) reviewed certain historical financial information of Sun for recent years
and interim periods including the most current financial results through august 31, 2001;
(ii) reviewed certain internal financial and operating data of sun including financial
projections prepared and provided by management relating to its business and its
prospects; (iii) met with certain members of senior management of Sun to discuss sun's
operations and future prospects; (iv) reviewed publicly available financial data and
considered the market value of public companies which Lazard Freres deemed generally
comparable to the operating business of Sun; (v) considered certain economic and industry
information relevant to the operating business; and (vi) conducted such other studies,
analysis, inquiries, and investigations as it deemed appropriate.
ALTHOUGH LAZARD FRERES
CONDUCTED A REVIEW AND ANALYSIS OF SUN'S BUSINESS, OPERATING ASSETS AND LIABILITIES AND
REORGANIZED SUN'S BUSINESS PLANS, IT ASSUMED AND RELIED ON THE ACCURACY AND COMPLETENESS
OF ALL (I) FINANCIAL AND OTHER INFORMATION FURNISHED TO IT BY SUN, AND (II) PUBLICLY
AVAILABLE INFORMATION. IN ADDITION, LAZARD FRERES DID NOT INDEPENDENTLY VERIFY
MANAGEMENT'S PROJECTIONS IN CONNECTION WITH SUCH ESTIMATES OF THE REORGANIZATION VALUE,
AND NO INDEPENDENT VALUATIONS OR APPRAISALS OF SUN WERE SOUGHT OR OBTAINED IN CONNECTION
HEREWITH.
THE ESTIMATED RANGE OF
REORGANIZATION VALUES DESCRIBED HEREIN DO NOT PURPORT TO BE APPRAISALS OR NECESSARILY
REFLECT THE VALUES WHICH MAY BE REALIZED IF ASSETS ARE SOLD AS A GOING CONCERN, IN
LIQUIDATION, OR OTHERWISE.
THE ANALYSIS OF SUN'S
REORGANIZATION VALUE PREPARED BY LAZARD FRERES REPRESENTS THE HYPOTHETICAL RANGE OF
ENTERPRISE VALUES AND IS BASED ON THE ASSUMPTIONS CONTAINED HEREIN. THE ANALYSIS WAS
DEVELOPED SOLELY FOR PURPOSES OF THE FORMULATION AND NEGOTIATION OF A PLAN OF
REORGANIZATION AND THE DETERMINATION OF IMPLIED RELATIVE RECOVERIES TO CREDITORS
THEREUNDER. SUCH ESTIMATES REFLECT COMPUTATIONS OF THE RANGE OF ENTERPRISE VALUES OF
REORGANIZED SUN THROUGH THE APPLICATION OF VARIOUS GENERALLY ACCEPTED VALUATION TECHNIQUES
AND DO NOT PURPORT TO REFLECT OR CONSTITUTE APPRAISALS, LIQUIDATION VALUES, OR ESTIMATES
OF THE ACTUAL MARKET VALUE THAT MAY BE REALIZED THROUGH THE SALE OF ANY SECURITIES TO BE
ISSUED PURSUANT TO THE PLAN, WHICH MAY BE SIGNIFICANTLY DIFFERENT THAN THE AMOUNTS SET
FORTH HEREIN.
32
THE VALUE OF AN OPERATING
BUSINESS IS SUBJECT TO NUMEROUS UNCERTAINTIES AND CONTINGENCIES WHICH ARE DIFFICULT TO
PREDICT, AND WILL FLUCTUATE WITH CHANGES IN FACTORS AFFECTING THE FINANCIAL CONDITION AND
PROSPECTS OF SUCH A BUSINESS. AS A RESULT, THE ESTIMATE OF THE RANGE OF ENTERPRISE VALUES
OF REORGANIZED SUN SET FORTH HEREIN IS NOT NECESSARILY INDICATIVE OF ACTUAL OUTCOMES,
WHICH MAY BE SIGNIFICANTLY MORE OR LESS FAVORABLE THAN THOSE SET FORTH HEREIN. BECAUSE
SUCH ESTIMATES ARE INHERENTLY SUBJECT TO UNCERTAINTIES, NEITHER SUN, LAZARD FRERES, NOR
ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THEIR ACCURACY. iN ADDITION, THE VALUATION OF
NEWLY ISSUED SECURITIES IS SUBJECT TO ADDITIONAL UNCERTAINTIES AND CONTINGENCIES, ALL OF
which ARE DIFFICULT TO PREDICT. ACTUAL MARKET PRICES OF SUCH SECURITIES AT ISSUANCE WILL
DEPEND UPON, AMONG OTHER THINGS, CONDITIONS IN THE FINANCIAL MARKETS, THE ANTICIPATED
INITIAL SECURITIES HOLDINGS OF PREPETITION CREDITORS [SOME OF WHICH MAY PREFER TO
LIQUIDATE THEIR INVESTMENT RATHER THAN HOLD IT ON A LONG-TERM BASIS] AND OTHER FACTORS
WHICH GENERALLY INFLUENCE THE PRICES OF SECURITIES.
Reorganized Sun may, in its
discretion, seek to list Reorganized Sun Common Stock for trading. There can be no
assurance, however, that the stock will be so listed and, if so listed, that an active
trading market would develop.
1
. Valuation Methodology
Lazard performed a variety
of analyses and considered a variety of factors in preparing its estimated range of
Reorganized Sun's enterprise value. While several generally accepted valuation techniques
for estimating Sun's enterprise value were used, Lazard primarily relied on comparable
public company analysis and discounted cash flow analysis. Lazard placed different weights
on each of the analyses and made judgments as to the relative significance of each
analysis in determining Sun's indicated enterprise value range. Lazard's valuation must be
considered as a whole and selecting just one methodology or portions of the analyses,
without considering the analyses as a whole, could create a misleading or incomplete
conclusion as to Sun's enterprise value.
In preparing its estimate
of the range of Reorganized Sun's enterprise value, Lazard performed a variety of analyses
and considered a variety of factors, some of which are described herein. The following
summary does not purport to be a complete description of the analyses and factors
undertaken to support Lazard's conclusions. The preparation of a valuation is a complex
process involving various determinations as to the most appropriate analyses and factors
to consider, and the application of those analyses and factors under the particular
circumstances. As a result, the process involved in preparing a valuation is not readily
summarized.
2.
Comparable Public Company
Analysis
A comparable public company
analysis estimates value based on a comparison of the target company's financial
statistics with the financial statistics of public companies that are similar to the
target company. It establishes a benchmark for asset valuation by deriving the value of
"comparable" assets, standardized using a common variable such as revenues,
earnings, and cash flows. The analysis includes a detailed multi-year financial comparison
of each company's income statement, balance sheet, and cash flow. In addition, each
company's performance, profitability, margins, leverage and business trends are also
examined. Based on these analyses, a number of financial multiples and ratios are
calculated to gauge each company's relative performance and valuation. Comparable public
company analysis is generally a historic or "backward looking" technique. It
33
relies on the fact that the price that an investor is willing to pay in the public
markets for securities of similar publicly traded companies represents Sun's current and
future prospects as well as the rate of return required on the investment.
A key factor to this
approach is the selection of companies with relatively similar business and operational
characteristics to the target company. Criteria for selecting comparable companies
include, among other relevant characteristics, similar lines of businesses, business
risks, growth prospects, maturity of businesses, market presence, size and scale of
operations. The selection of truly comparable companies is often difficult and subject to
interpretation. However, the underlying concept is to develop a premise for relative
value, which when coupled with other approaches, presents a foundation for determining
firm value.
Sun is one of the largest
skilled nursing facility operators in the United States. As of October 31, 2001, Sun
operated approximately 260 facilities, of which 14 were owned. Although there are several
generally comparable skilled nursing facility operators, they all differ in several key
aspects outlined below:
-
Number of facilities - Larger operators may reap greater economies of scale
-
Payor Mix -
Operators with high proportions of private or Medicare reimbursement generally have higher
revenues per patient day
-
Occupancy -
Operators with higher occupancy are generally able to spread fixed costs over a larger
base of patients, thereby increasing profitability
-
Degree of
Ownership of Facilities - Each operator owns or leases a different percentage of their
facilities which has an effect on traditional operating cash flow figures
-
Provision of
Ancillary Services - Some operators provide ancillary services to both affiliated and
nonaffiliated facilities
-
Provision of
other Healthcare Services - Certain operators also operate assisted living facilities and
acute care hospitals, each with different economics
In performing the
Comparable Public Company Analysis, five publicly traded companies deemed generally
comparable to Sun in some or all of the factors described above, were selected. They are:
Beverly Enterprises, Inc., Genesis Health Ventures, Inc., Manor Care, Inc., Mariner
Post-Acute Network, Inc. and Kindred Healthcare, Inc. Lazard analyzed the current trading
value for the five companies as a multiple of revenue, EBITDAR and EBITDA.
3.
Discounted Cash Flow Approach
("DCF")
The discounted cash flow
("DCF") valuation methodology relates the value of an asset or business to the
present value of expected future cash flows to be generated by that asset or business. The
DCF methodology is a "forward looking" approach that discounts the expected
future cash flows by a theoretical or observed discount rate determined by calculating the
average cost of debt and equity for publicly traded companies that are similar to Sun. The
expected future cash flows have two components: the present value of the projected
unlevered free cash flows for a determined period; and the present value of the terminal
value of cash flows (representing firm value beyond the time horizon of the projections).
Lazard's discounted cash flow valuation is based on a five-year projection of Sun's
operating results.
34
This approach relies on the
company's ability to project future cash flows with some degree of accuracy. Since Sun's
projections reflect significant assumptions made by Sun's management concerning
anticipated results, the assumptions and judgments used in the projections may or may not
prove correct and therefore, no assurance can be provided that projected results are
attainable or will be realized. Lazard cannot and does not make any representations or
warranties as to the accuracy or completeness of Sun's projections.
4.
Precedent Transactions
Analysis
Precedent transaction
analysis estimates value by examining public merger and acquisition transactions. An
analysis of the disclosed purchase price as a multiple of various operating statistics
reveals industry sales multiples for companies in similar lines of businesses to Sun.
These transaction multiples are calculated based on the purchase price (including any debt
assumed) paid to acquire companies that are comparable to Sun. These multiples are then
applied to Sun's key operating statistics to determine the total enterprise value or value
to a potential strategic buyer.
Precedent transaction
analysis explains other aspects of value. Unlike the comparable public company analysis,
the valuation in this methodology includes a "control" premium, representing the
purchase of a majority or controlling position in a company's assets. Thus, this
methodology generally produces higher valuations than the comparable public company
analysis. Other aspects of value that manifest itself in a precedent transaction analysis
include:
-
Circumstances
surrounding a merger transaction may introduce "noise" into the analysis (e.g.
an additional premium may be extracted from a buyer in the case of a competitive bidding
contest)
-
The market environment is not identical for
transactions occurring at different periods of time
-
Circumstances
pertaining to the financial position of a company may have an impact on the resulting
purchase price (e.g. a company in financial distress may receive a lower price due to
perceived weakness in its bargaining leverage)
Since precedent transaction
analysis explains other aspects of value besides the inherent value of a company, there
are limitations as to its usage in Sun's valuation. In the case of Sun, the low number of
completed transactions for which public data is available further limits this analysis.
Furthermore, most transactions occurred prior to the implementation of a Prospective
Payment System in June 1998 that significantly altered valuations in the industry. Due in
part to these factors, Lazard did not place significant emphasis on the precedent
transaction analysis in determining a range of enterprise values for Sun.
THE RANGE OF REORGANIZATION
VALUES DETERMINED BY LAZARD FRERES IS AN ESTIMATE AND DOES NOT NECESSARILY REFLECT VALUES
THAT COULD BE ATTAINABLE IN PUBLIC OR PRIVATE MARKETS. THE IMPUTED RANGE OF SUN'S
REORGANIZATION EQUITY VALUE IS NOT AN ESTIMATE OF THE POST-REORGANIZATION MARKET TRADING
VALUE OF THE SECURITIES TO BE ISSUED UNDER THE PLAN. ANY SUCH TRADING VALUE MAY BE
MATERIALLY DIFFERENT FROM THE ESTIMATED IMPUTED EQUITY VALUE RANGE FOR REORGANIZED SUN AS
DETERMINED IN LAZARD FRERES' VALUATION ANALYSIS.
35
V.
Business Description and Reasons for Chapter 11
A. The Debtors' Businesses
Sun and certain of the
other Debtors are among the largest providers of long-term, subacute and related specialty
healthcare services in the United States. Sun operates through three principal business
segments: inpatient services (SunBridge); rehabilitation therapy services, and respiratory
therapy supplies (SunDance and SunCare); and pharmaceutical (SunScript). The following is
a brief description of those operations. Additional detail on Sun's operations and
business segments can be found in its Form 10-K for 2000, filed on April 2, 2001, and its
Form 10-Q for the second and third quarters of 2001, filed on August 14, and [November
14,] 2001, respectively, with the Securities and Exchange Commission. These documents may
be obtained from the Securities and Exchange Commission, including at their EDGAR website
www.sec.gov or commercially at such websites as www.freeedgar.com.
1.
Inpatient Services (SunBridge)
At September 30, 2001, Sun
operated 260 long-term and subacute care facilities with 29,153 licensed beds. These
facilities provide inpatient skilled nursing and custodial services, principally to the
elderly. The facilities also provide rehabilitative, restorative, transitional medical,
and other services. Sun provides 24-hour nursing care in these facilities by registered
nurses, licensed practical nurses, and certified nursing assistants. As of September 30,
2001, Sun intended to disposed of 16 of these facilities with 1,824 licensed beds through
foreclosure sales, lease terminations through mutual agreement with the lessors, or
transferring operations to successor operators.
The revenues for Sun's
operations are highly dependent on federal (Medicare) and state (Medicaid) reimbursement.
The following table sets forth the total revenues by payor source for Sun's U.S.
operations for the periods indicated (in thousands):
Years Ended
December 31,
Sources of Revenues
2000
1999
1998
1997
Medicaid
$1,025,600
$1,041,662
$957,058
$583,583
Medicare
515,492
446,820
834,200
479,201
Private pay and other (a)
652,334
743,651
1,011,935
749,881
(a)
Includes revenues from the provision of ancillary services, which includes
payments for rehabilitation and respiratory therapy, temporary medical staffing services
and pharmaceutical services provided to nonaffiliated long-term and subacute facilities
and not directly charged to Medicaid or Medicare. Nonaffiliated sources may themselves
derive all or a portion of their revenues from Medicaid and/or Medicare.
36
2.
Rehabilitation Therapy
Services (SunDance) and Respiratory Therapy Supplies (SunCare
Through SunDance
Rehabilitation Corporation, Sun provides physical, occupational, and speech therapy
services. Through SunCare Respiratory Services, Inc., Sun provides oxygen and respiratory
therapy supplies and equipment. At September 30, 2001, Sun provided therapy services and
supplies to 950 facilities in 41 states, 677 of which were operated by nonaffiliated
parties. Sun is soliciting offers for its respiratory therapy supplies operation.
Sun's therapy operations
are significantly dependent on Medicare and Medicaid payments. As discussed below, the
implementation of PPS resulted in a per diem cap on Medicare reimbursement, based on the
acuity level of the patient. The implementation of these caps adversely affected the
revenues of every nursing home in the country that participates in the Medicare program,
including all of Sun's therapy customers. This in turn resulted in a sharp decline in
demand for Sun's therapy services.
3.
Pharmaceutical Services
(SunScript)
Through SunScript Pharmacy
Corporation, Sun provides pharmaceutical services. Pharmaceutical services include
dispensing pharmaceuticals for such purposes as infusion therapy, pain management,
antibiotic therapy and parenteral nutrition. Additional services include providing
consultant pharmacists and assistance in preparation of billing documentation. SunScript
services are provided to subacute and skilled nursing care facilities, assisted living
facilities, group houses, correctional facilities, mental health facilities and home
healthcare companies. As of September 30, 2001, Sun operated 32 regional pharmacies, nine
in-house long-term care pharmacies and one pharmaceutical billing and consulting center,
which together provided pharmaceutical products and services to a total of 655 long-term
and subacute care facilities in 23 states, 425 of which were operated by nonaffiliated
parties.
4.
Other Services
Sun is a nationwide
provider of temporary medical staffing through CareerStaff Unlimited, Inc.
("CareerStaff"). CareerStaff derives approximately 12% of its revenues from
skilled nursing facilities, 45% from schools and governmental agencies and 43% from
hospitals and other providers. CareerStaff provides (i) licensed therapists skilled in the
areas of physical, occupational and speech therapy, (ii) nurses, (iii) pharmacists,
pharmacist technicians and medical imaging technicians and (iv) related medical personnel.
At September 30, 2001, CareerStaff had 25 division offices providing temporary therapy and
nursing staffing services in major metropolitan areas and one division office specializing
in placements of temporary traveling therapists in smaller cities and rural areas. Sun's
temporary therapy service operations provided 695,110 temporary therapy staffing hours and
399,332 non-therapy hours to nonaffiliates for the nine months ended September 30, 2001.
Through SunAlliance
Healthcare Services, Inc. ("SunAlliance") and SunPlus Home Health Services, Inc.
("SunPlus"), Sun provides mobile radiology, medical laboratory, and home
healthcare services in certain locations. Through Shared Healthcare Systems, Inc., which
also does business under the trade name SHS.com, certain software for use in the long-term
care industry are developed and may be licensed or sold. Shared Healthcare Systems, Inc.
which is a majority-owned subsidiary of Sun, did not commence a case under Chapter 11 of
the U.S. Bankruptcy Code.
37
B. Events Leading to the Commencement of the Chapter 11
Cases
The Debtors believe that
their financial difficulties are attributable to a number of factors. First, the federal
government made fundamental changes to the reimbursement for medical services provided to
eligible individuals. The changes have had a significantly negative impact on the
healthcare industry as a whole and on the Debtors' cash flows. Second, the federal
reimbursement changes have exacerbated a long-standing problem of less than fair
reimbursement by the states for medical services provided to indigent persons. Third,
numerous other factors have adversely affected the Debtors' cash flows, including
increased labor costs, increased professional liability costs and insurance, and increased
interest rates prior to the commencement of their chapter 11 cases. Finally, as a result
of declining governmental reimbursement rates and in the face of rising inflationary
costs, the Debtors were too highly leveraged to service their indebtedness.
1.
Leverage and Debt Coverage
(prior to the Prospective Payment System
Historically, the Debtors'
earnings growth resulted primarily from the acquisition of long-term and subacute
facilities and the expansion of certain ancillary services (such as rehabilitation and
respiratory services and pharmaceutical and medical supply services) to affiliated and
non-affiliated facilities. Two of Sun's largest acquisitions were of Regency Health
Services, Inc. ("Regency") and Retirement Care Associates, Inc.
("RCA"). Sun acquired Regency in October 1997. At the date of acquisition
Regency operated 111 long-term care facilities (including one managed facility) in the
United States and provided rehabilitation therapy and pharmacy services to both affiliated
and nonaffiliated facilities. Sun acquired RCA in June 1998. RCA operated 98 skilled
nursing facilities and assisted living centers located primarily in eight states in the
southeastern United States.
Sun also engaged in
overseas acquisitions. On January 30, 1997, it increased its holdings to 100% of the
capital stock of Ashbourne PLC, a provider of healthcare services through 49 nursing
facilities located in the United Kingdom. In July 1997, Sun acquired a majority interest
in Eurosar, S.A., an operator of 11 long-term care facilities in Spain. In November 1997,
Sun acquired a 38% equity stake in Alpha Healthcare Limited, an Australian healthcare
provider, and in December 1997, Sun acquired a majority interest in Heim-Plan
Unternehmensgruppe, an operator of 11 nursing homes in Germany. As of the date hereof, Sun
has disposed of all its international operations.
Sun financed these
acquisitions through the incurrence of a significant amount of debt and the issuance of
equity securities. As of December 31, 1998, Sun had total liabilities of $2.08 billion and
had raised approximately $750 million through the issuance of its common stock. As of
December 31, 1998, Sun's annual net revenue was $3.09 billion and its earnings before
interest, taxes, depreciation, and amortization ("EBITDA") were $189.9 million.
2.
Medicare Reimbursement
The Health Insurance for
Aged and Disabled Act (Title XVIII of the Social Security Act), known as
"Medicare," has made available to nearly every American 65 years of age and
older a broad program of health insurance designed to help the nation's elderly meet
hospital and other health care costs. Health insurance coverage has been extended to
certain persons under age 65 qualifying as disabled and those having end-stage renal
disease. Medicare includes three related health insurance programs: (i) hospital
insurance ("Part A"); (ii) supplementary medical insurance ("Part B");
and (iii) a managed care option for beneficiaries who are entitled to Part A and enrolled
in Part B ("Medicare+Choice" or "Medicare Part C"). The Medicare
program is currently administered by fiscal intermediaries (for Part A and some Part B
services) and carriers (for Part B) under
38
the direction of Centers for Medicare and Medicaid Services (f/k/a the Health Care
Financing Administration) ("CMS") of the Department of Health and Human Services
("HHS").
3.
Prospective Payment System
Pursuant to the Balanced
Budget Act of 1997 and regulations promulgated by HHS, reimbursement under the Medicare
program has changed from a cost-based retrospective reimbursement system to what is known
as a prospective-payment system ("PPS") for Medicare Part A skilled nursing
facility services. The changes also resulted in the adoption of fee screen schedules which
limit and "cap" reimbursement for Medicare Part B therapy services. The
reimbursement rates under PPS were not published until May 12, 1998, less than two months
prior to the implementation of PPS, and were significantly lower than anticipated within
the industry.
The magnitude of the
reduction in rates took the industry by surprise. During the mid-1990's, CMS funded the
development of the Multi-State Nursing Home Case-Mix and Quality Demonstration. The
purpose of that project was to design, implement, and evaluate Medicare nursing home
prospective payment and quality monitoring systems across several states. A number of
facilities participated in the demonstration and helped to perfect the case mix
classification system (RUG-III) developed to capture resource use of nursing home
patients. Under the demonstration project, most non-therapy ancillary costs were passed
through and Medicare Part B expenditures incurred during the beneficiary's inpatient (Part
A) stay were not considered. The industry was led to believe that CMS would adjust its
payment "grouper" to compensate for these variable costs. That did not happen.
First, the expected adjustments for non-therapy ancillary costs were not made. Second, the
Medicare Part B expenditures during inpatient stays were under-calculated. Third,
adjustments were made that reduced the aggregate base year to the 1995 spending level.
Fourth, the market basket used by CMS to trend forward the 1995 expenditures to 1998 was
defective. Fifth, the RUG-III case-mix classification system, as implemented, was
insensitive to patients requiring multiple services, e.g., rehabilitation and extensive
medical care.
PPS became effective for
approximately 75 of the Debtors' facilities on July 1, 1998 and for the Debtors' remaining
290 facilities on January 1, 1999. Under PPS, CMS pays skilled nursing facilities
participating in the Medicare program a fixed fee per patient per day, based on the acuity
level of the patient, to cover all post-hospital extended care routine service costs,
including ancillary and capital related costs for Medicare beneficiaries receiving skilled
services. The per diem rate also covers substantially all items and services furnished
during a covered stay. Prior to the implementation of PPS, the costs of services were
reimbursed on a "pass through" basis. Thus, certain costs which were formerly
billed separately to the Medicare program are now part of the per diem rate. During the
first three years of the phase-in period, payments are based on a blend of the facility's
adjusted historical costs (based on 1995 cost data) and the federally-established per diem
rates under PPS.
The Debtors' revenues from
their inpatient facilities have been significantly and adversely affected by the size of
the federally-established per diem rates. The Balanced Budget Act of 1997 also set annual
limits on the amount of certain types of care that the government will pay for per
Medicare patient. The per diem reimbursement rate has generally been less than the amount
the Debtors' inpatient facilities received on a daily basis under cost-based
reimbursement. Moreover, PPS has adversely impacted the Debtors because the federal per
diem rates for higher acuity patients do not adequately compensate the Debtors for the
additional expenses and risks of caring for such patients.
The implementation of PPS
also has resulted in a greater than expected decline in demand for the Debtors' therapy
and pharmaceutical services. Prior to the implementation of the PPS, the Debtors'
rehabilitation, respiratory therapy, and
39
pharmaceutical services, had significantly higher operating margins than the margins
associated with the Debtors' long-term and subacute care facilities. Such ancillary
services provided most of the Debtors' operating profits.
4.
Cost Cutting Efforts and
Leverage Under PPS
The Debtors (and the rest
of the long-term care industry) were unable to predict how drastically PPS would affect
its financial performance. In 1998, the Debtors designed and implemented a cost-cutting
program to assure that their business operations would survive under PPS. Sun has
continued to cut costs through its chapter 11 case. The number of full and part-time
employees worldwide has decreased from 80,700 on February 20, 1999, to 46,003 on September
30, 2000, and to 39,177 on September 30, 2001. The decrease in 1999 was primarily
attributable to the elimination of rehabilitation therapy employees through attrition,
layoffs, and the disposition of a number of inpatient facilities. The Debtors restructured
its domestic operations to more closely align the inpatient, rehabilitation, and
pharmaceutical services divisions. The Debtors also decreased the number of layers in the
corporation management structure. The decrease in 2000 and through September 30, 2001,
primarily resulted from the disposition of the Debtors' international operations, medical
supplies operations, and many inpatient facilities.
However, the implementation
of PPS has had a much greater impact on the long term care industry than predicted by the
federal government. HHS worsened the results by selecting 1995 as the base year for
calculating each company's costs for purpose of calculating the transition rates. Given
the significant increase in costs between 1995 and 1998, such a decision significantly
worsened the financial condition of Sun and shortened the time within which it had to
react to the changes caused by PPS. Primarily as a result of PPS, Sun estimates that the
average Medicare Part A revenue per patient, per day at its inpatient facilities decreased
from approximately $466 in 1998 to $338 in 1999, although the amount increased fo $359 in
2000. In addition, Sun's average annual Medicare Part B revenue per facility decreased
approximately 67% from 1997 to 2000. Based on the actual effect of PPS, the Debtors'
leverage ratio increased significantly and its liquidity rapidly dwindled.
The implementation of PPS
has been identified as a significant factor affecting the commencement of chapter 11 cases
by six other national nursing home chains (Vencor, Inc., Integrated Health Services, Inc.,
Genesis Health Ventures, Inc., The Multicare Companies, Inc., Mariner Post-Acute Network,
Inc., and Mariner Health Group, Inc.), and the bankruptcy of numerous smaller nursing home
companies.
5.
Subsequent Adjustments to
Medicare Reimbursement
In November of 1999,
Congress passed the Medicare Balanced Budget Refinement Act (the "Refinement
Act"), which placed a moratorium on implementing the cap on Medicare Part B therapy
services through January 1, 2002, and provided for modest increases in the per diem rates
paid to skilled nursing facilities for their sickest patients. In spite of the Refinement
Act, the substantial reduction in reimbursement under the Medicare system has materially
impaired many of the lines of business of the Debtors. Long-term care facilities now
receive significantly less compensation for any given level of care. In many cases,
reimbursement does not cover even the direct cost of care, let alone overhead and capital
costs.
On December 15, 2000,
Congress passed the Benefit Improvement and Protection Act of 2000 which, among other
provisions, increases the nursing component of Federal PPS rates by approximately 16.7%
for the period April 1, 2001 through September 30, 2002. The legislation will also change
the 20% add-on to 3 of the 14 rehabilitation RUG categories to a
40
6.7% add-on to all 14 rehabilitation RUG categories beginning April 1, 2001. The Part B
consolidated billing provision of the Refinement Act will be repealed except for Medicare
Part B therapy services and the moratorium on the $1,500 therapy caps will be extended
through calendar year 2002.
6.
Medicaid Reimbursement
Medicaid (Title XIX of the
Social Security Act) is a federal-state cooperative program in which the federal
government supplements funds provided by the participating states for medical assistance
to "medically indigent" persons. The programs are administered by the applicable
state welfare or social service agencies. Although Medicaid programs vary from state to
state, traditionally they have provided for the payment of certain expenses, up to
established limits, at rates determined in accordance with each state's regulations. Most
states pay prospective rates and have some form of acuity adjustment.
Although the amount of
reimbursement varies significantly from state to state, in general, Medicaid payments are
lower than the costs associated with treating those patients. Moreover, the Balanced
Budget Act of 1997 repealed the "Boren Amendment" federal payment standard for
Medicaid payments to nursing facilities effective October 1, 1997. The Boren Amendment
required that Medicaid payments to certain health care providers be reasonable and
adequate in order to cover the costs of efficiently and economically operated healthcare
facilities.
This imbalance between
Medicaid rates and the costs of providing Medicaid patient care has been a chronic problem
which, until the implementation of PPS, was partially offset by Medicare reimbursement
rates. With the unanticipated and excessive reductions in Medicare reimbursement under
PPS, the Debtors no longer had the ability to subsidize the treatment of their Medicaid
patients while meeting their debt service obligations.
7.
Lack of Liquidity
The Debtors' available
liquidity, including cash reserves and availability under the Credit Agreement, decreased
from approximately $123 million at December 31, 1998 to approximately $38.4 million at
September 30, 1999. Including changes in working capital, the Debtors experienced positive
cash flow from operations of approximately $4.4 million for the nine months ended
September 30, 1999. Prior to the commencement of the chapter 11 cases, the Debtors'
liquidity position was negatively affected by, among other things, the implementation of
the prospective payment system, as described above, and an impairment of their accounts
receivable.
The implementation of PPS
for certain nonaffiliated nursing home customers reduced the cash flows of those homes,
thereby reducing the collectibility of amounts due to the Debtors. In addition, a growing
number of nonaffiliated nursing home customers have commenced cases under the Bankruptcy
Code. As a result, the Debtors' accounts receivable from nonaffiliated customers have been
impaired.
As of December 31, 1998,
September 30, 1999 and the Petition Date, the Debtors were not in compliance with certain
of the financial covenants contained in the Credit Agreement. Borrowings under the Credit
Agreement were $745.6 million and $875.0 million at December 31, 1998 and June 30, 1999,
respectively. Sun sought to amend the Credit Agreement to, among other things, obtain
waivers of current defaults and amend the financial covenants, but was unable to obtain
such amendment. As of the Petition Date, no further amounts could be borrowed under the
Credit Agreement.
Sun's noncompliance with
certain covenants contained in the Credit Agreement also caused cross-defaults under
certain other debt obligations. Because of liquidity concerns, on June 30, 1999, Sun
failed to make scheduled interest and principal payments under the Credit Agreement. The
lenders exercised their right to block Sun from making interest payments (i) due
41
May 1, 1999 on $150 million of their 9.375% subordinated notes due 2008 and (ii) due
July 1, 1999 on $250 million of their 9.5% subordinated notes due 2007, causing Sun to be
in default under such indentures.
8.
Prepetition Restructuring
Negotiations
By January 1, 1999, all of
the Debtors' skilled nursing facilities were operating under PPS. Sun began discussions
with its senior lenders in February 1999 in order to seek waivers of certain financial
covenants. At that point, the Company still did not know the full impact of PPS. In August
1999, Sun made its first restructuring proposal to the holders of the Senior Lender Claims
and the Senior Subordinated Note Claims. Negotiations continued through August and
September 1999 and culminated in an agreement in principle among Sun and those two senior
creditor groups on October 14, 1999 (the Petition Date).
The terms of that agreement
in principle were disclosed publicly on October 27, 1999, through the filing by Sun of a
Form 8-K with the Securities and Exchange Commission. Shortly after the Petition Date, the
holders of over two-thirds of the Senior Lender Claims, the holders of approximately 75%
of the Senior Subordinated Note Claims, and Sun signed an agreement for the implementation
of the agreement in principle through the terms of a plan of reorganization.
Unfortunately, the Debtors' revenues continued to decline during the course of these
chapter 11 cases and they were unable to proceed with the agreement in principle.
9.
Prepetition Facility Transfers
Prior to the commencement
of the Debtors' chapter 11 cases, the Debtors transferred operational and financial
responsibility for approximately 35 facilities to new operators. These facilities were
transferred as going-concerns. Certain of the Debtors may have limited indemnification
obligations arising from these transfers.
C. Pending Litigation and Other Proceedings
1.
Securities Litigation
In March and April, 1999,
class action lawsuits were filed against Sun and three officers of Sun in the United
States District Court for the District of New Mexico on behalf of purchasers of Sun's
common stock during the class period. These actions have been consolidated as
In re Sun
Healthcare Group, Inc. Securities and Litigation Master, File No. Civ. 99-269
. The
lawsuits allege, among other things, that Sun did not disclose material facts concerning
the impact that the prospective payment system would have on Sun's results of operations.
Sun disputes these allegations. Sun was dismissed without prejudice from this lawsuit, but
the litigation continues against the officers.
2.
Qui Tam Suits
Certain of the Debtors are
defendants in 12
qui tam
lawsuits brought by private citizens alleging, among other
things, violations of the federal False Claims Act. Each of these lawsuits will be settled
pursuant to the global settlement with HHS, other than claims for attorney fees. See the
description of the HHS Claims in section II.D.3.
42
3.
Insured Claims/Insurance
Coverage
a. Insured
Claims: Prior to the Petition Date, the Debtors and/or persons or entities the Debtors
indemnify, were defendants or potential defendants in approximately 582 insured claims
including lawsuits or notices of intent to sue which alleged personal injury, wrongful
death, advertising injury, products liability, property damage and other similar
allegations against the Debtors (the "Insured Claims"). Although many of the
Insured Claims have been resolved, 132 pre-petition Insured Claims remain unresolved and
are either pending in state and federal courts nationwide or are still in pre-suit status.
Of these unresolved Insured Claims, 56 claimants have stipulated to limiting their
recovery to available insurance proceeds. The Debtors dispute the allegations contained in
the remaining Insured Claims and intend to vigorously defend the same and/or seek
resolution through the ADR Program discussed in more detail below, through informal
negotiation, or through mediation as required by the state or federal court where the
Insured Claim is pending.
b. Insurance
Coverage: In general, the Debtors have a primary layer of professional liability insurance
coverage which provides up to $1,000,000 per occurrence with an aggregate of $3,000,000
per facility (the "Primary Coverage"). The Debtors' Primary Coverage includes
self-insured retention amounts ranging from $25,000 to $100,000 (the "SIR"). The
SIR applies to both defense and indemnity and must be exhausted as a prerequisite to
coverage by the carrier under the applicable policy. In addition, the Debtors have varying
aggregates of excess insurance coverage for exposure above the Primary Coverage (the
"Excess Coverage"). The Debtors estimate that the total amount of claims in this
category that are not covered by insurance (primarily due to self-insured retentions in
its policies) will be approximately $21,000,000. This uninsured portion will be treated as
part of Class E.
The Debtors are not aware
of any general denials of, or challenges to, coverage by any of the Debtors' insurance
carriers other than the possibility of the existence of individual reservation of rights
letters received in the ordinary course.
4.
Class Action Employment
Litigation
In May and August 1999,
former employees of Sun's long-term care subsidiary, SunBridge, and the Sun's therapy
subsidiary, SunDance, filed proposed class action complaints against SunBridge and
SunDance in the Western District of Washington. The plaintiffs sought to represent certain
current and former employees of SunBridge and SunDance who were allegedly not paid
appropriate wages under federal and state law since May and August 1996, respectively.
Plaintiffs filed claims in the chapter 11 cases in the amount of $780.0 million in the
SunDance action and $242.0 million in the SunBridge action, plus interest, costs and
attorney fees. Sun disputes these claims.
In order to avoid
protracted class action litigation in the Bankruptcy Court, the Debtors negotiated a
stipulation with the class action claimants, which was approved by the Bankruptcy Court on
September 22, 2000, whereby the parties agreed to withdrawal of the motion and vacature of
the automatic stay to permit the litigation to proceed in the district court. The
stipulation further provided for an expedited discovery and briefing schedule regarding
the scope and availability of a class relating to the claimants' state law claims and
issues involving the form and manner of notice for the FLSA claims.
The Debtors and the
claimants have resolved many of those issues and have reached an agreement in principle
which would settle the lawsuits on favorable terms for the Debtors. [Under the principal
terms of the settlement, the Debtors will provide a settlement fund of up to an aggregate
$3 million general unsecured claim , the claimants' attorney's fees are capped at
$300,000, and the Debtors will pay up to $550,000 to cover the cost of notice to
prospective claimants in the class and claims
43
administration.] The parties are presently working on a memorandum of understanding
that will form the basis of formal settlement papers for submission to the Bankruptcy
Court for final approval.
5.
Uninsured Litigation or Other
Proceedings
The Debtors are parties to
various other uninsured legal actions and administrative proceedings arising in the
ordinary course of business including the following:
a. Employment
Claims: There are approximately 90 employment related pre-petition claims or lawsuits that
are either currently pending against the Debtors before various administrative agencies,
in state or federal courts nationwide, or are potential claims not currently before a
court or administrative agency (the "Employment Claims"). These Employment
Claims include allegations of wage and hour violations, sex, race, gender, age, pregnancy,
and disability discrimination, wrongful termination, sexual harassment, non-subscriber
workers compensation claims and violations of various state and/or federal employment
statutes and/or regulations. The Debtors dispute all allegations contained in these
Employment Claims and intend to vigorously defend the same and/or to pursue prompt
informal resolution thereof. The Debtors estimate that the total amount of claims in this
category will be approximately $7,000,000, which will be treated as part of Class E.
b. Contract
and Miscellaneous Claims: There are approximately 38 contract related and miscellaneous
pre-petition claims currently pending in various state or federal courts nationwide
against the Debtors (the "Contract and Miscellaneous Claims"). These claims
include allegations ranging from breach of pharmacy agreements, breaches of contracts for
services rendered and condemnation proceedings for municipal road widening. The Debtors
dispute all allegations contained in these Contract Claims and intend to vigorously defend
the same and/or to pursue prompt informal resolution thereof. The Debtors estimate that
the total amount of claims in this category will be approximately $12,000,000, which will
be treated as part of Class E.
VI.
Significant Events During the Chapter 11 Case
A. Filing and First Day Orders
On October 14, 1999, the
Debtors filed their petitions under chapter 11 of the Bankruptcy Code. On that date, the
Bankruptcy Court entered certain orders designed to minimize the disruption of the
Debtors' business operations and to facilitate their reorganization.
- Case Administration Orders.
These orders:
(i) authorized joint administration of the chapter 11 cases, (ii) established interim
compensation procedures for professionals (which were subsequently modified by the
Bankruptcy Court), (iii) granted an extension of the time to file the Debtors' schedules
and statements, and (iv) authorized the mailing of initial notices and all other mailings
directly to parties in interest and the filing of a list of creditors without claim
amounts in lieu of a matrix.
- Payments on Account of Certain Prepetition Claims.
The Bankruptcy Court authorized the payment of prepetition: (i) wages, compensation and
employee benefits, (ii) sales and use taxes, (iii) claims of common carriers and
warehousemen, (iv) claims of critical trade vendors, (v) refunds to patients, and (vi)
claims of foreign
44
creditors. The Debtors have made payments totaling approximately $57.2 million on
account of these claims (approximately $41 million of which related to employee payroll.
- Business Operations.
The Bankruptcy Court
authorized the Debtors to: (i) comply with certain license and regulatory agency fee
requirements, (ii) continue customer service programs, (iii) continue prepetition premium
obligations under workers' compensation insurance and all other insurance policies, and
bonds relating thereto, (iv) maintain existing bank accounts and business forms, (v)
continue their centralized cash management system, (vi) employ certain investment
guidelines, (vii) provide adequate assurance to utility companies including the payment of
certain prepetition claims, (viii) grant administrative expense status to undisputed
obligations arising from the postpetition delivery of goods ordered in the prepetition
period and make payment of such claims in the ordinary course of business, and (ix)
maintain patient trust accounts.
- Bankruptcy Matters.
The Bankruptcy Court
authorized the Debtors to: (i) reject twenty-eight unexpired leases of nonresidential real
property, and (ii) obtain interim postpetition financing under the DIP Credit Agreement on
a superpriority basis for $25 million, pending further interim and final hearings.
On February 3, 2000, HoMed
filed a petition under chapter 11 of the Bankruptcy Code. HoMed is a wholly owned indirect
subsidiary of Sun Healthcare Group, Inc. On February 25, 2000, the Bankruptcy Court
entered orders in the HoMed case substantially similar to the orders entered on October
14, 2000 for the other Debtors. HoMed is not a party to the DIP Credit Agreement.
B. Appointment of the Creditors' Committee
On October 22, 1999, the
United States Trustee for the District of Delaware, pursuant to its authority under
section 1102 of the Bankruptcy Code, appointed an Official Committee of Unsecured
Creditors in these bankruptcy cases.
Since the appointment of
the Creditors' Committee, the Debtors have consulted with the Creditors' Committee
concerning the administration of the chapter 11 cases. The Debtors have informed the
Creditors' Committee with respect to their operations and have sought concurrence of the
Creditors' Committee for actions and transactions outside of the ordinary course of
business. The Creditors' Committee has participated actively, together with the Debtors'
management and professionals, regarding the Debtors' business operations, operating
performance and business plan.
The Creditors' Committee
currently consists of ten members. The current members of the Creditors' Committee, and
the attorneys and financial advisors retained by the Creditors' Committee, are set forth
below:
HSBC Bank USA
10 East 40th Street, 14th Floor
New York, New York 10016
Cooperative Centrale Raiffeisen -
Bohrenleenbank B.A., "Rabobank Nederland" New York Branch
245 Park Avenue
New York, New York 10167
Credit Suisse First Boston Corporation
11 Madison Avenue
New York, New York 10022
Bank of America, N.A.
555 South Flower Street
Los Angeles, California 90071
45
GSC Partners
500 Campus Drive
Suite 220
Florham Park, New Jersey 07932
Foothill Income Trust c/o Foothill Capital
Corporation
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025
Crestwood Hospitals, Inc.
7556 Shoreline Drive
Suite B
Stockton, California 95219
LTC Properties, Inc.
300 Esplanade Drive
Suite 1860
Oxnard, California 93030
Service Employees International Union
1313 L Street, N.W.
Washington, D.C. 20005
U.S. Bank National Association, as Indenture
Trustee
180 East Fifth Street
St. Paul, Minnesota 55101
The Creditors' Committee
has retained the following advisors:
Attorneys
Otterbourg, Steindler,
Houston & Rosen, P.C.
230 Park Avenue
New York, New York 10169
Houlihan Lokey Howard & Zukin
2 First National Plaza
20 South Clark Street, 21st Floor
Chicago, Illinois 60603-1881
By motion dated December 8,
1999, John Castel, a former officer of one of the Debtors and a creditor of certain of the
Debtors, filed a motion for an order directing the United States Trustee to appoint an
additional committee of unsecured creditors or to expand the existing Creditors' Committee
and appoint Mr. Castel as a member. The Bankruptcy Court denied his motion in part on
January 13, 2000.
The Creditors' Committee
has participated in all aspects of the chapter 11 cases of Sun and the other Debtors.
C. DIP Credit Agreement
The DIP Credit Agreement is
the Revolving Credit Agreement, dated as of October 14, 1999, among Sun and each of its
subsidiaries named therein (all of its domestic debtor-subsidiaries other than HoMed), the
lenders thereto, The CIT Group/Business Credit, Inc., as Lenders' Agent (as defined in the
DIP Credit Agreement), and Heller Healthcare Finance, Inc., as collateral agent
(collectively, the "Agents"). The Debtors entered into the DIP Credit Agreement
in order to ensure that they had the necessary liquidity to fund the expenses associated
with their chapter 11 cases. The DIP Credit Agreement has been amended during the
bankruptcy case, pursuant to orders of the Bankruptcy Court.
The lenders under the DIP
Credit Agreement agreed to provide credit, subject to a borrowing base limit, of up to
$200 million (including a $75 million letter of credit sublimit). As presently amended,
borrowings under the DIP Credit Agreement
46
bear interest at the prime rate plus 1.25% in the case of alternative base rate loans
and at an adjusted LIBO Rate plus 3.75% for eurodollar loans. The DIP Credit Agreement
terminates on the earliest of February 28, 2002, the Effective Date of the Plan of
Reorganization and the date on which all amounts payable under the DIP Credit Agreement
become due and payable.
The DIP Credit Agreement is
secured by a first priority senior priming lien on all inventory (other than inventory
located at the skilled nursing facilities), present and future accounts receivable and
leasehold interests. The DIP Credit Agreement is further secured by a first priority lien,
subject and subordinate to liens that are valid and perfected on the Petition Date, in all
present and future equipment, documents of title, general intangibles and personal
property of the Debtors. Finally, the obligations under the DIP Credit Agreement are
entitled to superpriority status. That is, they are to be paid before any other unsecured
obligations of the Debtors (other than HoMed), including administrative expenses and other
claims entitled to priority under the Bankruptcy Code.
On October 14, 2001, the
Bankruptcy Court entered a first day order authorizing the Debtors to enter into the DIP
Credit Agreement, pending an interim hearing. Shortly after the Petition Date, the United
States Department of Health and Human Services objected to the DIP Credit Agreement. On
October 22, 1999, the Court held an interim hearing and approved interim financing under
the DIP Credit Agreement. After litigation relating to a stay pending appeal, the
Department of Health and Human Services and the Debtors negotiated a stipulation resolving
the issues raised by the DIP Credit Agreement. On November 12 and 29, 1999, the Bankruptcy
Court entered final orders approving the DIP Credit Agreement.
Thereafter, on December 3,
1999, twelve states filed a joint motion to reconsider the order approving the DIP Credit
Agreement. The states asserted that under the Eleventh Amendment to the United States
Constitution, the Bankruptcy Court lacked jurisdiction to enter the order approving the
DIP Credit Agreement. In a decision dated February 25, 2000, the Bankruptcy Court held
that the order approving the DIP Credit Agreement did not constitute a suit against the
states and did not contravene the Eleventh Amendment. The states have appealed that
decision, which appeal is pending.
During the second quarter
of 2000 and, later, the first quarter of 2001, the Debtors notified the Agents of the
occurrence of certain defaults and/or events of default under the DIP Credit Agreement and
requested that the lenders thereunder agree to waive such defaults. As a result of
extensive, arm's length negotiations, the lenders waived the defaults on the condition
that the lenders, the Agents, and the Debtors enter into certain amendments to the DIP
Credit Agreement (individually, the "First Amendment" and the "Second
Amendment").
Pursuant to the First
Amendment, the EBITDA covenant was modified to reflect lower EBITDA projections estimated
by the Debtors. Pursuant to the Second Amendment, the interest rate for loans made under
the DIP Credit Agreement was increased by one percent as of February 15, 2001. The Second
Amendment provided, however, that, to the extent that the Debtors achieved certain EBITDA
targets, the amount of the increase in the interest rate for the following calendar month
would be reduced. Effective April 9, 2001, the Debtors exercised their right to reduce the
aggregate commitment. After such reduction, the commitment was $175,000,000.
Because the DIP facility
was scheduled to mature on October 14, 2001, in October of 2001, the Debtors and lenders
under the DIP Credit Agreement entered into a Third Amendment of the DIP Credit Agreement.
Among other things, the Third Amendment reduced the commitment under the DIP Credit
Agreement to $150 million, extended the maturity date of the DIP facility to February 28,
2002, and eliminated the incentive interest rate reductions adopted in the Second
Amendment.
47
As of November 5, 2001,
approximately $53,000,000 has been drawn and remains outstanding under the DIP Credit
Agreement. In addition, letters of credit in the approximate aggregate amount of
$37,645,682 have been issued.
D. Cash Collateral Stipulation
By motion dated October 14,
1999, the Debtors sought approval of a cash collateral stipulation with Bank of America,
N.A., as administrative agent under the Credit Agreement. According to the Debtors'
records, the balances of accounts receivable in which the Bank of America, N.A. had a
security interest, together with the balance of funds on deposit in accounts (as to which
the holders of the Senior Lender Claims asserted setoff rights) were estimated to be
approximately $40 million. Because of the way the Debtors' cash management system
operates, it would have been impractical to segregate accounts receivable on which the
lenders under the Credit Agreement had a lien and to attempt to remove cash from the bank
accounts maintained with the holders of the Senior Lender Claims. In addition, the
accounts receivable formed an integral part of the borrowing base for the DIP Credit
Agreement.
In order to facilitate
funding under the DIP Credit Agreement and to adequately protect to lenders under the
Credit Agreement, the Debtors sought approval of a cash collateral stipulation. The cash
collateral stipulation provided for the Bank of America, N.A., as administrative agent, to
release its liens on the collateral in exchange for a $40 million adequate protection
payment funded through borrowings under the DIP Credit Agreement or other available funds.
To the extent that its collateral exceeded $40 million, the Bank of America, N.A., as
administrative agent, received replacement liens on all of the estates' assets (other than
avoidance actions), junior only to the obligations under the DIP Credit Agreement. The
Debtors now estimate that the collateral will exceed the original estimate of $40 million
by approximately $4.1 million.
The liens of the Bank of
America, N.A., as administrative agent were subject to challenge if the Creditors'
Committee (or certain other parties in limited circumstances) timely filed and prevailed
in a challenge to the liens securing that debt. The Creditors' Committee investigated
these liens and did not assert a challenge by the deadline, although they reserved their
right to question the guaranties of the holders of the Senior Lenders Claims loans by
Sun's subsidiary guarantors.
On November 12, 1999, the
Bankruptcy Court entered an order approving the cash collateral stipulation.
E. Facility Transactions
1.
Assisted Living Facilities
American Senior Living
Limited Partnership
. Prior to the Petition Date, Sun determined to sell its assisted
living division because of its continued drain on cash. Assisted living facilities serve
the elderly who do not need the full-time nursing care provided by long-term or subacute
care facilities but who do need some assistance with the activities of daily living.
SunBridge, Inc., one of the Debtors, owned through direct and indirect interests Sun's
assisted living division.
In connection with this
planned divestiture, the Debtors engaged Bank of America Securities LLC to market 24
assisted living facilities, including several facilities that were affiliated with, but
not wholly owned by, certain of the Debtors.
After extensive
negotiations with numerous parties, the Debtors and American Senior Living Limited
Partnership executed a sale agreement. Pursuant to the sale agreement, American Senior
Living Limited Partnership acquired 21 facilities
48
and assets used in connection with those facilities for $86,660,000, including the
assumption of certain liabilities in the amount of approximately $83 million, subject to
higher and better offers to be received at an auction. The conditions to the sale
agreement included Bankruptcy Court approval of the sale agreement (subject to higher or
better offers), approval and consent from various government agencies, and consent of
certain third parties. The sale agreement included a break-up fee which was payable in
certain situations.
American Senior Living
Limited Partnership was the highest and best bidder at the auction. The transaction for 13
of the facilities closed as of April 1, 2000, with the closing of the transaction for five
more facilities occurring on or before July 1, 2000. The three remaining facilities were
withdrawn from the transaction.
Assisted Living Investments LLC.
Prior to the Petition Date, SunBridge, Inc. held a
10% limited liability company interest in Assisted Living Investments LLC, a nondebtor
limited liability company. Assisted Living Investments LLC developed assisted living
facilities in accordance with plans approved by SunBridge, Inc. The facilities were
initially managed by SunBridge, Inc. for Assisted Living Investments LLC, until SunBridge,
Inc. entered into net leases for those facilities. Sun also arranged to provide financing
to Assisted Living Investments LLC.
In February 1999, Sun and
SunBridge, Inc. advised Assisted Living Investments LLC that they were no longer
interested in remaining in the assisted living business and that they would like Assisted
Living Investments LLC to sell the existing facilities. Sun, SunBridge, Inc. and Assisted
Living Investments LLC amended the existing agreements and made provisions for the sale of
the facilities owned by Assisted Living Investments LLC and parcels of undeveloped land.
With the assistance of Banc of America Securities LLC, and after extensive negotiations,
Sun, SunBridge, Inc. and Assisted Living Investments LLC entered into a purchase agreement
with Epoch Senior Living, Inc. Thereafter, the agreement was amended.
The amended agreement
provided for the sale of eight facilities to Epoch Senior Living, Inc. for $85 million,
including the assumption of debt. The net distribution to Sun was approximately $3.7
million. In addition, Sun obtained title to the undeveloped land owned by Assisted Living
Investments LLC. At the time of the sale, Sun recorded the amount to be realized from the
sale at approximately $9.2 million.
The Bankruptcy Court
approved the transaction on November 18, 1999. The transaction closed as of December 15,
1999.
2.
Omega Healthcare Investors,
Inc
On November 12, 1999 the
Bankruptcy Court approved the Debtors' transaction with Omega Healthcare Investors, Inc.
and certain other affiliated lessors from which the Debtors leased 54 facilities. Prior to
the Petition Date, Omega Healthcare Investors, Inc. (and its affiliates), the Debtors'
largest landlord, served the Debtors with a notice of termination with respect to those
leases. In order to resolve their dispute regarding whether the leases terminated prior to
the commencement of the chapter 11 cases, the Debtors and Omega Healthcare Investors, Inc.
(and its affiliates) negotiated a global resolution.
In order to effectuate the
settlement and provide for the transfer of the four rejected facilities, the parties
entered into a forbearance agreement. The forbearance agreement provided for a forbearance
period during which the lessors would not commence any legal action relating to
pre-forbearance agreement defaults. The forbearance agreement outlined the mechanism
governing the rejection of the four leases and the transfer of operations of the
facilities. In addition, the forbearance agreement
49
set forth certain terms required for the assumption of the leases, including the cure
of a monetary default in the amount of approximately $214,000 and the ratification of the
cross-default provisions contained therein.
3.
Karrell Capital
Previously in these
bankruptcy cases, the Debtors leased 44 facilities from an association of 21 lessor
entities known as Karell Capital. One of those facilities, the Bayside facility, located
in Bellingham, Washington, was leased from an entity known as Bellingham Associates. The
Bayside Facility reached a state of deterioration, and was in imminent danger of being
closed by the state fire marshal. In order to move their patients from the Bayside
Facility to a new facility, the Debtors applied for a replacement certificate of need in
1996, to allow construction of a new facility, the Cordata facility. Construction of the
Cordata facility was completed postpetition, and the Debtors began plans for the transfer
of the Bayside facility patients to the new Cordata facility.
Bellingham Associates
originally was unwilling to give the consent it believed necessary to a transfer of the
patients from the Bayside facility to the Cordata facility. Subsequently, the Debtors
purchased the Bayside facility from Bellingham Associates, for which such entity received
a note in the amount of approximately $2.9 million and a second mortgage granting certain
security interests. On or about October 12, 1999, counsel for Bellingham Associates
notified the Debtors that it claimed a lien on the certificate of need and other property
related to the Cordata facility. After the commencement of these chapter 11 cases,
Bellingham Associates filed a motion, on November 8, 1999, seeking relief from the
automatic stay to protect and assert its lien rights.
The Debtors entered into
negotiations for a global settlement with the principals of Karrell Capital concerning
satisfaction of the Bayside note and issues relating to other leases with the Bellingham
Associates, as well as the other remaining Karell Capital entities. The Debtors wanted to
replace certain facilities subject to a master lease, which Karell Capital asserted was
not severable. After four months, the negotiations ultimately led to a global compromise
and settlement with Karell Capital, whereby 28 leases in the lease portfolio were assumed
and the remaining 16 rejected, the Debtors satisfied the Bayside note for approximately
$2.21 million, certain of the assumed leases were amended, and Karell Capital released any
and all liens, claims, charges or encumbrances Karell Capital and its affiliates claimed
to hold on the Bayside and Cordata facilities. The settlement not only avoided costly and
prolonged litigation with Karell Capital, but also resulted in substantial savings to the
Debtors in the form of rent reductions and abatements, waivers and releases of claims held
by Karell Capital, and the transfer of underperforming facilities that the Debtors no
longer wished to operate.
The Bankruptcy Court
approved the transaction on May 25, 2000, and the transactions closed on or before July
31, 2000.
4.
LTC Properties Inc.
Three of the assisted
living facilities that were withdrawn from the American Senior Living Limited Partnership
transaction had mortgages either held or serviced by LTC Properties Inc. The Debtors,
however, needed to secure the consent of LTC Properties Inc. prior to any sale and the
assumption and assignment of the LTC Properties Inc. related debt. The Debtors, therefore,
entered into negotiations with LTC Properties Inc. in an effort to not only resolve the
three facilities that were to be sold to American Senior Living Limited Partnership, but
also to effect concurrent resolution for the retention and
50
disposition of several other facilities, on which LTC Properties Inc. either held or
serviced the mortgage, on terms favorable to the Debtor. In the second quarter of 2000,
the Debtors entered into a settlement agreement with LTC Properties, Inc., which
encompasses nine properties.
Eight of the facilities
covered by the settlement were owned by debtor and non-debtor subsidiaries of Sun. The
remaining facility is owned by another non-Sun related entity; a Sun entity holds the
leasehold interest on that facility.
As part of the settlement,
the Debtors reinstated the mortgages on two of the facilities, in the amount of
approximately $504,000, which the Debtors desired to retain. Two more facilities (one
owned by a Sun entity, the other by the non-Sun entity) were cross-collateralized and
jointly secured a loan in the amount of approximately $3.955 million. As part of the
settlement, the loan was separated into two, independent debt obligations with no
cross-collateralization. The Debtors sold their facility back to LTC Properties Inc. for
the amount outstanding on the mortgage. American Senior Living Limited Partnership paid
the equity on that facility to the Debtors in the approximate amount of $144,787, with the
understanding that both properties would then be ultimately leased to American Senior
Living Limited Partnership.
Pursuant to the settlement
agreement, another of the facilities was sold to American Senior Living Limited
Partnership outright, for approximately $4,180,000, netting the Debtors approximately
$520,000 after satisfaction of the debt owed to LTC Properties, Inc. Under the settlement
agreement, the remaining four properties were to be sold to LTC Properties Inc., subject
to higher and better offers, for the amounts outstanding on the mortgages. Because no
higher and better offers were received, such properties were sold to LTC Properties, Inc.
5.
THCI (Meditrust)
THCI Company LLC
("THCI") is currently the landlord for thirty-five facilities and the mortgagee
for four additional facilities in the Debtors' total healthcare facility portfolio. Two of
the facilities have previously been identified by the Debtors for divestiture.
Accordingly, on November 3, 2000, the Debtors filed a motion, seeking an order authorizing
the divestiture of the two facilities pursuant to applicable state law and the rejection
of the associated real property leases and Medicare and Medicaid provider agreements.
Hearings on the motion were
adjourned in the hopes that negotiations with the former lessor/owner, Meditrust, would
result in a mutually acceptable settlement. In early 2001, however, THCI acquired the
facilities from Meditrust. Thereafter, the Debtors entered into separate negotiations with
THCI regarding a global settlement of facility dispositions in the entire THCI portfolio.
On May 4, 2001, THCI filed
an objection to the motion. THCI argued, among other things, that certain cross default
provisions in the leases required the Debtors to reject or alternatively assume the lease
portfolio in its entirety and that the Debtors could not reject individual leases and
retain the right to assume the remaining leases. The motion did not proceed to hearing,
but was adjourned to permit the ongoing settlement discussions with THCI to proceed. Those
discussions did not result in a mutually acceptable settlement. The Debtors have a reply
memorandum in support of the motion, on September 4, 2001, in which the Debtors maintained
that upholding certain anti-assignment provisions in the leases was unsupported by
applicable bankruptcy law.
On September 21, 2001,
prior to hearing on the motion, THCI also filed an adversary proceeding, seeking a
declaratory judgment concerning the enforceability of the anti-assignment clauses in the
remaining 33 leases in the THCI portfolio. Eventually, on October 4, 2001, a hearing on
the motion was held. The Bankruptcy Court ruled that questions regarding the
enforceability of the anti-assignment provisions in the entire THCI lease portfolio,
including the two leases
51
included in the Debtors' original motion, would be determined within the adversary
proceeding, which is currently slated for trial in mid-January 2002. Whether the Debtors
ultimately reject the leases relating to the two facilities, and any additional leases
relating to underperforming facilities in the THCI portfolio, depends on the resolution of
the adversary proceeding.
6.
Other Facilities; Negotiations
with the Government
As of the Petition Date,
the Debtors were parties to more than 425 unexpired leases of real property in connection
with the Debtors' skilled nursing facilities and other healthcare operations in the United
States. Those leases are held by over 100 landlords. Most of the long-term care facilities
house elderly and infirm persons who require full-time nursing care.
During the six-month period
prior to the Petition Date, the Debtors and their advisors performed an extensive analysis
of the profitability of the Debtors' facilities and the legal issues relating to certain
of the facility leases. This analysis included, among other things, a review of (i)
revenue and expense items, (ii) the locations of the Debtors' facilities and geographic
mix of the Debtors' overall facility portfolio, and (iii) the terms of the facility leases
and alleged "master leases" that covered more than one facility. As a result of
such analysis, the Debtors determined that it was in their best interest to dispose of
certain facilities held in their portfolio in a manner that is consistent with the goal of
ensuring at all times the health and safety of their patients.
Transferring facilities on
a going-concern basis is complicated by the interaction of the Bankruptcy Code with the
Medicare and Medicaid programs and state licensing requirements with respect to the
facilities, their operations, and successor liability therefor. Most of the facilities are
certified by Medicare and/or Medicaid. Generally, facilities cannot be operated profitably
if deprived of reimbursement from both the Medicare and Medicaid programs. Only entities
with provider agreements with these programs are eligible for reimbursement from these
programs.
In response to a motion by
the Debtors to transfer facilities to new operators, HHS objected to a new operator's use
of a Debtor's Medicare provider agreement pending the new operator's certification. Under
the position espoused by HHS, the Debtors must assume and assign provider agreements in
order to transfer Medicare agreements to new operators. Such assumption would result in
the elevation of HHS' prepetition claims to administrative expense priority status.
Further, HHS asserted that any new operator would be subject to transferee liability in
the full amount of HHS' claims against the Debtors.
HHS directly administers
the Medicare program and has considerable influence over the states' administration of the
Medicaid programs. Under federal law, the federal government pays a portion of the
Medicaid payments made by the states to providers such as the Debtors. If the states were
to permit a new operator to use a Debtor's Medicaid provider agreement, the state would be
at risk that CMS would decline to pay the federal financial participation amount for such
Medicaid payments. The risk of federal non-reimbursement effectively prevents the states
from adopting a position on the transferability of provider agreements inconsistent with
HHS' position.
HHS' position and the
influence its position had on the various state agencies hindered the Debtors' ability to
transfer the facilities as going concerns. If the Debtors were to assume the provider
agreements in accordance with general bankruptcy law principles, the Debtors would be
required to pay HHS' claims in full. This was unacceptable to the Debtors. Further, HHS
argued that any transferee of a facility assumes any overpayment liability under the
existing provider agreement. The risk of assuming a large, unknown, overpayment liability
caused concern among potential new operators and landlords.
52
After reviewing their
options, the Debtors entered into settlement negotiations with HHS in order to develop a
procedure by which the facilities could be transferred to new operators on a consensual
basis. After lengthy negotiations, the Debtors and the federal government agreed to a
stipulation, authorized by the Bankruptcy Court by order dated August 21, 2000, that
resolved the outstanding Medicare issues that were stalling facility divestitures,
including issues related to the elevation of prepetition claims and successor liability
under transferred provider agreements. In addition, the Debtors obtained authorization
from the Bankruptcy Court for transfer procedures pursuant to which the Debtors execute a
form lease termination and release agreement and an operations transfer agreement to
effectuate the going concern transfer of a facility.
The form of lease
termination and release agreement provides for the release of any claims by a landlord
against the Debtors with respect to their obligations under the applicable lease,
including claims for rejection damages. The new operator enters into the operations
transfer agreement, which governs, among other things, how the Medicaid provider agreement
will be handled.
Subsequent to commencing
the chapter 11 cases, the Debtors divested 11 skilled nursing facilities in 1999, 49 in
2000, and 32 through September 30, 2001. As of September 30, 2001, Sun had identified an
additional 16 facilities for divestiture. The Debtors will attempt to transfer the 16
remaining facilities on a going-concern basis prior to the Effective Date of the Plan of
Reorganization. [___] of those facilities are currently the subject of working capital
agreements pursuant to which the landlord funds any net operating losses. If a facility
cannot be transferred, it may be necessary to close the facility. To date, the Debtors
have found it necessary to close six facilities.
In addition to the transfer
of certain unprofitable facilities, the Debtors negotiated rent concessions for 22
facilities. With such rent concessions, the Debtors believe that these facilities can be
operated profitably.
F. Key Employee and Key Executive Retention Program
On December 15, 1999, the
Bankruptcy Court approved the Debtors' employee retention program for key employees. The
retention program was designed to encourage key employees and key executives to remain
with the Debtors by providing them with additional compensation. The additional
compensation consisted of a total of $6 million of retention payments which was available
for all key employees other than the top four executives of the Company. The retention
payments were distributed to employees who remained with Sun on December 31, 1999, April
1, 2000, and September 30, 2000. Sun's executive officers did not receive any retention
payments, but are eligible for cash bonuses at the time the Debtors emerge from chapter
11. Based on the projected emergence date, the amount of those bonuses would be $425,000
for the chief executive officer, $93,750 for the chief administrative officer, and
$170,000 for the general counsel.
The retention program also
establishes severance payments for the key employees who are terminated without cause. The
amount of severance available depends on the employee's position and ranges from four
months to twelve months of salary, subject to reduction based on the employee's earnings
from employment during the period for which he or she is entitled to severance.
G. Scutieri Claims
In December 1998, Peter J.
Scutieri Jr. joined as co-plaintiff a trademark infringement action commenced by Sunrise
Assisting Living, Inc. ("SALI") against three of the Debtors, Sun Healthcare
Group, Inc., SunBridge Corporation, and SunMark of New Mexico, in the United States
District Court for the Eastern District of Virginia (the "Virginia Action").
SALI and the Debtors settled their disputes prepetition. On August 27, 1999, the district
court granted the Debtors' motion for
53
summary judgment as to Scutieri's claims and dismissed the Virginia Action. Scutieri
filed a notice of appeal, with further proceedings stayed upon the filing of the Debtors'
chapter 11 cases.
On June 15, 2000, Scutieri
filed a proof of claim in the amount of approximately $9.3 billion against each of the
three Debtors (the "Claim") relating to the Virginia Action. On November 20,
2000, the Debtors filed a motion to disallow the Claim, or in the alternative, to estimate
the Claim at zero dollars. In his response to the motion, Scutieri argued in part that the
dismissal of the complaint in the Virginia Action was pending appeal. At the March 15,
2001 hearing on the Debtors' motion, the Bankruptcy Court found the motion to be premature
and continued the matter. Thereafter, the parties stipulated to relief from the automatic
stay to permit the appeal to proceed.
Thereafter, the Debtors and
Scutieri resolved their disputes. The settlement requires the Debtors to pay Scutieri
$15,000. The settlement also includes a mutual release of all claims, including the $9.3
billion claim against the Debtors. In addition, Scutieri has agreed to indemnify the
Debtors for potential damages that may be assessed against the Debtors as a set off or
contribution for amounts that any third party is required to pay Scutieri as a result of
the Virginia Action. The Debtors will seek approval for the settlement with Scutieri prior
to confirmation of the Plan.
H. Claims Process and Bar Date
1.
Schedules and Statements
On January 26, 2000, the
Debtors filed with the Bankruptcy Court a statement of financial affairs, schedules of
assets and liabilities and schedules of executory contracts and unexpired leases and a
schedule of equity security holders. These schedules and statements were initially filed
on a consolidated basis and were subsequently amended. The Debtors and their professionals
prepared consolidating schedules and statements, reflecting the individual liabilities of
each of the Debtors, which were filed on May 2, 2000.
2.
Bar Date
By order dated May 2, 2000,
the Bankruptcy Court fixed June 20, 2000 at 5:00 p.m. as the date and time by which proofs
of claim were required to be filed in the Debtors' bankruptcy cases, except that
governmental entities had until August 1, 2000 at 5:00 p.m. to timely proofs of claim
against HoMed. In accordance with the order fixing the bar date, on or about May 2, 2000,
notices informing creditors of the last date to timely file proofs of claims, and a
"customized" proof of claim form, reflecting the nature, amount, and status of
each creditor's claim as reflected in the schedules of assets and liabilities, were mailed
to all creditors listed on the schedules of assets and liabilities. In addition,
consistent with that order, on May 19, 2000, the Debtors caused to be published in 37
regional publications and the national editions of the
Wall Street Journal
,
New
York Times
and
Los Angeles Times
notice of the last date to timely file proofs
of claim. The date by which HHS may file its proof of claim has been extended from time to
time pursuant to court approved stipulations among the parties.
3.
Omnibus Claims Objection
Motions
As described above,
unsecured claims in excess of $14 billion have been asserted against the Debtors. In an
effort to get a more accurate picture of the true nature and extent of the unsecured
claims, the Debtors commenced objecting to certain categories of unsecured claims by
filing its First Omnibus Objection to Claims Filed Against the Debtors, and Motion to
Disallow and Expunge Such Claims, on November 6, 2000. The Debtors subsequently have filed
16 additional omnibus claims objec
54
tion motions, and more will be filed shortly. To date, all of the omnibus objections
which have been decided by the Bankruptcy Court have been granted, expect where the
Debtors have agreed to continue or withdraw a motion as to a particular party.
The omnibus claims
objection process has been extremely successful to date. Through the first 16 omnibus
objections, the Court has approved the expungement of 3,161 claims in the aggregate amount
of $4,368,028,760.67. It has also reduced and/or reduced and allowed 162 additional
claims, with an aggregate savings to the Debtors of $81,572,139.40. Additionally, the
Debtors have filed a 17th Omnibus Claims Objection Motion which is currently pending. If
granted, 8 more claims would be expunged at a savings of an additional $2,398,394.99.
To date, the omnibus
objections have included, without limitation, objections to claims which were (i)
duplicate of other claims or superceded by later claims; (ii) not reflected on the
Debtors' books and records and not supported by further documentation; (iii) settled with
the claimant, for example through the Alternative Dispute Resolution process described in
paragraph K below, and not otherwise subject to a stipulation reducing or expunging the
claim; (iv) no longer valid because the claimant had waived them, either through an
operations transfer agreement, a lease transfer agreement, a stipulation for relief from
the automatic stay which included a waiver of claims against the Debtors' estates in
exchange for an agreement to allow such claimant to pursue insurance proceeds, or
otherwise; (v) tax claims levied against the wrong party; (vi) negotiated with the
claimants after a proof of claim was filed; and (vii) otherwise subject to objections. The
Debtors anticipate filing several more omnibus claims objection motions, as well as
objections to specific claims, before and after any confirmation of a plan of
reorganization.
I. Sale of International Operations
The Company sold its
operations in the United Kingdom and Germany in 2001. A receiver for the Company's
operations in Australia sold those operations in July 2001 and liquidated the Company's
Australian subsidiaries. The Company received approximately $4.4 million from the
disposition of the operations in the United Kingdom, Germany and Australia. Due to the
sale of these operations, the Company was released from approximately $151.2 million of
aggregate debt, capital lease obligations, notes payable and other liabilities.
J. Miscellaneous Assets Sales
1.
Medical Supply Businesses
SunChoice Medical Supply,
Inc., Contour Medical, Inc., Americare Health Services Corp., Ameridyne Corporation,
Atlantic Medical Supply Company, Inc., Contour Medical-Michigan, Inc., Facility Supply,
Inc., Quest Medical Supply, Inc., and SunSolutions, Inc., each a debtor in these chapter
11 cases, were engaged in the business of distributing medical supplies used in providing
long-term care. These businesses incurred a substantial cash loss each month. Sun believed
that absent significant capital expenditures on management information systems and other
various items, these businesses could not become profitable. To avoid the continuing cash
drain on their estates, the Debtors determined that rather than investing funds into
non-core businesses, more benefit to the Debtors' estates could be gained by selling the
assets of the businesses to provide needed funds for the Debtors' reorganization efforts.
Accordingly, the Debtors negotiated a sale of substantially all of the assets used in
connection with the businesses for $16 million. The Bankruptcy Court authorized the sale
by order dated January 17, 2001.
55
2.
ACP
In April 1997, the Debtors
acquired Accelerated Care Plus LLC ("ACP") by purchasing the stock of its parent
corporations from John C. and Dawn Castel (the "Castels") and John and Curtis
Beach (the "Beaches") for cash, promissory notes, and future payments related to
ACP's performance. ACP manufactured and sold equipment, including electromedical devices
and related accessories (including disposable accessories) for use in connection with
rehabilitation therapy in the long-term healthcare industry and provided services and
training programs for the use of the equipment ACP manufactured. The implementation by the
federal government of the prospective payment system ("PPS") resulted in the
decline in ACP's business, and in October 1999, prior to the filing of the chapter 11
cases, Sun initiated a shutdown process for ACP, laying off approximately 75% of its
employees. The Debtors thereafter sought to sell ACP.
After unsuccessful efforts
to sell ACP's assets to unrelated parties, the Debtors negotiated a settlement for a sale
to the Castels and Beaches, who had filed claims totaling $4.7 million against certain of
the Debtors. Under the terms of the settlement, the Castels and Beaches received
substantially all of the assets of ACP, together with $100,000 cash. In exchange, the
Castels and Beaches agreed to limit their claims against the Debtors to a single claim in
the amount of $500,000. The parties also agreed to mutual releases. The Bankruptcy Court
approved the settlement on July 28, 2000.
3.
SunCare
SunCare Respiratory
Services, Inc. ("SunCare") is a provider of respiratory therapy supplies and
equipment to skilled nursing facilities, hospitals and to individual patients in their own
homes. SunCare experiences a negative cash flow from its operations and has become a drain
on the economic resources of the Debtors. The Debtors investigated various means of
relieving the economic burden arising from the operation of such businesses and determined
that the best resolution is a sale of the assets of SunCare. Accordingly, the Debtors have
entered into negotiations with a prospective purchaser for the sale of the SunCare assets
for approximately $1.2 million. The Debtors hope to finalize such sale prior to
confirmation of the chapter 11 cases.
4.
NeuroFlex
NeuroFlex, Inc.
("NeuroFlex"), a provider of orthotic braces for chronic joint and spinal
problems, historically experienced poor performance and amassed nearly two years worth of
inventory. In order to stop the substantial and persistent losses that NeuroFlex suffered
as a result of continued business operations, the Debtors decided to divest the NeuroFlex
operations. The Debtors, therefore, filed a motion on June 22, 2001 seeking authorization
to sell the assets or wind up the business operations of NeuroFlex.
The Debtors were contacted
by John Kenney, the former owner of NeuroFlex, Trestles Healthcare, Inc., and Restorative
Medical, Inc. (collectively, the "Buyers"), who expressed interest in acquiring
the NeuroFlex assets. Subsequently, the Debtors negotiated an agreement under which the
Buyers would release certain claims against the Debtors in exchange for the assets. The
Buyers also agreed to indemnify the Debtors from any potential liability relating to
patent infringement or other intellectual property actions relating to the property
conveyed to Buyers, and from any liability relating to Medicaid investigations conducted
by the State of Kentucky. Additionally, the Buyers agreed to carve out for the benefit of
the Debtors $250,000 of NeuroFlex's outstanding accounts receivable, in addition to
covering certain expenses associated with the transfer of the NeuroFlex operations to the
Buyers. The Bankruptcy Court approved the sale to the Buyers, subject to higher and better
offers, by order dated August 8, 2001.
56
5.
SunAlliance
SunAlliance Healthcare
Services, Inc. ("SunAlliance") provides, among other things, mobile x-ray and
EKG services to long term care facilities, private residences, corporate health programs
and correctional facilities. The Debtors plan to sell certain assets of SunAlliance that
constitute underperforming aspects of their operations and have little prospect for a
financial turnaround. In that regard, the Debtors have distributed an information
memorandum to prospective purchasers in an effort to complete a sale prior to confirmation
of the Debtors' plan of reorganization.
6.
Corporate Office Buildings
The Debtors are in the
process of selling two of their office buildings, which constitute a portion of the
Debtors' corporate headquarters in Albuquerque, New Mexico (the "Buildings").
One of the Buildings, a six-story commercial office building of approximately 180,000
square feet, is currently vacant. Construction on it commenced in 1999 at a time when the
Debtors anticipated heightened growth in their businesses. The other Building, a four
story structure that was completed in 1998, in is currently occupied by the Debtors.
Given the Debtors'
reduction in size, attained through a streamlining of operations through the
reorganization process, the Debtors have determined that continued retention of the
Buildings is not essential. Accordingly, the Debtors began steps to market the Buildings
for possible sale. On April 30, 2001, the Court entered an order authorizing the Debtors
to retain Cushman & Wakefield of Texas, Inc. as their real estate brokers in
conjunction with their sale of the Buildings. After extensive marketing efforts, the
Debtors have reached an agreement in principle with a potential purchaser who has offered
approximately $15 million for the Buildings with the understanding that the Debtors would
leaseback the office space in the occupied Building. The Debtors are currently negotiating
the final terms of a purchase and sale agreement.
K. Alternative Dispute Resolution Procedures
In an effort to resolve the
Insured Claims more particularly described in section IV.C.3 above, and given the nature
and extent of these matters, the Debtors believed and continue to believe that the most
efficient way to resolve the Insured Claims, expedite their resolution and save the
estates and the individuals pursuing these claims (the "Tort Claimants")
substantial litigation costs was to adopt an alternative dispute resolution procedure (the
"ADR Procedures"). The Debtors filed a motion for approval of ADR Procedures on
May 10, 2000. After several modifications of the proposed ADR Term Sheet and its
attachments, and after two lengthy hearings, the Court approved the ADR Procedures over
the objection of scores of claimants. The ADR Order was entered on August 24, 2000.
The procedures adopted by
the ADR Order have been enormously successful to date and are nearing completion. A total
of 517 Tort Claimants were included in the ADR Procedure (the "ADR Claims"). Of
these, 27 stipulated out of the ADR Procedure and limited their recovery to available
insurance proceeds. The Debtors have settled 285 of the ADR Claims to date. Inexplicably,
73 Tort Claimants simply ignored the ADR Procedure altogether (the "Defaulting
Claimants"). On June 1, 2001, the Bankruptcy Court entered an order which disallowed
and expunged any proof of claim filed by all but 6 of the Defaulting Claimants, and forbid
the Defaulting Claimants from filing new claims. A similar order will be sought by the
Debtors for an approximately 30 additional Tort Claimants who have also failed to comply
with the ADR Order.
Pursuant to the ADR Order,
any ADR claimant whose claim was not resolved through mediation was entitled to obtain
relief from the automatic stay to pursue the litigation in the forum in which the case was
originally venued. As of October 31,
57
2001, 28 Tort Claimants have or are entitled to obtain stay relief because their claims
were not successfully mediated in the ADR Procedure. The Debtors continue to pursue
resolution of these matters.
A total of 48 Pending
Actions remain in the ADR Procedure and the Debtors anticipate that the majority of these
will be settled prior to or at the mediation of these matters which will be scheduled as
early as late December, 2001.
L. Shared Healthcare System Loans
Shared Healthcare Systems,
Inc. ("SHS"), a non-debtor entity in the chapter 11 cases in which the Debtors
own an approximate 70% equity interest, is a provider of integrated solutions to the
senior care market place. SHS has developed numerous software packages for assisted living
and long-term rehabilitation hospitals, including systems that facilitate time management,
resource allocation, decision-support, outcomes trend analysis, and billing document
generation.
SHS is in the final process
of developing a software package, known as Unison Orcas ("Orcas"), that can be
used to integrate financial and clinical management systems for providers in the long-term
healthcare industry. SHS anticipates that the introduction of its Orcas software will be
marketable within the industry and thus will become a profitable venture. However, the
software cannot be deployed until coding for the clinical management systems is completed.
Because the coding of the Orcas software package has taken longer than anticipated, and
the final stages of production require a substantial expenditure of capital, SHS's current
financial resources are insufficient to bridge the gap to the deployment of the new
software.
The Debtors determined that
it was necessary and beneficial to protect their existing equity interest in SHS.
Accordingly, to enable SHS to complete its development of the integrated software, the
Debtors sought Bankruptcy Court approval to provide SHS with a short-term secured loan of
up to $1.5 million through the provision of a line of credit, which was obtained by order
dated August 8, 2001. Sun has received consent from the Creditors' Committee to increase
the amount of that loan, if necessary.
M. Request for Appointment of an Equity Committee
On November 22, 1999, the
United States Trustee declined to appoint a committee to represent shareholders requested
by Mr. Peter Kern. Mr. Kern is Sun's largest prepetition shareholder. On December 30,
1999, Mr. Kern filed a motion with the Bankruptcy Court seeking the appointment of such a
committee. The Debtors, the Creditors' Committee, and representatives of holders of the
Senior Lender Claims objected to the motion on the basis that the enterprise value of Sun
was not sufficient to support any distribution for shareholders of Sun. The Bankruptcy
Court held a full evidentiary trial on the issue of valuation of the Debtors. In an oral
ruling on August 10, 2000, the Bankruptcy Court denied the motion on the grounds that the
Debtors were hopelessly insolvent.
N. Appointment of Examiner
On November 1, 2000, Mr.
Kern filed a motion seeking the appointment of an examiner under section 1104(c) of the
Bankruptcy Code. By order dated January 31, 2001, the Bankruptcy Court granted the motion
and directed the United States Trustee to make the appointment. The United States Trustee
appointed Mr. Kevin Pendergast. The Bankruptcy Court ordered the examiner to investigate
the cost structure of the Debtors in comparison to competitors in the industry, as well as
whether it would be possible for the Debtors to enhance their revenues. The examiner
retained Crossroads LLC as his financial advisor and Gibson, Dunn & Crutcher as his
legal advisor. The examiner delivered a preliminary report under seal to the Bankruptcy
Court and the parties on April 17, 2001. In his preliminary report, the examiner
identified a limited number of revenue
58
enhancement opportunities available to the Debtors and proposed a detailed budget and
plan for analyzing the Debtors' cost structure. The Bankruptcy Court approved the proposed
investigation. The examiner delivered his final report under seal to the Bankruptcy Court
and the parties on August 7, 2001. The examiner concluded that Sun's cost structure was in
line with the rest of the industry, given Sun's lease structure and certain other factors
over which Sun has little control. The examiner also concluded that the Debtors had only
limited opportunities to increase their cash flows.
VII.
Governance of Reorganized Sun
A. Board of Directors of Reorganized Sun
The initial Board of
Directors of Reorganized Sun will consist of seven members. Six members will be selected
by the holders of the Senior Lender Claims and one will be the Chief Executive Officer of
Reorganized Sun. Each member of the initial Board of Directors will serve on the Board of
Directors for a one-year term. After selection of the initial Board of Directors, the
holders of the New Series A Common Stock and the New Redeemable Preferred Stock (to the
extent issued) will elect members of the Board of Directors.
B. Management of Reorganized Sun
[insert]
VIII.
Other Aspects of the Plan of Reorganization
A. Distributions
One of the key concepts
under the Bankruptcy Code is that only claims and equity interests that are
"allowed" may receive distributions under a chapter 11 plan. This term is used
throughout the Plan of Reorganization and the descriptions below. In general, an
"allowed" claim or "allowed" equity interest simply means that the
debtor agrees, or in the event of a dispute, that the Bankruptcy Court determines, that
the claim or interest, and the amount thereof, is in fact a valid obligation of the
debtor.
Any claim which is not a
disputed claim and for which a proof of claim has been filed is an allowed claim. Any
claim that has been listed by any Debtor in such Debtor's schedules of assets and
liabilities, as may be amended from time to time, as liquidated in amount and not disputed
or contingent is an allowed claim in the amount listed in the schedules unless an
objection to such claim has been filed. If the holder of such claim files a proof of claim
in an amount different than the amount set forth on the Debtor's schedules of assets and
liabilities, the claim is an allowed claim for the lower of the amount set forth on the
Debtor's schedules of assets and liabilities and on the proof of claim and a disputed
claim for the difference. Any claim that has
59
been listed in the Debtor's schedules of assets and liabilities as disputed, contingent
or not liquidated and for which a proof of claim has been filed is a disputed claim. Any
claim for which an objection has been timely interposed is a disputed claim. For an
explanation of how disputed claims will be determined, see section VIII.2.
An objection to any claim
may be interposed by the Debtors within 120 days after the Effective Date or such later
date as may be fixed by the Bankruptcy Court. Any claim for which an objection has been
interposed will be an Allowed Claim to the extent the objection is determined in favor of
the holder of the claim.
For purposes of the Plan of
Reorganization, the Senior Lender Claims and the Senior Subordinated Note Claims are
expressly allowed in the amounts of $843,318,000 and $431,800,518 million, respectively.
1.
Timing and Conditions of
Distributions
(a)
Date
of Distribution
Except as otherwise
provided for in the Plan of Reorganization, distribution on account of allowed claims will
be made on the later of the Effective Date or within twenty (20) days after the order
allowing a disputed claim becomes a final order. Disputed claims will be treated as set
forth below.
(b)
Surrender
of Certain Securities Necessary for Distribution
Plans of reorganization
generally require a holder of an instrument or security of a debtor to surrender such
instrument or security prior to receiving a new instrument or security in exchange
therefore under a plan of reorganization. This rule avoids disputes regarding who is the
proper recipient of instruments or securities under a plan of reorganization.
As a condition to
participating in the distribution under the Plan of Reorganization, a holder of a senior
subordinated note must, prior to the first anniversary of the Effective Date, (a)
surrender such senior subordinated note to Reorganized Sun or its designee or (b) provide
the disbursing agent with an affidavit of loss and/or indemnity and bond, reasonably
satisfactory to the disbursing agent. Failure to do so within such time will result in the
forfeiture of such holder's right to receive any distribution relating to such senior
subordinated note under the Plan of Reorganization.
Holders of the convertible
subordinated debentures, the C-TIPS, the equity interests, or other agreements or
commitments relating thereto shall not be required to surrender such instruments or
securities because they are not receiving a distribution under the Plan of Reorganization
on account of such securities.
(c)
Fractional
Shares
No fractional shares of New
Series A Common Stock, New Redeemable Preferred Stock, or cash in lieu thereof shall be
distributed. For purposes of distribution, fractional shares of New Series A Common Stock
or New Redeemable Preferred Stock shall be rounded up to the next whole number.
60
2.
Procedures for Treating
Disputed Claims Under the Plan of Reorganization
(a)
Disputed
Claims
A disputed claim is a claim
that has not been allowed or disallowed pursuant to an agreement by the parties or an
order of the Bankruptcy Court. In addition, all tort claims not previously allowed by the
Bankruptcy Court are disputed claims. A claim for which a proof of claim has been filed
but that is listed on the Debtors' schedules of assets and liabilities as unliquidated,
disputed or contingent, and which has not yet been resolved by the parties or by the
Bankruptcy Court, is a disputed claim. If a holder of a claim has filed a proof of claim
that is inconsistent with the claim as listed on the Debtors' schedules of assets and
liabilities, such claim is a disputed claim to the extent of the difference between the
amount set forth in the proof of claim and the amount scheduled by the Debtors. Any claim
for which the Debtors or any party in interest have interposed (or will interpose) a
timely objection is a disputed claim.
(b)
Objections
to Claim
The Debtors shall be
entitled to object to all disputed claims or claims not already allowed other than the
Senior Lender Claims and the Senior Subordinated Note Claims. Any objections to claims
shall be served and filed on or before one hundred and twenty (120) days after the
Effective Date or such later date as may be fixed by the Bankruptcy Court.
(c)
No
Distributions Pending Allowance
If any portion of a claim
is a disputed claim, no payment or distribution shall be made on account of such claim
until such disputed claim becomes an allowed claim. Pending the allowance or disallowance
of the disputed claims, the Debtors shall withhold from the payments and distributions
made pursuant to the Plan of Reorganization to the holders of allowed claims the payments
and distributions allocable to the disputed claims as if the disputed claims had been
allowed claims.
(d)
Distributions
After Allowance
To the extent that a
disputed claim becomes an allowed claim, the holder of such allowed claim shall receive a
distribution in accordance with the provisions of the Plan of Reorganization. The
distribution shall include actual interest or dividends earned on account of such
property. The distribution shall be made as soon as practicable but no later than 20 days
after the order allowing the disputed claim becomes a final order.
Except with respect to
Class E, to the extent that a disputed claim is disallowed, the amount of property
withheld by the Debtors on account of such claim shall be retained by the applicable
Debtor. If the property retained consists of a security issued in connection with the Plan
of Reorganization, the Debtor may elect to cancel such security. Unclaimed property
distributable to holders of claims in Class E will be reallocated to the other holders of
claims in that class unless the cost of such reallocation and distribution would outweigh
the value of the property distributed.
B. Treatment of Executory Contracts and Unexpired Leases
1.
Contracts and Leases Not
Expressly Assumed are Rejected
All executory contracts and
unexpired leases, except for those expressly assumed by the Plan of Reorganization or by
separate motion, are rejected pursuant to the Plan of Reorganization.
61
The Plan of Reorganization
provides for the Debtors to assume those executory contracts and unexpired leases
specifically designated as a contract or lease to be assumed on Schedule 8.1 to the Plan
of Reorganization. The Debtors will file Schedule 8.1 on or before the commencement of the
hearing on the approval of this Disclosure Statement or such later date as may be fixed by
the Bankruptcy Court. Any time prior to the first Business Day prior to the commencement
of the Confirmation Hearing of the Plan of Reorganization, the Debtors may amend Schedule
8.1 The Debtors will provide notice to the parties affected by any amendment to Schedule
8.1.
Any contract or lease that
has already been assumed pursuant to a final order of the Bankruptcy Court or which is the
subject of a separate motion to assume or reject such contract or lease filed prior to the
filing of Schedule 9.1 will not be rejected pursuant to the Plan of Reorganization.
Executory contracts and
unexpired leases that are listed on Schedule 8.1 relating to the use or occupancy of real
property are broadly defined to include related agreements or supplements and executory
contracts or unexpired leases appurtenant to the premises. The treatment of these other
agreements will be the same as for the underlying agreement (
i.e.
, both will be
assumed or both will be rejected) unless the Debtors specifically treat the other
agreements separately in accordance with the provisions of the Plan of Reorganization.
Given the large number of
contracts that the Debtors have entered into (many of which are no longer executory), it
is possible that contracts may be inadvertently rejected under this procedure.
Accordingly, if the non-Debtor party to such a contract requests in writing that such
contract be assumed, the Debtors will consider such request. The request must state that
any defaults under such contract are being waived.
2.
Cure of Defaults
Generally, if there has
been a default (other than a default specified in section 365(b)(2) of the Bankruptcy
Code) under an executory contract or unexpired lease, the debtor can assume the contract
or lease only if the debtor cures the default. Accordingly, a condition to the assumption
of an executory contract or unexpired lease is that any default under an executory
contract or unexpired lease that is to be assumed pursuant to the Plan of Reorganization
will be cured in a manner consistent with the Bankruptcy Code and as set forth in the Plan
of Reorganization.
3.
Rejection Claims
If an entity with a claim
for damages arising from the rejection of an executory contract or unexpired lease under
the Plan of Reorganization has not filed a proof of claim for such damages, that Claim
shall be barred and shall not be enforceable against the Debtors unless a proof of claim
is filed with the Bankruptcy Court and served upon counsel for the Debtors within thirty
(30) days after the Effective Date.
C. Exit Facility
The only condition to the
effectiveness of the Plan of Reorganization is that the Debtors have obtained exit
financing sufficient to pay administrative expenses and provide necessary working capital
for operations after the Effective Date. The Debtors are in discussions with several
lenders to arrange such a facility and expect such a facility to take the form of a new
revolving credit agreement. The Debtors are seeking a facility with a $200,000,000
borrowing limit. The Debtors anticipate that such a facility will have to be secured by
the same property as presently secures its debtor in possession financing.
62
D. Effect of Confirmation
1.
Discharge of Claims and
Termination of Equity Interests
Confirmation of the Plan of
Reorganization will discharge all existing debts and claims, and terminate all equity
interests, of any kind, nature or description whatsoever against or in Sun. All holders of
existing claims against and equity interests in the Debtors will be enjoined from
asserting against the Debtors, or any of their assets or properties, any other or further
claim or equity interest based upon any act or omission, transaction, or other activity
that occurred prior to the Effective Date, whether or not such holder has filed a proof of
claim or proof of equity interest In addition, upon the Effective Date, each holder of a
Claim against or equity interest in the Debtors shall be forever precluded and enjoined
from prosecuting or asserting any discharged claim against or terminated equity interests
in the Debtors.
2.
Indemnification
The Plan provides for the
assumption and continuation of normal corporate indemnification contracts or provisions
related to the protection of officers and directors.
3.
Exculpation
The Plan of Reorganization
exculpates the Debtors, the Creditors' Committee and their respective agents for conduct
relating to the prosecution of the chapter 11 cases. Specifically, the Plan of
Reorganization provides that neither the Debtors, the disbursing agent, the Creditors'
Committee nor any of their respective members, officers, directors, employees, agents or
professionals shall have or incur any liability to any holder of any claim or equity
interest for any act or omission in connection with, or arising out of, the chapter 11
cases, the confirmation of the Plan of Reorganization, the consummation of the Plan of
Reorganization or the administration of the Plan of Reorganization or property to be
distributed under the Plan of Reorganization, except for willful misconduct or gross
negligence.
E. Releases
The Plan provides for a
release of all claims by the Debtors against the current and former officers, directors,
employees, financial advisors, professionals, accountants, and attorneys of the Debtors,
the Creditors' Committee, and Bank of America, N.A., as agent for the holders of the
Senior Lender Claims. This provision is intended to release all claims of the Debtors,
whether arising prepetition or postpetition, and based on any theory (whether negligence,
gross negligence, or willful misconduct) against these individuals. The release is limited
to claims that could be asserted by the Debtors and only applies to claims against such
parties in their representative capacity.
The purpose of the release
of the Debtors' personnel is to prevent a collateral attack against the Debtors by
asserting large claims against its current and former officers and directors. Those
entities would be entitled to assert indemnification claims against the Debtors for any
amounts recovered, thereby defeating the purpose of the discharge granted by the
Bankruptcy Code. In addition, because of the extraordinary regulatory scrutiny which
currently exists in the healthcare industry, it is generally very difficult to retain
qualified management. This difficulty is compounded when the healthcare company is
operating as a debtor in possession under chapter 11 of the Bankruptcy Code. Despite these
daunting obstacles, management of the Debtors has made enormous contributions to the
reorganization efforts and the compromises set forth in the Plan. Therefore, it is
important that these individuals be relieved of the threat of any derivative actions
against them personally by parties in these reorganization cases that may be dissatisfied
with the treatment provided in the Plan.
63
The purpose of the release
of the representatives of the other major constituencies in these cases, such as the
Creditors' Committee, is to protect the chapter 11 process for individuals who have
contributed to the restructuring process. The Debtors are not aware of any pending or
threatened actions against these representatives.
F. Management Incentive Plan
[to be provided]
G. Preservation of Avoidance Actions
The Debtors are preserving
and retaining their right to prosecute any avoidance or recovery actions under the
Bankruptcy Code. These include the ability to avoid statutory liens and the ability to
recover preferential transfers, preferential setoffs, fraudulent conveyances and
unauthorized transfers of property of the estate. On or before October 12, 2001, the
Debtors filed approximately 1,000 avoidance actions. Reorganized Sun intends to pursue the
avoidance actions.
Recoveries by the Debtors
can give rise to additional allowed claims against their estates. To satisfy those claims,
the Debtors will provide a credit of [__%] of such allowed claims against the recovery to
be received. This credit will be in full satisfaction of the allowed claim arising from
such avoidance action. The determination of the percentage to be credited is based on the
midpoint of the expected recoveries for holders of general unsecured claims, adjusted for
the aggregate additional claims the Debtors estimate will be generated through the
prosecution of avoidance actions. Thus the midpoint percentage recoveries for holders of
allowed claims in Class E described in the chart in section II.B is adjusted by adding
$[___________] of expected additional general unsecured claims to the amount described in
section II.D.5 ($270,000,000) and recalculating the pro rata recovery based on the
midpoint of the enterprise values described in section IV.D.
H. Miscellaneous Provisions
The Plan of Reorganization
contains provisions relating to the cancellations of existing securities, corporate
actions, the disbursing agent, delivery of distributions, manner of payment, vesting of
assets, binding effect, term of injunctions or stays, injunction against interference with
the Plan of Reorganization, payment of statutory fees, retiree benefits, dissolution of
the Creditors' Committee (at an appropriate time after the Effective Date), recognition of
guaranty rights, substantial consummation, compliance with tax requirement, severablity,
revocation and amendment of the Plan of Reorganization, governing law, and timing. For
more information regarding this items, see the Plan of Reorganization attached hereto as
Exhibit A.
IX.
Certain Factors to Be Considered
A. Certain Bankruptcy Considerations
Although the Debtors
believe that the Plan of Reorganization will satisfy all requirements necessary for
confirmation by the Bankruptcy Court, there can be no assurance that the Bankruptcy Court
will reach the same conclusion. Moreover, there can be no assurance that modifications of
the Plan of Reorganization will not be required for confirmation or that such
modifications would not necessitate the resolicitation of votes. In addition, although the
Debtors believe that the Effective Date will occur soon after the Confirmation Date, there
can be no assurance as to such timing.
64
The Plan of Reorganization
provides for no distribution to Class G (Convertible Subordinated Debenture Claims), Class
H (CTIPS Claims), Class I (Subsidiary Debtor Intercompany Claims), Class J (Securities
Litigation Claims), and Class K (equity interests in the Debtors). The Bankruptcy Code
conclusively deems these classes to have rejected the Plan of Reorganization.
Notwithstanding the fact that these classes are deemed to have rejected the Plan of
Reorganization, the Bankruptcy Court may confirm the Plan of Reorganization if at least
one impaired class votes to accept the Plan of Reorganization (with such acceptance being
determined without including the vote of any "insider" in such class). Thus, for
the Plan of Reorganization to be confirmed with respect to each Debtor, one of Class C
(HHS Claims), Class D (Senior Lender Claims), Class E (General Unsecured Claims), or Class
F (Senior Subordinated Note Claims) must vote to accept the Plan of Reorganization. As to
each impaired class that has not accepted the Plan of Reorganization, the Plan may be
confirmed if the Bankruptcy Court determines that the Plan of Reorganization "does
not discriminate unfairly" and is "fair and equitable" with respect to
these classes. The Debtors believe that the Plan of Reorganization satisfies these
requirements. For more information, see section X below.
B. Risks Relating to the Plan Securities
1.
Variances from Projections
The projections included
herein are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Factors that could cause actual results to
differ materially include, but are not limited to, Sun's ability to divest unprofitable
facilities, operate its business consistent with plan, comply with the covenants of its
financing agreements, emerge from bankruptcy, attract and retain key executives and
staffing at its facilities, and respond to adverse regulatory actions taken by the federal
and state governments.
2.
Substantial Leverage; Ability
to Service Debt
Reorganized Sun will still
have significant indebtedness. On the Effective Date, after giving effect to the
transactions contemplated by the Plan of Reorganization, Reorganized Sun will have
approximately $[135] million in secured indebtedness and $[15] million in unsecured
indebtedness outstanding. This results in a pro forma leverage ratio (Debt / EBITDA) upon
emergence of approximately [___] and a pro forma adjusted leverage ratio (Debt + 7x rent /
EBITDAR) upon emergence of [___].
The degree to which
Reorganized Sun is leveraged could have important consequences, including, but not limited
to, the following: (i) a substantial portion of Reorganized Sun's cash flow from
operations will be required to be dedicated to debt service and will not be available to
Reorganized Sun for its operations, (ii) Reorganized Sun's ability to obtain additional
financing in the future for acquisitions, capital expenditures, working capital or general
corporate purposes could be limited, and (iii) Reorganized Sun will have increased
vulnerability to adverse general economic and industry conditions.
Sun believes that it will
be able to generate sufficient operating cash flow to pay interest and principal on its
outstanding debt as those payments become due. However, Reorganized Sun's ability to meet
its ongoing debt service obligations will depend on a number of factors including its
future performance and financial results, which, to a certain extent, are subject to
general economic, financial, competitive, legislative, regulatory and other factors beyond
Reorganized Sun's control.
65
In addition, Sun's
post-reorganization leverage, together with certain restrictions that will be placed on
Reorganized Sun pursuant to its exit facility and the Plan Securities, may impair
Reorganized Sun's ability to take advantage of significant business opportunities that may
arise. In addition, such leverage will increase Reorganized Sun's vulnerability to adverse
general economic and health care industry conditions.
3.
Significant Holders
Under the Plan of
Reorganization, certain holders of allowed claims may receive distributions of shares in
Reorganized Sun representing in excess of five percent of the outstanding shares of either
New Redeemable Preferred Stock or New Series A Common Stock. If holders of a significant
number of shares of Reorganized Sun were to act as a group, such holders may be in a
position to control the outcome of actions requiring shareholder approval, including the
election of directors.
Further, the possibility
that one or more of the holders of a number of shares of Reorganized Sun may determine to
sell all or a large portion of their shares in a short period of time may adversely affect
the market price of the stock of Reorganized Sun.
4.
Lack of Trading Market
The stock issued under the
Plan will not be listed on any exchange. There can be no assurance that an active trading
market for the New Series A Common Stock and the New Redeemable Preferred Stock will
develop. Accordingly, no assurance can be given that a holder of New Series A Common Stock
and the New Redeemable Preferred Stock will be able to sell such securities in the future
or as to the price at which any such sale may occur. If such markets were to exist, such
securities could trade at prices higher or lower than the value ascribed to such
securities herein depending upon many factors, including the prevailing interest rates,
markets for similar securities, general economic and industry conditions, and the
performance of, and investor expectations for, Reorganized Sun.
Unless otherwise directed
by its new board of directors, Reorganized Sun will use its best efforts to remain a
reporting company under the Securities Exchange Act of 1934.
5.
Dividend Policies
Because all of the Debtors'
cash flows will be used in the foreseeable future to make payments under the exit facility
that will be entered into in connection with the emergence from chapter 11 and under
certain of the Plan Securities, Reorganized Sun does not anticipate paying dividends on
the New Series A Common Stock in the near future.
6.
Restrictions on Transfer
Holders of Plan Securities
who are deemed to be "underwriters" as defined in section 1145(b) of the
Bankruptcy Code, including holders who are deemed to be "affiliates" or
"control persons" within the meaning of the Securities Act, will be unable
freely to transfer or to sell their securities except pursuant to (a) "ordinary
trading transactions" by a holder that is not an "issuer" within the
meaning of section 1145(b), (b) an effective registration of such securities under the
Securities Act and under equivalent state securities or "blue sky" laws or (c)
pursuant to the provisions of Rule 144 under the Securities Act or another available
exemption from registration requirements. For a more detailed description of these
matters, see section II.E.
66
As a result, the Plan
provides that Reorganized Sun will enter into registration rights agreement with
significant holders of the new Series A Common Stock to be issued in the Plan providing
for certain demand an "piggyback" registration rights and will undertake to
deliver information required by Rule 144A of the Securities Exchange Act of 1934.
C. Risks Associated with the Business
Additional discussion of
risks related to the Company's business are set forth in greater detail in Sun's most
recent Form 10-K, filed with the Securities and Exchange Commission on April 2, 2001. See
the sections entitled: Risk Associated with Reimbursement Process; Reduced Revenues
Resulting from Prospective Payment System; Self-Funded Insurance; Competitive Conditions;
Collectibility of Certain Accounts Receivable; Risks Related to Investigations and Legal
Proceedings; Risk Of Adverse Effect Of Future Healthcare Reform; Potential Adverse Effect
of Change in Revenue Sources; Potential Adverse Impact from Extensive Regulation; Risk of
International Operations; Foreign Exchange Risk; and Increased Labor Costs.
X.
Confirmation of the Plan of Reorganization
A. Confirmation Hearing
Section 1128(a) of the
Bankruptcy Code requires the Bankruptcy Court, after appropriate notice, to hold a hearing
on confirmation of a plan of reorganization. The confirmation hearing is scheduled for
__:__ _.m., Eastern Standard Time, before the Honorable Mary F. Walrath, Courtroom 1,
United States Bankruptcy Court, District of Delaware, 824 Market Street, Wilmington,
Delaware, 19801. The confirmation hearing may be adjourned from time to time by the
Bankruptcy Court without further notice except for an announcement of the adjourned date
made at the confirmation hearing or any subsequent adjourned confirmation hearing.
Section 1128(b) of the
Bankruptcy Code provides that any party in interest may object to confirmation of a plan
of reorganization. Any objection to confirmation of the Plan of Reorganization must be in
writing, must conform to the Federal Rules of Bankruptcy Procedure, must set forth the
name of the objector, the nature and amount of claims or interests held or asserted by the
objector against the particular Debtor or Debtors, the basis for the objection and the
specific grounds therefor, and must be filed with the Bankruptcy Court, with a copy to
Chambers, together with proof of service thereof, and served upon (i) Weil, Gotshal &
Manges LLP, Co-Attorneys for Debtors and Debtors in Possession, 767 Fifth Avenue, New
York, New York 10153, Attention: Michael F. Walsh, Esq.; (ii) Richards, Layton &
Finger PA, Co-Attorneys for Debtors and Debtors in Possession, One Rodney Square P.O. Box
551, Wilmington, Delaware 19899; Attention Mark D. Collins, Esq. (iii) The United States
Trustee for the District of Delaware, Attention: Donald Beskrone, Esq. 844 King Street,
Suite 2313, Lock Box 35, Wilmington, DE 19801-3519; (iv) Otterbourg Steindler Houston
& Rosen, P.C., Attorneys for the Official Committee of Unsecured Creditors, 230 Park
Avenue, New York, New York 10169, Attention: Scott Hazan, Esq.; (v) Saul Ewing LLC, 222
Delaware Avenue, Suite 1200 Wilmington, Delaware 19801, Attention: Mark Minuti, Esq.;
O'Melveny & Myers, LLP, Attorneys for Agent to the Senior Lenders, 400 South Hope
Street, Los Angeles, California 90071, Attention: Ben H. Logan, Esq., (vi) Dewey
Ballantine LLP, Attorneys for DIP Credit Agreement lenders, 1301 Avenue of the Americas,
New York, New York 10019, Attention: Stuart Hirschfield, (vii) Fried, Frank, Harris,
Shriver & Jacobson, Attention: Brad Eric Scheler, Esq., One New York Plaza, New York,
New York, 10004.
67
Objections to confirmation
of the Plan of Reorganization are governed by Rule 9014 of the Federal Rules of Bankruptcy
Procedure.
UNLESS AN OBJECTION TO CONFIRMATION IS TIMELY SERVED AND FILED, IT MAY NOT BE
CONSIDERED BY THE BANKRUPTCY COURT.
B. General Requirements of Section 1129
At the confirmation
hearing, the Bankruptcy Court will determine whether the following confirmation
requirements specified in section 1129 of the Bankruptcy Code have been satisfied.
1
. The Plan of Reorganization
complies with the applicable provisions of the Bankruptcy.
2
. The Debtors have complied with
the applicable provisions of the Bankruptcy Code.
3
. The Plan of Reorganization has
been proposed in good faith and not by any means proscribed by law.
4
. Any payment made or promised by
the Debtors or by a person issuing securities or acquiring property under the Plan of
Reorganization for services or for costs and expenses in, or in connection with, the
chapter 11 cases, or in connection with the Plan of Reorganization and incident to the
chapter 11 cases, has been disclosed to the Bankruptcy Court, and any such payment made
before the confirmation of the Plan of Reorganization is reasonable or if such payment is
to be fixed after confirmation of the Plan of Reorganization, such payment is subject to
the approval of the Bankruptcy Court as reasonable.
5
. The Debtors have disclosed the
identity and affiliations of any individual proposed to serve, after confirmation of the
Plan of Reorganization, as a director, officer or voting trustee of the Debtors,
affiliates of the Debtors participating in the Plan of Reorganization with the Debtors, or
a successor to the Debtors under the Plan of Reorganization, and the appointment to, or
continuance in, such office of such individual is consistent with the interests of
creditors and equity holders and with public policy, and the Debtors have disclosed the
identity of any insider that will be employed or retained by the Debtors, and the nature
of any compensation for such insider.
6
. With respect to each class of
claims or equity interests, each holder of an impaired claim or impaired equity interest
either has accepted the Plan of Reorganization or will receive or retain under the Plan of
Reorganization on account of such holder's claim or equity interest, property of a value,
as of the Effective Date, that is not less than the amount such holder would receive or
retain if the Debtors were liquidated on the Effective Date under chapter 7 of the
Bankruptcy Code. See discussion of "Best Interests Test" below.
7
. Except to the extent the Plan of
Reorganization meets the requirements of section 1129(b) of the Bankruptcy Code (discussed
below), each class of claims or equity interests has either accepted the Plan of
Reorganization or is not impaired under the Plan of Reorganization. Classes G (Convertible
Subordinated Debentures Claims), H (C-TIPS Claims), I (Subsidiary Intercompany Claims), J
(Securities Litigation Claims) and K (equity interests) are deemed to have rejected the
Plan of Reorganization and thus the Plan of Reorganization can be confirmed only if the
requirements of section 1129(b) of the Bankruptcy Code are met.
68
8
. Except to the extent that the
holder of a particular claim has agreed to a different treatment of such claim, the Plan
of Reorganization provides that allowed undisputed Administrative Expense Claims and
Allowed Priority Non-Tax Claims will be paid in full on the Effective Date and that
Allowed Priority Tax Claims will receive on account of such claims deferred cash payments,
over a period not exceeding six (6) years after the date of assessment of such claims, of
a value, as of the Effective Date, equal to the allowed amount of such claims.
9
. At least one class of impaired
Claims has accepted the Plan of Reorganization, determined without including any
acceptance of the Plan of Reorganization by any insider holding a Claim in such class.
10
. Confirmation of the Plan of Reorganization
is not likely to be followed by the liquidation or the need for further of financial
reorganization of the Debtors or any successor to the Debtors under the Plan of
Reorganization, unless such liquidation or reorganization is proposed in the Plan of
Reorganization. See discussion of "Feasibility" below.
11
. The Plan of Reorganization provides
for the continuation after the Effective Date of payment of all retiree benefits (as
defined in section 1114 of the Bankruptcy Code), at the level established pursuant to
subsection 1114(e)(1)(B) or 1114(g) of the Bankruptcy Code at any time prior to
confirmation of the Plan of Reorganization, for the duration of the period the Debtors
have obligated themselves to provide such benefits.
C. Best Interests Tests
As described above, the Bankruptcy
Code requires that each holder of an impaired claim or equity interests either (i) accept
the Plan or (ii) receive or retain under the Plan of Reorganization property of a value,
as of the Effective Date, that is not less than the value such holder would receive if the
Debtors were liquidated under chapter 7 of the Bankruptcy Code.
The first step is determining whether
this test has been satisfied is to determine the dollar amount that would be generated
from the liquidation of the Debtors' assets and properties in the context of a chapter 7
liquidation case. The gross amount of cash that would be available for satisfaction of
claims and equity interests would be the sum of the proceeds resulting from the
disposition of the unencumbered assets and properties of the Debtors, augmented by the any
unencumbered cash held by the Debtors at the time of the commencement of the liquidation
case.
The next step is to reduce that
gross amount by the costs and expenses of the liquidation itself and by such additional
administrative and priority claims that might result from the termination of the Debtors'
business and the use of chapter 7 for the purposes of liquidation. Any remaining net cash
would be allocated to creditors and shareholders in strict priority in accordance with
section 726 of the Bankruptcy Code. Finally, the present value of such allocations (taking
into account the time necessary to accomplish the liquidation) are compared to the value
of the property that is proposed to be distributed under the Plan of Reorganization on the
Effective Date.
The Debtors' costs of
liquidation under chapter 7 would include the fees payable to a trustee in bankruptcy, as
well as those fees that might be payable to attorneys and other professionals that such a
trustee might engage. Other liquidation costs include the expenses incurred during the
chapter 11 cases allowed in the chapter 7 case, such as compensation for attorneys,
financial advisors, appraisers, accountants and other professionals for the Debtors and
the Creditors' Committee, and costs and
69
expenses of members of the Creditors' Committee, as well as other compensation claims.
In addition, claims would arise by reason of the breach or rejection of obligations
incurred and leases and executory contracts assumed or entered into by the Debtors during
the pendency of the chapter 11 cases.
The foregoing types of
claims, costs, expenses, fees and such other claims that may arise in a liquidation case
would be paid in full from the liquidation proceeds before the balance of those proceeds
would be made available to pay pre-chapter 11 priority and unsecured claims. The Debtors
believe that in a chapter 7, no prepetition claims or equity interests
would
receive any distribution of property.
The Debtors' liquidation
analysis is an estimate of the proceeds that may be generated as a result of a
hypothetical chapter 7 liquidation of the Debtors. The analysis is based on a number of
significant assumptions which are described. The liquidation analysis does not purport to
be a valuation of the Debtors' assets and is not necessarily indicative of the values that
may be realized in an actual liquidation.
D. Liquidation Analysis
The liquidation analysis
presented below has been prepared in consultation with the Debtors' financial advisors.
STATEMENT OF
ASSETS
($ in thousands)
Book Value as of August 31, 2001 (Note A)
(Unaudited)
Hypothetical Percentage Recovery
Estimated Liquidation Value
(Unaudited)
Note Reference
[1]
[2]
[1] * [2]
= [3]
Cash and Cash
Equivalents
$37,030
100%
$37,030
B
Accounts
Receivable, Net
80,610
48%
39,031
C
Other Current
Assets
18,453
4%
790
D
Fixed Assets, Net
160,359
13%
21,500
E
Goodwill and Other
Intangible Assets, Net
144,807
0%
0
F
Other Assets,
Including Investments in Subsidiaries
356,946
2%
8,381
G
Net Proceeds from
Liquidation of Subsidiaries
101,991
H
Assets Available
for Distribution
$208,723
======
Costs Associated
with Liquidation:
I
Corporate
Payroll/Overhead Costs during Liquidation
($8,083)
Chapter 7 Trustee
Fees
(6,285)
Chapter 7
Professional Fees
(6,262
)
70
Costs Associated
with Liquidation
($20,630)
Net Estimated
Liquidation Proceeds Available for Distribution
$188,093
======
DISTRIBUTION
ANALYSIS SUMMARY
($ in thousands)
Estimated
Estimated
Estimated
Allowable
Recovery
Recovery
Note
Claims
Value ($)
Value (%)
Reference
Net Estimated
Liquidation Proceeds Available for Distribution to Secured Claims
$188,093
Less Secured
Claims:
J
DIP Credit Facility
Loans
$53,783
$53,783
100.0%
Letters of Credit
(DIP Facility)
37,565
37,565
100.0%
Other Secured
Claims
71,938
42,528
59.1%
Total Secured
Claims
$163,286
$133,877
82.0%
Net Estimated
Liquidation Proceeds Available After Secured Claims
$54,216
Less Chapter 11
Administrative and Priority Claims:
K
Administrative
Claims
Post-Petition Trade
& Other
$25,438
$6,269
24.6%
Post-Petition
Payroll & Related
52,743
12,998
24.6%
Post-Petition Other
Accrued
132,069
32,547
24.6%
Priority Claims -
Taxes
9,749
2,402
24.6%
Total
Administrative and Priority Claims
$219,999
$54,216
24.6%
Net Estimated
Liquidation Proceeds Available to Unsecured Claims
$0
======
1.
Notes to Liquidation Analysis
The Liquidation Analysis
reflects the Debtors' estimate of the proceeds that could be realized if the Debtors were
to be liquidated in accordance with chapter 7 of the Bankruptcy Code. Underlying the
liquidation analysis are a number of estimates and assumptions that, although developed
and considered reasonable by management and Lazard Freres, are inherently subject to
significant business, economic, and competitive risks, uncertainties, and contingencies
beyond the control of the Debtors and their management, and upon assumptions with respect
to the liquidation decisions which could be subject to change.
ACCORDINGLY, THERE CAN
BE NO ASSURANCE THAT THE VALUES REFLECTED IN THE
71
LIQUIDATION ANALYSIS WOULD BE REALIZED IF THE DEBTORS WERE, IN FACT, TO ATTEMPT TO
UNDERGO SUCH A LIQUIDATION, AND ACTUAL RESULTS COULD VARY MATERIALLY FROM THOSE SHOWN
HERE.
The analysis assumes that a
chapter 7 case is initiated and a chapter 7 trustee is appointed. The chapter 7 trustee
would be responsible for liquidating the Debtors' assets over an assumed period of six
months. Proceeds resulting from the liquidation would be reduced by the expenses of the
liquidation before any allowed secured claimant would receive proceeds from the sale of
collateral securing that claim. Detailed below are the significant assumptions reflected
in the analysis.
2.
Major Assumptions
1) In a
chapter 7 liquidation scenario, approximately one-half of the value to be realized from
the Debtors' assets is through the sale of four of its operating units as going concern
businesses. These units include SunScript, seven sub-acute hospitals owned by Sun,
CareerStaff, and SunAlliance. Sun is unable to sell its long-term care businesses as a
going concern because Sun does not own the buildings in which it operates these
businesses. The liquidation analysis assumes that the four units are sold, and the
remaining assets liquidated, within a six month period.
2) The
liquidation analysis assumes that the operating subsidiaries to be sold on a going concern
basis maintain a full complement of employees during the sale period to ensure their
normal course operation in order to maximize potential sale proceeds. Those subsidiaries
that are projected to operate at a negative operating cash flow, whose revenues are
dependent on sales to affiliated nursing homes, or that are not likely sale candidates are
assumed to be closed upon conversion to chapter 7 and all employees terminated within 30
days.
3) During the
chapter 7 liquidation, it is assumed that the Debtors' subsidiaries to be sold as a going
concern operate on a cash break-even basis. The Debtors are, however, assumed to incur
certain overhead costs based on the estimated amount of corporate staff required to
oversee and implement the liquidation. See Note I below for details.
4) It is assumed
that the majority of the Debtors' nursing home facilities would be involuntarily placed in
receivership by various state regulatory authorities once Sun converts to a chapter 7
proceeding. Due to the fact that Sun does not own its facilities, there would be very
little, if any, value to be realized from the sale of physical property. Therefore, it is
assumed that Sun's creditors will only receive value from the liquidation of the accounts
receivable at those facilities.
5) It is assumed
that the Debtors' nursing home and other assets, exclusive of the four subsidiaries to be
sold as going concern businesses, are liquidated on an orderly basis over a six month
period. Estimated recoveries on such assets were based on management assumptions and
historical experience. The book values of the assets shown in the liquidation analysis
reflect the Debtors' balance sheet as of August 31, 2001.
6) All
liquidation proceeds are stated in actual dollar terms and have not been discounted to
reflect present values.
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3.
Key Limitations
1) During
the chapter 7 liquidation, Sun, through its subsidiaries, continues to operate certain of
its businesses and, accordingly, events may occur that could impact recovery proceeds and
claims to be satisfied.
2) If the
implementation of the liquidation process is delayed, significant operating losses and/or
changes in assets and liabilities may be incurred during the interim period until the
liquidation is completed, and the net liquidation value could be significantly below that
estimated herein.
3) Upon
liquidation, actual liabilities may vary significantly from those reflected on the
Debtors' estimated consolidated balance sheet and in this liquidation analysis, because
claims presently unknown to the Debtors may be asserted. It is not possible to predict
with any certainty the potential increase in liabilities resulting from contingent and/or
unliquidated claims. Actual amounts may vary materially from these estimates.
4) Liquidation
values are predicated upon the August 31, 2001 unaudited financial statements provided by
the Debtors. The analysis does not take into account operating results subsequent to
August 31, 2001, or changes in assets and liabilities after that date, except for specific
adjustments described in the assumptions or notes to the liquidation analysis.
5) This analysis
assumes no new litigation and only assumes amounts already accrued on the consolidated
balance sheet to cover known litigation exposures.
4.
Notes to Liquidation Analysis
Note A - Basis of Presentation
The liquidation analysis
has been prepared based on the orderly liquidation of the Company's assets, exclusive of
the four subsidiaries to be sold on a going concern basis, pursuant to a Chapter 7
liquidation. The book value of assets and liabilities presented reflect the unaudited
financials of Sun exclusive of the four subsidiaries to be sold on a going concern basis
as of August 31, 2001.
Note B - Cash and Cash Equivalents
Cash and Cash Equivalents
reflect consolidated cash available as of August 31, 2001. It is assumed that each of the
units sold as a going concern are sold exclusive of their respective cash balances.
Note C - Accounts Receivables, net
The Debtors assume that
accounts receivable, along with other working capital accounts, at subsidiaries to be sold
as a going concern are transferred as part of the sale of such subsidiary. At the various
subsidiaries to be liquidated, the Debtors reserve for doubtful accounts such that net
accounts receivable represent between 18%-95% of gross billings. Recovery has been
estimated as a percentage of net accounts receivable based on management assumptions.
Accounts receivable, net are estimated to have a weighted average recovery of 48%.
73
Note D - Other Current Assets
Other Current Assets
consists primarily of inventory, prepaid expenses and deferred tax assets. No recovery is
expected from these assets. Other Current Assets also includes short-term notes
receivable, other receivables and restricted cash at SunBridge. A modest recovery is
expected on the short-term notes and other receivables and full recovery is expected on
the restricted cash balance of approximately $550,000.
Note E - Fixed Assets, net
Property and Equipment
includes office equipment, medical equipment, land, buildings and improvements,
leaseholds, and construction in process. It is assumed that the office equipment, medical
equipment, leaseholds and construction in process will yield no recovery. The Debtors are
currently marketing for sale certain owned land and buildings. Management estimates an
aggregate recovery of $20 million based on indications of interest from prospective
purchasers of these assets. With respect to certain additional owned properties, the sale
proceeds of individual buildings or parcels of land are estimated to be insufficient to
cover the amount of debt outstanding against such building or parcel. Management also
assumes that $1.5 million of proceeds can be realized on the Debtors' $2.3 million (book
value) of artwork.
Note F - Goodwill and Other Intangibles, net
Goodwill and Other
Intangibles, net have no liquidation value. Sun does not own any licenses or patents
through which it would be able to derive cash proceeds.
Note G - Other Assets
Other Assets consist
primarily of investments in subsidiaries of Sun that are assumed to have no liquidation
value. Also contained in Other Assets are certain notes receivable estimated by management
to be 50%-75% collectable, long-term restricted cash estimated by management to be 15%
collectable, and a minority investment in a non-affiliated company estimated by management
to be 75% collectable.
Note H - Net Proceeds from Liquidation of Subsidiaries
Four of Sun's operating
subsidiaries have been identified as potential acquisition candidates with substantial
non-affiliated revenues. Such subsidiaries include SunScript, seven sub-acute hospitals
owned by Sun, CareerStaff, and SunAlliance. Under a chapter 7 liquidation, the recovery to
Sun from the liquidation of these four subsidiaries, assuming sales of the businesses on a
going concern basis, was derived based on the following:
Proceeds from the sale of the four subsidiaries to be sold on a going concern basis
were estimated using multiples of pro forma EBITDA (earnings before interest, taxes,
depreciation and amortization). Pro forma EBITDA was estimated using the following
methodology:
1) Begin with subsidiary-level EBITDAM (earnings before
interest, taxes, depreciation, amortization and management fees) for the twelve months
ended August 31, 2001 for each of the four subsidiaries.
74
2) Reduce subsidiary-level EBITDAM for each subsidiary by
the amount of EBITDAM generated by sales to affiliated entities to account for the assumed
loss of all affiliated revenue. Affiliated EBITDAM was estimated by multiplying affiliated
revenue by subsidiary-specific EBITDAM margins.
3) Reduce non-affiliated EBITDAM by estimated stand-alone
overhead to arrive at pro forma EBITDA. Stand-alone overhead was assumed at between 1% and
2.5% of non-affiliated revenue.
In order to estimate sale proceeds, subsidiaries were assigned pro forma EBITDA
acquisition multiples. The multiples selected reflect several factors including Sun's
recent experience in selling certain business units, the limited number of potential
acquirers, the current outlook for the particular markets in which the subsidiaries
operate, and the impact of a chapter 7 liquidation on value. The sale price was reduced by
transaction costs (assumed at the greater of $500,000 or 3% of the sale price for each of
the four units) and was assumed to include net working capital. Net proceeds (after
transaction costs) from the sale of subsidiaries are estimated at approximately $102
million.
Note I - Costs Associated with Liquidation
Wind-down costs reflect the
payment of corporate payroll and operating costs during liquidation based upon the
assumption that select corporate functions would be required to oversee the liquidation
process during a 6 month wind-down of operations. Wind-down expenses are assumed to be 50%
of average monthly corporate overhead for the first two months of liquidation and 40%,
30%, 20% and 10% of average monthly corporate overhead for the final four months of
liquidation, respectively. chapter 7 Trustee fees and professional fees include those fees
associated with the appointment of a chapter 7 trustee and associated legal and accounting
fees incurred during the liquidation process. chapter 7 Trustee fees are calculated in
accordance with section 326 of the Bankruptcy Code and other professional fees are
estimated at 3% of assets available for distribution.
Note J - Secured Claims
Secured claims consist
primarily of drawings under Sun's debtor in possession credit facility and funded letters
of credit. The analysis assumes that $37.6 million of letters of credit under the that
credit facility are drawn upon conversion to chapter 7. Other secured claims consist of
mortgages and other secured debt. In certain cases, liquidation value of a mortgaged asset
is below the face value of the debt on such assets. In these instances, recovery to the
debt holder is less than 100%, with the balance of the debt holder's claim assumed to
become a general unsecured obligation of the Debtors.
Note K - Administrative and Priority Claims
Administrative and priority
claims include estimates for post-petition accrued liabilities and accounts payable, tax
claims and accrued but unpaid professional fees. Based on the chapter 7 liquidation
scenario, proceeds available for distribution after satisfaction of secured debt
obligations (up to the value of the underlying assets) will be insufficient to satisfy
administrative and priority claims.
Based on the chapter 7
liquidation scenario, the Debtors are administratively insolvent and no recovery is
available for creditors junior to secured claims.
75
E. Feasibility
The Bankruptcy Code
requires that a debtor demonstrate that confirmation of a plan is not likely to be
followed by liquidation or the need for further financial reorganization. For purposes of
determining whether the Plan of Reorganization meets this requirement, the Debtors have
analyzed their ability to meet their obligations under the Plan. As part of this analysis,
the Debtors have prepared projections described in section IV above. Based upon such
projections, the Debtors believe that they will be able to make all payments required
pursuant to the Plan of Reorganization and, therefore, that confirmation of the Plan of
Reorganization is not likely to be followed by liquidation or the need for further
reorganization.
Section 1129(b)
The Bankruptcy Court may
confirm a plan of reorganization over the rejection or deemed rejection of the plan of
reorganization by a class of claims or equity interests if the plan of reorganization
"does not discriminate unfairly" and is "fair and equitable" with
respect to such class.
1.
No Unfair Discrimination
This test applies to
classes of claims or equity interests that are of equal priority and are receiving
different treatment under the Plan of Reorganization. The test does not require that the
treatment be the same or equivalent, but that such treatment be "fair."
2.
Fair and Equitable Test
This test applies to
classes of different priority and status (e.g., secured versus unsecured) and includes the
general requirement that no class of claims receive more than 100% of the allowed amount
of the claims in such class. As to the dissenting class, the test sets different
standards, depending on the type of claims or interests in such class:
- Secured Creditors
. Each holder of an impaired
secured claim either (i) retains its liens on the property, to the extent of the allowed
amount of its secured claim and receives deferred cash payments having a value, as of the
effective date, of at least the allowed amount of such claim, or (ii) has the right to
credit bid the amount of its claim if its property is sold and retains its liens on the
proceeds of the sale (or if sold, on the proceeds thereof) or (ii) receives the
"indubitable equivalent" of its allowed secured claim.
- Unsecured Creditors
. Either (i) each holder of an
impaired unsecured creditor receives or retains under the plan property of a value equal
to the amount of its allowed claim or (ii) the holders of claims and interests that are
junior to the claims of the dissenting class will not receive any property under the plan.
- Equity Interests
. Either (i) each equity
interest holder will receive or retain under the plan property of a value equal to the
greater of (a) the fixed liquidation preference or redemption price, if any, of such stock
and (b) the value of the stock, or (ii) the holders of interests that are junior to the
equity interests of the dissenting class will not receive or retain any property under the
plan of reorganization.
The Debtors believe the
Plan of Reorganization will satisfy the "fair and equitable" requirement
notwithstanding that Classes G (Convertible Subordinated Debentures Claims), H (C-TIPS
Claims), I (Subsidiary Intercompany Claims), J
76
(Securities Litigation Claims) and K (Equity Interests) are deemed to reject the Plan
of Reorganization because no class that is junior to such classes will receive or retain
any property on account of the claims or equity interests in such class.
The Convertible
Subordinated Debenture Claims are unsecured claims that are contractually subordinated to
the Senior Lender Claims and the Senior Subordinated Note Claims. Pursuant to the terms of
the Convertible Subordinated Debentures, holders of those debentures are not entitled to
receive a distribution unless the senior debt of Sun is paid in full. The Plan of
Reorganization enforces this subordination provision. Because the Senior Lender Claims are
not being paid in full, the holders of the Convertible Subordinated Debenture Claims are
not entitled to payment.
The C-TIPS have preferred
interests in Sun Financing I. The sole asset of Sun Financing I, one of the Debtors, is
the 7% Convertible Junior Subordinated Debenture Due 2008. That debenture is junior to all
of Sun's indebtedness for money borrowed. There will be no distribution for the sole asset
of Sun Financing I. Because the Senior Lender Claims are not being paid in full, the
holders of the C-TIPS Claims will not receive a distribution under the Plan of
Reorganization.
The Securities Litigation
Claims are subordinated by section 510(b) of the Bankruptcy Code to the class of claims to
which those Claims related, except for Securities Litigation Claims relating to common
stock which ranks pari passu with common stock. The Securities Litigation Claims are
junior to claims that are not being paid in full. Because the Senior Lender Claims are not
being paid in full, the Securities Litigation Claims are being extinguished.
Because several classes of
claims are not being paid in full, the existing equity interests in the Debtors are being
extinguished.
XI.
Alternatives to Confirmation and Consummation of this Plan of Reorganization
A. Liquidation Under Chapter 7
If no chapter 11 plan can
be confirmed, the chapter 11 cases may be converted to cases under chapter 7 of the
Bankruptcy Code in which a trustee would be elected or appointed to liquidate the assets
of the Debtors for distribution in accordance with the priorities established by the
Bankruptcy Code. A discussion of the effect that a chapter 7 liquidation would have on the
recoveries of holders of Claims is set forth in section X.D of this Disclosure Statement.
The Debtors believe that liquidation under chapter 7 would result in smaller distributions
being made to creditors than those provided for in the Plan of Reorganization because (a)
the likelihood that other assets of the Debtors would have to be sold or otherwise
disposed of in a less orderly fashion, (b) additional administrative expenses attendant to
the appointment of a trustee and the trustee's employment of attorneys and other
professionals, (c) additional expenses and claims, some of which would be entitled to
priority, which would be generated during the liquidation and from the rejection of leases
and other executory contracts in connection with a cessation of the Debtors' operations.
In a chapter 7 liquidation, the Debtors believe that there would be no distribution to
holders of Classes F, G, H, J, and K.
B. Alternative Plan of Reorganization
If the Plan of
Reorganization is not confirmed, the Debtors or any other party in interest (if the
Debtors' exclusive period in which to file a plan of reorganization has expired) could
attempt to formulate a different plan of reorganization. Such a plan might involve either
a reorganization and continuation of the Debtors' business or an orderly liquidation of
the Debtors' assets
77
under chapter 11. The Debtors have concluded that the Plan of Reorganization enables
creditors and equity holders to realize the most value under the circumstances. In a
liquidation under chapter 11, the Debtors would still incur the expenses associated with
closing or transferring to new operators numerous facilities. The process would be carried
out in a more orderly fashion over a greater period of time. Further, if a trustee were
not appointed, because such appointment in not required in a chapter 11 case, the expenses
for professional fees would most likely be lower than those incurred in a chapter 7 case.
Although preferable to a chapter 7 liquidation, the Debtors believe that liquidation under
chapter 11 is a much less attractive alternative to creditors and equity holders than the
Plan of Reorganization because of the greater return provided by the Plan of
Reorganization.
XII.
Certain Federal Income Tax Consequences of the Plan of Reorganization
THE FOLLOWING DISCUSSION IS
A SUMMARY OF CERTAIN OF THE SIGNIFICANT FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN TO THE
DEBTORS, TO HOLDERS OF CLAIMS WHO ACQUIRED SUCH CLAIMS ON ORIGINAL ISSUE AND TO HOLDERS OF
EQUITY INTERESTS, AND IS BASED ON THE INTERNAL REVENUE CODE OF 1986, AS AMENDED TO THE
DATE HEREOF (THE "TAX CODE"), TREASURY REGULATIONS PROMULGATED AND PROPOSED
THEREUNDER, JUDICIAL DECISIONS AND PUBLISHED ADMINISTRATIVE RULES AND PRONOUNCEMENTS OF
THE INTERNAL REVENUE SERVICE ("IRS") AS IN EFFECT ON THE DATE HEREOF. CHANGES IN
SUCH RULES OR NEW INTERPRETATIONS THEREOF COULD SIGNIFICANTLY AFFECT THE TAX CONSEQUENCES
DESCRIBED BELOW. NO RULINGS HAVE BEEN REQUESTED FROM THE IRS. MOREOVER, NO LEGAL OPINIONS
HAVE BEEN REQUESTED FROM COUNSEL WITH RESPECT TO ANY OF THE TAX ASPECTS OF THE PLAN.
THE FEDERAL, STATE, LOCAL
AND OTHER TAX CONSEQUENCES OF THE PLAN TO THE HOLDERS OF CLAIMS AND EQUITY INTERESTS MAY
VARY BASED UPON THE INDIVIDUAL CIRCUMSTANCES OF EACH HOLDER. IN ADDITION, THIS DISCUSSION
DOES NOT COVER ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO THE DEBTORS
OR TO HOLDERS OF ALLOWED CLAIMS OR EQUITY INTERESTS, NOR DOES THE DISCUSSION DEAL WITH TAX
ISSUES PECULIAR TO CERTAIN TYPES OF TAXPAYERS (SUCH AS DEALERS IN SECURITIES, S
CORPORATIONS, LIFE INSURANCE COMPANIES, FINANCIAL INSTITUTIONS, TAX-EXEMPT ORGANIZATIONS
AND FOREIGN TAXPAYERS). NO ASPECT OF FOREIGN, STATE, LOCAL OR ESTATE AND GIFT TAXATION IS
ADDRESSED.
THE FOLLOWING SUMMARY IS,
THEREFORE, NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING AND ADVICE BASED UPON THE INDIVIDUAL
CIRCUMSTANCES OF EACH HOLDER OF A CLAIM OR EQUITY INTEREST. HOLDERS OF CLAIMS OR EQUITY
INTERESTS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS FOR THE FEDERAL, STATE, LOCAL AND
OTHER TAX CONSEQUENCES PECULIAR TO THEM UNDER THE PLAN.
The federal income tax
consequences of the implementation of the Plan to a holder of a Claim will depend, among
other things, upon the origin of the holder's Claim, when the holder's Claim becomes an
Allowed Claim, when the holder receives payment in respect of such Claim, whether the
holder reports income using the accrual or cash method of accounting, whether the holder
has taken a bad debt deduction or worthless security deduction with respect to such Claim
and whether the holder's Claim constitutes a "security" for federal income tax
purposes.
Generally, a holder of an
Allowed Claim will realize gain or loss on the exchange under the Plan of its Allowed
Claim for stock and other property (such as Cash and new debt instruments), in an amount
equal to the difference between (i) the sum of the amount of any Cash, the issue price of
any debt instrument, and the fair market value on the date of the exchange of any other
property received by the holder (other than any consideration attributable to a Claim for
accrued but unpaid interest) and (ii) the adjusted basis of the Allowed Claim exchanged
therefor (other than basis attributable to accrued but unpaid interest previously included
in the holder's taxable income). With respect to the treatment of accrued but unpaid
interest and amounts allocable thereto, see section XII.B.8 "Allocation of
Consideration to Interest."
Whether or not such
realized gain or loss will be recognized (
i.e.,
taken into account) for federal
income tax purposes will depend in part upon whether such exchange qualifies as a
recapitalization or other "reorganization" as defined in the Tax Code, which may
in turn depend upon whether the Claim exchanged is classified as a "security"
for federal income tax purposes. The term "security" is not defined in the Tax
Code or in the Treasury Regulations. One of the most significant factors considered in
determining whether a particular debt instrument is a security is the original term
thereof. In general, the longer the term of an instrument, the greater the likelihood that
it will be considered a security. As a general rule, a debt instrument having an original
term of 10 years or more will be classified as a security, and a debt instrument having an
original term of fewer than five years will not. Debt instruments having a term of at
least five years but less than 10 years are likely to be treated as securities, but may
not be, depending upon their resemblance to ordinary promissory notes, whether they are
publicly traded, whether the instruments are secured, the financial condition of the
debtor at the time the debt instruments are issued and other factors. Each holder of an
Allowed Claim should consult its own tax advisor to determine whether its Allowed Claim
constitutes a security for federal income tax purposes.
2.
Holders of Allowed Administrative Expense Claims
(Unclassified) and Allowed Priority Non-Tax Claims
(Class A)
Holders of Allowed
Administrative Expense Claims and Allowed Priority Non-Tax Claims generally will be paid
in full in Cash on, or subsequent to, the Effective Date. Such holders must include
amounts received in excess of their adjusted tax basis in their Claim (if any) in gross
income in the taxable year in which such amounts are actually or constructively received
by them. Where appropriate, income tax and employment tax will be withheld from such
payments as required by law. With respect to the treatment of accrued but unpaid interest
(if any) and amounts allocable thereto, see section XII.B.8, "Allocation of
Consideration to Interest."
In general, a holder of an
Allowed Other Secured Claim will (i) receive the collateral securing such holder's Allowed
Other Secured Claim; (ii) receive Cash in an amount equal to the value of the collateral
securing the Allowed Other Secured Claim; or (iii) have its Allowed Other Secured Claim
reinstated. If a holder has its Claim reinstated, such holder will not realize any gain or
loss for federal income tax purposes because the transaction will not give rise to a
significant modification of the Allowed Other Secured Claim within the meaning of the
Treasury Regulations.
If a holder of an Allowed
Other Secured Claim receives Cash or collateral in satisfaction of such claim in whole or
in part, such holder will realize gain or loss in an amount equal to the difference
between (a) the holder's basis in the Allowed Other Secured Claim and (b) the amount of
Cash and the fair market value of the collateral received in the exchange in excess of
amounts allocable to accrued but unpaid interest. The amount of Cash or the portion of the
collateral received in respect of claims for accrued interest, fees and charges will be
taxed as ordinary income, except to the extent previously included in income by a holder
under his method of accounting. See section XII.B.8, "Allocation of Consideration to
Interest."
A holder of an Allowed
Senior Lender Claim will receive Cash and New Series A Common Stock on or after the
Effective Date. The Debtors believe that the Senior Lender Claims do not constitute
"securities" for federal income tax purposes. In general, a holder of a Senior
Lender Claim will realize gain or loss in an amount equal to the difference between (a)
the holder's basis in the Senior Lender Claim and (b) the sum of the amount of any Cash
and the fair market value of the New Series A Common Stock received in excess of amounts
allocable to accrued but unpaid interest. Amounts received in respect of claims for
accrued interest will be taxed as ordinary income, except to the extent previously
included by a holder under his method of accounting. See section XII.B.8, "Allocation
of Consideration to Interest."
5.
Holders of Allowed General
Unsecured Claims (Class E)
A holder of an Allowed
General Unsecured Claim will receive New Series A Common Stock on or after the Effective
Date. Whether such distribution is taxable depends upon whether a holder's Allowed General
Unsecured Claim constitutes a "security" for federal income tax purposes. See
section XII.B.1, "Realization and Recognition of Gain or Loss in General." If an
Allowed General Unsecured Claim does not constitute a "security" for federal
income tax purposes, the holder of such a Claim would realize gain or loss in an amount
equal to the difference between (a) the holder's basis (if any) in the General Unsecured
Claim and (b) the fair market value of the New Series A Common Stock received in excess of
amounts allocable to accrued but unpaid interest. Amounts received in respect of claims
for accrued interest will be taxed as ordinary income, except to the extent previously
included by a holder under his method of accounting. See section XII.B.8, "Allocation
of Consideration to Interest." A holder's tax basis in any New Series A Common Stock
received in satisfaction of its Claim will equal the fair market value of such stock.
If an Allowed General
Unsecured Claim constitutes a "security" for federal income tax purposes, the
receipt of New Series A Common Stock in satisfaction of such Claim will constitute a
"recapitalization" for federal income tax purposes. Therefore, any realized gain
or loss will not be recognized for federal income tax purposes. Amounts received in
respect of claims for accrued interest will be taxed as ordinary income, except to the
extent previously included by a holder under his method of accounting. See section
XII.B.8, "Allocation of Consideration to Interest." A holder's tax basis in any
New Series A Common Stock received in satisfaction of its Claim (other than a claim for
accrued interest) will equal the holder's aggregate
80
adjusted tax basis in its Claim (not including any claim for accrued but unpaid
interest). In general, the holder's holding period for the New Series A Common Stock
received will include the holder's holding period for its Claim, except to the extent the
New Series A Common Stock was issued in respect of a claim for accrued but unpaid
interest. A holder's tax basis in any New Series A Common Stock received in satisfaction
of its Claim for accrued but unpaid interest will be equal to the fair market value of any
New Series A Common Stock so received.
Holders of Claims Arising
Under the 9.375% Senior Subordinated Notes due 2008 and the 9.5% Senior Subordinated Notes
due 2007
If Class F votes to accept
the Plan, holders of Allowed Senior Subordinated Note Claims will receive New Warrants on
or after the Effective Date. The Debtors believe that the 9.375% Senior Subordinated Notes
due 2008 and the 9.5% Senior Subordinated Notes due 2007 constitute "securities"
for federal income tax purposes. See section XII.B.1, "Realization and Recognition of
Gain or Loss in General." Accordingly, the receipt of the New Warrants in
satisfaction of claims arising under the 9.375% Senior Subordinated Notes due 2008 and the
9.5% Senior Subordinated Notes due 2007 will constitute a "recapitalization" for
federal income tax purposes. Therefore, any realized gain or loss will not be recognized
for federal income tax purposes. Amounts received in respect of claims for accrued
interest will be taxed as ordinary income, except to the extent previously included by a
holder under his method of accounting. See section XII.B.8, "Allocation of
Consideration to Interest."
A holder's tax basis in any
New Warrants received in satisfaction of its Claim (other than a claim for accrued
interest) will equal the holder's aggregate adjusted tax basis in its Claim (not including
any claim for accrued but unpaid interest). In general, the holder's holding period for
the New Warrants received will include the holder's holding period for its Claim, except
to the extent the New Warrants were issued in respect of a claim for accrued but unpaid
interest. A holder's tax basis in any New Warrants received in satisfaction of its claim
for accrued but unpaid interest will be equal to the fair market value of any New Warrants
so received.
If the 9.375% Senior
Subordinated Notes due 2008 or the 9.5% Senior Subordinated Notes due 2007 do not
constitute "securities" for federal income tax purposes, a holder of such a note
will recognize gain or loss in an amount equal to the difference between (i) the sum of
the fair market value of the New Warrants received (other than any amount received in
respect of a claim for accrued interest) and (ii) the holder's adjusted tax basis in its
Claim (other than any claim for accrued but unpaid interest). Amounts received in respect
of claims for accrued interest will be taxed as ordinary income, except to the extent
previously included by a holder under his method of accounting. See section XII.B.8,
"Allocation of Consideration to Interest."
Holders of Claims Arising
Under the 11.75% Senior Subordinated Notes Due 2002
If Class F votes to accept
the Plan, a holder of an Allowed Claim arising under the 11.75% Senior Subordinated Notes
Due 2002 will receive New Warrants on or after the Effective Date. The Debtors believe
that the 11.75% Senior Subordinated Notes constitute "securities" for federal
income tax purposes. See section XII.B.1, "Realization and Recognition of Gain or
Loss in General." However, the receipt of the New Warrants in satisfaction of Claims
arising under the 11.75% Senior Subordinated Notes Due 2002 will not constitute a
"recapitalization" for federal income tax purposes because the 11.75% Senior
Subordinated Notes Due 2002 are securities of Mediplex, not Sun. Therefore, a holder of an
Allowed Claim arising under the 11.75% Senior Subordinated Notes Due 2002 will realize
gain or loss in an amount equal to the difference between
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(a) the holder's basis (if any) in the Claim arising under the 11.75% Senior
Subordinated Notes Due 2002 and (b) the fair market value of the New Warrants received in
excess of amounts allocable to accrued but unpaid interest. Amounts received in respect of
claims for accrued interest will be taxed as ordinary income, except to the extent
previously included by a holder under his method of accounting. See section XII.B.8,
"Allocation of Consideration to Interest."
The foregoing discussion is
limited to holders of Claims who acquired such Claims at original issue. A holder of a
Claim who acquired such Claim other than at original issue should consult its own tax
advisor as to the potential applicability of the market discount rules.
7.
Holders of
Convertible Subordinated Debenture Claims (Class G), C-TIPS Claims (Class H) and Equity
Interests (Class K)
On the Effective Date,
Convertible Subordinated Debenture Claims, C-TIPS Claims and Equity Interests will be
extinguished. Accordingly, holders of such claims will realize a loss equal to their
adjusted tax basis in their claim upon implementation of the Plan.
8.
Allocation
of Consideration to Interest
Pursuant to the Plan, all
Distributions in respect of Allowed Claims will be allocated first to the principal amount
of the Allowed Claim, with any excess allocated to unpaid accrued interest. However, there
is no assurance that such allocation would be respected by the IRS for federal income tax
purposes. In general, to the extent any amount received (whether stock, Cash or other
property) by a holder of a debt is received in satisfaction of accrued interest during its
holding period, such amount will be taxable to the holder as interest income (if not
previously included in the holder's gross income). Conversely, a holder generally
recognizes a deductible loss to the extent any accrued interest claimed was previously
included in its gross income and is not paid in full. Each holder of an Allowed Claim is
urged to consult his or her own tax advisor regarding the allocation of consideration and
the deductibility of unpaid interest for tax purposes.
9.
Tax Treatment of Gain Recognized
on Subsequent Sale of Certain Stock
Any gain recognized by a
holder upon a subsequent taxable disposition of New Series A Common Stock received
pursuant to the Plan in satisfaction of a holder's Claims will be treated as ordinary
income to the extent of (i) any bad debt deductions (or additions to a bad debt
reserve) claimed with respect to its Claims and any ordinary loss deduction incurred upon
satisfaction of such Claims, less any income (other than interest income) recognized by
the holder upon satisfaction of such Claims, and (ii) with respect to a cash-basis
holder, also any amounts which would have been included in its gross income if the holders
of such Claims had been satisfied in full but which was not included by reason of the cash
method of accounting.
10.
Exercise of New Warrants; Conversion of New
Series Class A Common Stock into New Redeemable Preferred
Stock
No gain or loss will be recognized by a holder of New Warrants who exercises such New
Warrants and receives shares of New Series A Common Stock. Shares of New Redeemable
Preferred Stock received upon conversion of shares of New Series A Common Stock will be
treated as Nonqualified Preferred Stock under the Tax Code. In the absence of Treasury
Regulations, it is not clear whether a conversion of New Series A Common Stock into New
Redeemable Preferred Stock would be treated as a fully taxable exchange in which gain or
loss would be recognized or whether, under certain circumstances, such conversion would be
treated as a distribution of Redeemable Preferred Stock with respect to the New
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Series A Common Stock that would be treated as a tax free stock dividend and result in
the receipt by an exchanging stockholder of Section 306 Stock. Each person who considers
converting such New Series A Common Stock into New Redeemable Preferred Stock should
consult with its own tax advisor.
In general, the discharge
of a debt obligation by a debtor for an amount less than the adjusted issue price
(generally, the amount received upon incurring the obligation plus the amount of any
previously amortized original issue discount and less the amount of any previously
amortized bond issue premium) gives rise to cancellation-of-indebtedness ("COD")
income which must be included in a debtor's income for federal income tax purposes,
unless, in accordance with section 108(e)(2) of the Tax Code, payment of the liability
would have given rise to a deduction. A corporate debtor that issues its own stock or its
own debt in satisfaction of its debt is treated as realizing COD income to the extent the
fair market value of the stock or the issue price of new debt issued is less than the
adjusted issue price of the old debt. COD income is not recognized by a taxpayer that is a
debtor in a title 11 (bankruptcy) case if a discharge is granted by the court or pursuant
to a plan approved by the court (the "bankruptcy exclusion rules").
Pursuant to the Plan,
[Administrative Expense Claims, Priority Tax Claims, Priority Non-Tax Claims, Other
Secured Claims and HHS Claims] generally will be paid in full and, therefore, treatment of
such Claims should not give rise to COD income. With respect to other Claims, there could
be COD income if such Claims are not satisfied in full. Based upon current estimates of
value, the Debtors believe that consummation of the Plan will give rise to approximately
$___________ of COD income that will be excluded from gross income as described above, but
will reduce attributes as described below.
The relief accorded to COD
income by the bankruptcy exclusion rules is not without cost. If a taxpayer excludes COD
income because of the bankruptcy exclusion rules, it is required to reduce prescribed tax
attributes in the following order and at the following rates: (i) net operating losses
("NOLs") for the taxable year of the discharge and NOL carryovers to such
taxable year, dollar for dollar; (ii) general business credit carryovers, 33-1/3 cents for
each dollar of excluded income; (iii) the minimum tax credit available under section 53(b)
of the Tax Code as of the beginning of the taxable year immediately following the taxable
year of the discharge, 33-1/3 cents for each dollar of excluded income; (iv) any capital
losses for the taxable year of the discharge and any capital loss carryovers to such
taxable year, dollar for dollar; (v) the basis of the taxpayer's assets both
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depreciable and nondepreciable, dollar for dollar, but the basis cannot be reduced
below an amount based on the taxpayer's aggregate liabilities immediately after the
discharge; (vi) passive activity loss or credit carryovers of the taxpayer under section
469(b) of the Tax Code from the taxable year of the discharge, dollar for dollar in the
case of loss carryovers and 33-1/3 cents for each dollar of excludible income in the case
of any passive activity credit carryovers; and (vii) foreign tax credit carryovers, 33-1/3
cents for each dollar of excluded income. However, under section 108(b)(5) of the Tax Code
the taxpayer may elect to avoid the prescribed order of attribute reduction and instead
reduce the basis of depreciable property first, without regard to the "aggregate
liabilities" limitation. This election extends to stock of a subsidiary if the
subsidiary consents to reduce the basis of its depreciable property. If the Reorganized
Debtors make this election, the limitation prohibiting the reduction of asset basis below
the amount of its remaining undischarged liability does not apply. The Debtors are
considering whether it would be advantageous to make the election to reduce the basis of
their depreciable assets first under section 108(b)(5) of the Tax Code.
In general, a taxpayer
determines its tax liability for the year of discharge without regard to the attribute
reduction rules, which are applied as of the beginning of the following taxable year.
In general, whenever there
is a 50% ownership change of a debtor corporation during a three-year period, the
ownership change rules in section 382 of the Tax Code limit the utility of NOLs on an
annual basis to the product of the fair market value of the corporate entity immediately
before the ownership change, multiplied by a hypothetical interest rate published monthly
by the IRS called the "long-term tax-exempt rate." The long-term tax-exempt rate
as of the date of this Disclosure Statement is ____%. In any given year, this limitation
may be increased by certain built-in gains realized after, but accruing economically
before, the ownership change and the carryover of unused section 382 limitations from
prior years.
On the other hand, if at
the date of an ownership change the adjusted basis for federal income tax purposes of a
debtor's assets exceeds the fair market value of such assets by prescribed amounts, (a
"net unrealized built-in loss") then, upon the realization of such built-in
losses during a five-year period beginning on the date of the ownership change, such
losses are treated as if they were part of the net operating loss carryover, rather than
the current deduction, and are also subject to the section 382 limitation.
The Debtors believe that
implementation of the Plan will create a section 382 change of ownership. The harsh
effects of the ownership change rules can be ameliorated by an exception that applies in
the case of reorganizations under the Bankruptcy Code. Under the so-called "Section
382(1)(5) bankruptcy exception" to section 382 of the Tax Code, if the reorganization
results in an exchange by qualifying creditors and stockholders of their claims and
interests for at least 50% of the debtor's stock (in vote and value), then the general
ownership change rules will not apply. Instead, the debtor will be subject to a
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different tax regime under which the NOL is not limited on an annual basis but is
reduced by the amount of interest deductions claimed during the three taxable years plus
the part year, if any, immediately preceding the effectiveness of the Plan, in respect of
debt converted into stock in the reorganization. Moreover, if the section 382(1)(5)
bankruptcy exception applies, any further ownership change of the debtor within a two-year
period will result in forfeiture of all of the debtor's NOLs incurred prior to the date of
the second ownership change.
In determining whether a
debtor satisfies the 50% test described above, and hence qualifies for Section 382(l)(5)
treatment, only creditors who have held their claims for prescribed periods of time and
exchange such claims for stock may be counted. Thus, active trading in the claims may
prevent a debtor from meeting the tests of Section 382(l)(5). The Debtors do not know at
this time whether, as a result of such claims trading, it will fail to qualify under
Section 382(l)(5).
If the debtor would
otherwise qualify for the section 382(1)(5) bankruptcy exception, but the NOL reduction
rules mandated thereby would greatly reduce the NOL, the debtor may elect instead to be
subject to the annual limitation rules of section 382 of the Tax Code, but is permitted to
value the equity of the corporation for purposes of applying the formula by using the
value immediately after the ownership change (by increasing the value of the old loss
corporation to reflect any surrender or cancellation of creditors' claims) instead of
immediately before the ownership change (the "Section 382(1)(6) limitation").
Alternatively, if the debtor does not qualify for the section 382(1)(5) bankruptcy
exception, the utility of its NOL would automatically be governed by the section 382(1)(6)
limitation.
Based on their returns as
filed and upon estimates at the close of the taxable year ending December 31, 2000, the
Debtors believe they will have an NOL of approximately $530 million for regular tax
purposes and $495 million for alternative minimum tax purposes. See section XII.C.5,
"Alternative Minimum Tax." In addition, they will have a capital loss carryover
of approximately $56 million.
The Debtors do not know whether they will have a net
unrealized built-in loss as of the ownership change arising from implementation of the
Plan.
However, the amount of the NOL could be reduced or eliminated because of audit
adjustments by the IRS that result from IRS examinations of the Debtors' returns, or any
COD income as a result of the attribute reduction rules discussed above in section
XII.C.2, "Attribute Reduction." In addition, depending upon the valuation placed
on the Debtors' assets, the Debtors could have a net unrealized built-in loss.
The amount of NOLs
available to the Debtors or Reorganized Debtors is based on factual and legal issues with
respect to which there can be no certainty. The actual annual utility of the NOL
carryovers will be determined by actual market value and the actual long-term tax-exempt
rate at the date of reorganization and may be different from amounts described herein.
Accordingly, the utility of the Section 382(l)(5) bankruptcy exception versus an election
to apply the 382(l)(6) limitation cannot be ascertained at this time.
[The confirmation of
the Plan may result in the recognition of income or loss attributable to the existence of
deferred intercompany transactions, excess loss accounts or similar items. The Debtors,
however, do not believe that the consequence of such items (if any) would have a material
effect on them.]
A corporation is required
to pay alternative minimum tax to the extent that 20% of "alternative minimum taxable
income" ("AMTI") exceeds the corporation's regular tax liability for the
year. AMTI is generally equal to regular taxable income with certain adjustments. For
purposes of computing AMTI, a corporation is entitled to offset no more than 90% of its
AMTI with NOLs (as computed for alternative minimum tax purposes). Thus, if the
Reorganized Debtors' consolidated group is subject to the alternative minimum tax in
future years, a federal tax of not less than 2% (20% of the 10% of AMTI not offset by
NOLs) will apply to any net taxable income earned by the Reorganized Debtors' consolidated
group in future years that would otherwise be offset by NOLs.
Certain legislative
proposals now pending before Congress would, if enacted, retroactively repeal the
Alternative Minimum Tax for corporations.
XIII.
Conclusion
The Debtors believe the
Plan of Reorganization is in the best interests of all creditors and equity holders and
urges the holders of impaired claims in Class D (Senior Lender Claims), Class E (General
Unsecured Claims), and Class F (Senior Subordinated Note Claims) to vote to accept the
Plan of Reorganization and to evidence such acceptance by returning their Ballots.
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