IN THE UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
____________________________________
: CHAPTER 11
In re: :
:
CORECARE BEHAVIORAL HEALTH :
MANAGEMENT, INC. : BANKRUPTCY NO. 02-16792(SR)
:
Debtor :
____________________________________:
__________________________________________
DISCLOSURE STATEMENT IN RESPECT OF
THIRD AMENDED PLAN OF REORGANIZATION
PROPOSED BY DEBTOR-IN-POSSESSION
__________________________________________
Dated: December 29, 2003
1.A. INTRODUCTION
------------
On or about May 6, 2002, CoreCare Behavioral Health Management, Inc.
(the "Debtor" or "CCBHM") filed a Voluntary Petition for Reorganization under
Chapter 11 of the United States Bankruptcy Code with the United States
Bankruptcy Court for the Eastern District of Pennsylvania. At the same time
CoreCare Realty Corporation ("Realty"), an Affiliate of the Debtor (collectively
CCBHM and Realty are referred to as the "Debtors") filed a Voluntary Petition
under Chapter 11. Since the Petition Date, the Debtor and its Affiliate have
been operating and conducting their businesses as Debtors-in-Possession pursuant
to the terms of the United States Bankruptcy Code.
CCBHM operates a private, for-profit mental health care facility at 111
North 49th Street, Philadelphia, Pennsylvania known as the Kirkbride Center (the
"Property"). Kirkbride Center is a 21 acre campus in West Philadelphia on which
is located five principal buildings totaling approximately 380,000 square feet.
CoreCare Systems, Inc. is the parent and one hundred percent (100%) stockholder
of the Debtors.
CCBHM acquired the Kirkbride Property in 1997 from The Pennsylvania
Hospital. CCBHM acquired the Property in 1997 to attempt to capitalize on doing
business with a newly formed agency within the City of Philadelphia called
Community Behavioral Health (CBH). CBH was charged with the task of providing
mental health services to the 500,000 Medicaid patients in the City of
Philadelphia. CoreCare hoped to capitalize on the demand for psychiatric
services generated by CBH, and its position as a low cost provider within the
City, by acquiring Kirkbride Center and negotiating a profitable service
provider contract with CBH. CoreCare was indeed able to negotiate a contract
with CBH to provide acute and sub-acute psychiatric care services to CBH
starting in 1997 and proceeded to do so.
CCBHM continues to serve as a full service psychiatric hospital that
has approximately 250 employees and 150 patients for treatment in the facility.
Realty functions essentially as a pass thru entity that subleases a substantial
portion of CoreCare Behavioral's facility which it leases to various tenants.
The Debtor has attempted to formulate a Plan of Reorganization which it believes
will benefit all creditors and allow the Debtor to continue to operate and serve
the community.
CCBHM's real property located at 111 North 49th Street in Philadelphia,
Pennsylvania is secured by a mortgage and note of WRH Mortgage, Inc. ("WRH").
WRH has a first lien on all real estate and fixtures. This note and mortgage has
been assigned to Kirkbride Holdings, LLC ("KBH"). The first mortgage has a
current balance due of approximately $13,700,000. PricewaterhouseCoopers
recently completed an appraisal of the Debtor and the real estate and concluded
that the business plus the real estate has a value of $25,300,000 (14 acres
only) and that the real estate (14 acres only) by itself has a value of
$15,500,000.
The Debtor's Plan is contingent on a favorable ruling from the Court on
the disposition of the Tobacco Settlement Funds which are in escrow and the
closing on a refinance of the account receivable line of credit. Heller, Class 2
creditor, does not agree to the disposition of the Tobacco Settlement Funds as
outlined by the Debtor's Plan. Absent agreement, this issue will be litigated.
Heller also intends to assert that the absolute priority rule prevents
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confirmation. The Debtor believes that Heller as over-secured creditor does not
have standing to raise that issue.
The Debtor and the Class 1 Creditor are still negotiating the Class 1
treatment and the loan documents referenced in the treatment of Class 1
including the Kirkbride Lease. The most current draft of the KBH Loan Documents
are attached to the Plan. The inclusion of these documents as an Exhibit to the
Plan should not be construed as acceptance of the attached documents by the
Debtor or Class 1and should not be construed as an acceptance by KBH of the
Class 1 treatment. The Debtor is hopeful that such acceptance will occur and the
Debtor will provide the final versions of all KBH loan documents at the time of
Confirmation.
The Debtor and Class 10 have discussed potential treatment under the
Plan. The Committee has not, as of the Disclosure Statement hearing, consented
to the Class10 treatment set forth in the Plan. The Debtor and the Committee
will be negotiating the treatment for Class 10 and may modify the treatment as
set forth in the Plan. Further, the Debtor and Committee will be negotiating the
appropriate loan documents which will be available at the time of the
Confirmation Hearing.
THE DEBTOR RECOMMENDS A VOTE FOR ACCEPTANCE OF ITS PLAN.
2. DISCLAIMERS
-----------
2.1 THIS DISCLOSURE STATEMENT MAY NOT BE RELIED ON FOR ANY PURPOSE
OTHER THAN TO DETERMINE HOW TO VOTE ON THE PLAN, AND NOTHING CONTAINED IN IT
SHALL CONSTITUTE AN ADMISSION OF ANY FACT OR LIABILITY BY ANY PARTY, OR BE
ADMISSIBLE IN ANY PROCEEDING INVOLVING THE PLAN OR OTHER LEGAL EFFECTS OF THE
REORGANIZATION ON CREDITORS, HOLDERS OF CLAIMS OR INTERESTS, OR THE DEBTOR.
2.2 THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT ARE MADE AS
OF THE DATE HEREOF UNLESS ANOTHER TIME IS SPECIFIED HEREIN, AND NEITHER DELIVERY
OF THIS DISCLOSURE STATEMENT NOR ANY EXCHANGE OR RIGHTS MADE IN CONNECTION WITH
THIS DISCLOSURE STATEMENT SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH HEREIN SINCE THE DATE THE
DISCLOSURE STATEMENT WAS COMPILED.
2.3 THE STATEMENT AND REPRESENTATIONS CONTAINED HEREIN ARE MADE SOLELY
BY OR AT THE INSTANCE OF THE DEBTOR AND NO OTHER PARTY IN INTEREST IS
RESPONSIBLE FOR THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED HEREIN.
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2.4 NO REPRESENTATIONS CONCERNING THE PLAN ARE AUTHORIZED BY THE DEBTOR
OTHER THAN AS SET FORTH IN THIS DISCLOSURE STATEMENT. THE DEBTOR DOES NOT
WARRANT OR REPRESENT THAT THE INFORMATION CONTAINED HEREIN IS WITHOUT ANY
INACCURACY.
2.5 THE PRESENTATION OF THE INFORMATION SET FORTH HEREIN DOES NOT
CONSTITUTE FACTUAL OR LEGAL ADMISSIONS BY THE DEBTOR. CERTAIN OF THE
INFORMATION, BY ITS NATURE, IS FORWARD LOOKING, CONTAINS ESTIMATES AND
ASSUMPTIONS WHICH MAY PROVE TO BE FALSE OR INACCURATE AND CONTAINS PROJECTIONS
WHICH MAY BE MATERIALLY DIFFERENT FROM ACTUAL FUTURE EXPERIENCES. SUCH ESTIMATES
AND ASSUMPTIONS ARE MADE FOR INFORMATIONAL PURPOSES ONLY AND NO REPRESENTATION
OR WARRANTY IS MADE WITH RESPECT THERETO.
3. INFORMATION ABOUT THE REORGANIZATION PROCESS
--------------------------------------------
3.1 PURPOSE OF DISCLOSURE STATEMENT
The purpose of a Disclosure Statement is to provide the
creditors and equity holders with sufficient information about the Debtor and
proposed Plan of Reorganization so as to permit them to make an informed
judgment when voting on the Plan. This Disclosure Statement therefore includes
background information about the Debtor and also identifies the classes into
which creditors have been placed by the Plan. The Disclosure Statement describes
the proposed treatment of each of those classes if the Plan is confirmed. In
addition, the Disclosure Statement contains information concerning the future
prospects for the Debtor in the event of confirmation or, in the alternative,
the prospects if confirmation is denied or the proposed Plan does not become
effective.
This Disclosure Statement and the Exhibits described herein
have been approved by Order of the Bankruptcy Court dated _____________, 2003,
as containing, in accordance with the provisions of the Bankruptcy Code,
adequate information of a kind and in sufficient detail that would enable a
reasonable, hypothetical investor typical of a holder of impaired claims or
interests to make an informed judgment about the Plan. The Bankruptcy Court's
approval of this Disclosure Statement, however, does not constitute a
recommendation by the Bankruptcy Court either for or against the Plan.
YOU ARE URGED TO STUDY THE PLAN IN FULL AND TO
CONSULT WITH YOUR COUNSEL AND OTHER ADVISORS
ABOUT THE PLAN AND ITS IMPACT, INCLUDING POSSIBLE
TAX CONSEQUENCES, UPON YOUR LEGAL RIGHTS. PLEASE READ
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THIS DISCLOSURE STATEMENT CAREFULLY BEFORE VOTING
ON THE PLAN.
3.2 BRIEF EXPLANATION OF CHAPTER 11
Chapter 11 is the principal business reorganization section of
the Bankruptcy Code. Pursuant to Chapter 11, the Debtor is permitted to
reorganize its business affairs for its own benefit and that of its creditors
and other interest holders. Unless a trustee is appointed, The Debtor is
authorized to continue to operate its business while all attempts to collect
pre-petition claims from the Debtor, or to foreclose upon property of the
Debtor, are stayed during the pendency of the case unless the Bankruptcy Court
orders otherwise.
The objective of a Chapter 11 case is the formulation of a
plan of reorganization of the Debtor and its affairs. The plan is a vehicle for
resolving claims against the Debtor, as well as providing for its future
direction and operations.
Creditors are given an opportunity to vote on any proposed
plan, and the plan must be confirmed by the Bankruptcy Court to be valid and
binding on all parties. Once the plan is confirmed, all claims against the
Debtor which arose before the Chapter 11 proceeding was initiated are
extinguished, unless specifically preserved in the Plan.
3.3 VOTING PROCEDURE
The United States Bankruptcy Court has reviewed this
Disclosure Statement and entered an Order determining that these documents
contain "adequate information" such that creditors can meaningfully evaluate the
Plan. A copy of the Bankruptcy Court Order approving the Disclosure Statement is
attached. Only after creditors have had an opportunity to vote on the Plan will
the Court consider the Plan and determine whether it should be approved or
confirmed.
All creditors entitled to vote on the Plan may cast their
votes for or against the Plan by completing, dating, signing and causing the
Ballot Form accompanying this Disclosure Statement to be returned to the
following address in the enclosed envelope:
ALBERT A. CIARDI, III, ESQUIRE
CIARDI MASCHMEYER & KARALIS, P.C.
1900 SPRUCE STREET
PHILADELPHIA, PA 19103
BALLOTS MUST BE RECEIVED ON OR BEFORE 5:00 P.M. ON ______________, 2004 TO BE
COUNTED IN THE VOTING. BALLOTS RECEIVED AFTER THIS TIME WILL NOT BE COUNTED IN
THE VOTING UNLESS THE COURT SO ORDERS.
THE DEBTOR RECOMMENDS A VOTE "FOR ACCEPTANCE" OF THE PLAN.
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This Disclosure Statement has been approved by the Bankruptcy Court in
accordance with Section 1125 of the Bankruptcy Code and is provided to all of
the known holders of Claims against the Debtor whose Claims are impaired under
the Plan and to each Interest holder of record. The Disclosure Statement is
intended to assist creditors in evaluating the Plan and in determining whether
to accept the Plan.
3.4 BALLOTS
Accompanying this Disclosure Statement are appropriate Ballots
for acceptance or rejection of the Plan. The Bankruptcy Code provides that only
Classes of Claims and Interests which are impaired may vote on a Plan. A claim
(or interest) to which an objection has been filed is a disputed claim (or
interest) and not an allowed claim (or interest), unless the Court denies such
objection or temporarily allows the disputed claim (or interest) for the purpose
of voting on the Plan. Thus, any holder of a claim which is the subject of an
objection pending during the applicable voting period will not be entitled to
vote on the Plan. Each party in interest entitled to vote on the Plan will
receive a Ballot (as for each class of claim or interest for which it belongs).
Because some parties may be in more than one class for voting purposes, in some
instances more than one Ballot has been included with the Disclosure Statement.
The classes which are, or may be, impaired by the Plan and which, therefore, are
entitled to vote to either accept or reject the Plan are the following:
Class Description of Class
----- --------------------
1 Kirkbrige Holdings, LLC
2 Internal Revenue Service
3 Heller Healthcare Finance
4 Commonwealth of Pennsylvania, Dept. of Revenue
5 Commonwealth of Pennsylvania, Dept. of Labor
6 Advanta Leasing Services
7 CitiCorp Vendor Finance
8 City of Philadelphia, Dept. of Revenue
9 Priority Non-Tax Claims
10 Unsecured Claims
11 Interest Holder
Each member of a voting class will be asked to vote for
acceptance or rejection of the Plan. A party who holds claims in more than one
class should complete a Ballot for each class with respect to the applicable
proportion of its claim included in each class. In determining acceptance of the
Plan, votes of Claims and Interests will only be counted if submitted by holders
of Claims and Interests which have been scheduled by the Debtor as undisputed,
non-contingent and liquidated, or who have filed a Proof of Claim with the
Bankruptcy Court which has neither been disallowed nor the subject of an
unresolved objection prior to the Confirmation Hearing.
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YOU MAY RECEIVE MORE THAN ONE PLAN OR A PLAN
FROM MORE THAN ONE CASE. YOU SHOULD SUBMIT
A BALLOT IN EACH CASE IN WHICH YOU
BELIEVE YOU HAVE A CLAIM.
THE BANKRUPTCY COURT HAS FIXED ________________, 2004 AS THE
LAST DATE BY WHICH ALL BALLOTS MUST BE RECEIVED. All parties eligible to vote on
the Plan are urged to complete and return their Ballots promptly to avoid delay
in confirmation of the Plan.
3.5 THE CONFIRMATION HEARING
The Bankruptcy Court has scheduled a hearing on the
confirmation of the Plan to commence on ______________, 2004 at __________, or
as soon thereafter as the parties can be heard. Confirmation Hearing will be
held in the United States Courthouse, 900 Market Street, Courtroom 4, Second
Floor, Philadelphia, PA 19107. At the hearing, the Bankruptcy Court will
consider whether the Plan satisfies the various requirements of the Bankruptcy
Code, including whether it is feasible and whether it is in the best interest of
holders of claims and interest. The Bankruptcy Court will also receive and
consider a Report of Plan Voting prepared on behalf of the Debtor concerning the
votes for acceptance or rejection of the Plan by the parties entitled to vote.
3.6 ACCEPTANCES NECESSARY TO CONFIRM PLAN
At the scheduled confirmation hearing, the Bankruptcy Court
must determine, among other things, whether the Plan has been accepted by each
impaired class. Under Section 1126 of the Bankruptcy Code, an impaired class is
deemed to have accepted the Plan if at least 2/3 in amount and more than 1/2 in
number of the Allowed Claims of class members who have voted to accept or reject
the Plan have voted for acceptance of the Plan. Further, unless there is
acceptance of the Plan by all impaired classes, the Bankruptcy Court must also
determine that under the Plan class members will receive property of a value, as
of the Effective Date of the Plan, that is not less than the amount that such
class members would receive or retain if the Debtor were liquidated under
chapter 7 of the Bankruptcy Code on the Effective Date of the Plan.
3.7 CONFIRMATION OF THE PLAN WITHOUT THE NECESSARY ACCEPTANCES.
The Plan may be confirmed even if it is not accepted by one or
all of the impaired classes if the Bankruptcy Court finds that the Plan does not
discriminate unfairly against and is
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fair and equitable as to such class or classes. This provision is set forth in
Section 1129(b) of the Bankruptcy Code and requires that, among other things,
the claimants must either receive the full value of their claims or, if they
receive less, no class with junior liquidation priority may receive anything. If
the class of unsecured claims does not accept the Plan and the Plan does not
propose to pay the class their allowed claims in full, no junior class (which,
in this proceeding, includes, among others, the Debtor's shareholder), may
retain their equity interest, unless the shareholder contributes money or
something of value related to their participation in equity. The Plan provides
that the stock of the Debtor shall be retained by the shareholder. The Debtor
may, at its option, choose to rely upon this provision (ss.1129(b)) to seek
confirmation of the Plan if it is not accepted by an impaired class or classes
of Creditors.
4. LIQUIDATION ANALYSIS AND FINANCIAL PROJECTIONS.
----------------------------------------------
4.1 BEST INTEREST OF CREDITORS AND COMPARISON WITH CHAPTER 7
LIQUIDATION.
As a condition to confirmation of the Plan, Section
1129(a)(7)(A)(ii) of the Bankruptcy Code requires that each impaired class of
claims or interests must receive or retain at least the amount or value it would
receive if the Debtor would liquidate under a Chapter 7 scenario on the
Effective Date of the Plan. Reference is made to the "Liquidation Analysis for
Debtor" which is attached hereto as Schedule 1. The liquidation analysis assumes
a Chapter 7 scenario in which a trustee appointed by the Bankruptcy Court would
liquidate the assets of the Debtor's estate. The liquidation analysis is based
upon estimates and assumptions that, although developed and considered
reasonable by the Debtor, are inherently subject to significant economic and
competitive uncertainties and contingencies beyond the control of the Debtor.
The liquidation analysis is also based upon assumptions with regard to
liquidation decisions that are subject to change. Accordingly, there can be no
assurance that the values reflected in the liquidation analysis would be
realized if the Debtor were, in fact, to undergo such a liquidation.
A Chapter 7 liquidation would result in a substantial
diminution in the value to be realized by holders of claims because of (i) the
failure to realize the greater going concern value of the Debtor's business,
(ii) additional administrative expenses involved in the appointment of a
trustee, attorneys, accountants and other professionals to assist such trustee
and (iii) additional expenses and claims, some of which would be entitled to
priority and payment, which would arrive by reason of the liquidation. In
addition, it should be noted that the analysis does not reduce the value of
liquidation recoveries on account of a substantial time that likely would elapse
before creditors would receive any distribution in respect to their claims in a
liquidation scenario. Consequently, the Debtor believes that the Plan which
provides for the continuation of the Debtor's core business, provides a
substantially greater return to holders of claims than would a liquidation.
Under the Plan, unsecured creditors will receive, one hundered percent of their
allowed claim.
4.2 Financial Projections.
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During the period in which the Debtor has been in
possession of its assets as a Debtor-in-Possession, it has filed with the
Bankruptcy Court monthly unaudited periodic income statements, balance sheets,
reports of cash balances and summaries of cash receipts and disbursements. In
addition, the Debtor has also filed with the Bankruptcy Court, Schedules and
Statement of Financial Affairs. These documents may be examined in the Office of
the Clerk of the United States Bankruptcy Court, Robert N.C. Nix Building, 900
Market Street, Suite 400, Philadelphia, PA 19107. Attached hereto as Schedule 2
is the Debtor's projected financial statements in regard to the Plan. All of the
figures in Schedule 2 are estimated and projected regardless of whether the time
period indicated is in the past. The projections show that the Reorganized
Debtor will have sufficient funds to make the payments required under the Plan
and to continue operations.
The Debtor believes the projected financial data to
be reasonable and has incorporated conservative assumptions into the
projections, but no assurance can be given that the results shown will be
realized.
4.3 Funds Required on the Effective Date
The Debtor's projected statement of cash flow as of the
Effective Date is attached hereto as part of Schedule 2. The Debtor has also
attached such other supporting documents or schedules as part of Schedule 2.
5. GENERAL INFORMATION
-------------------
5.1 HISTORY OF THE DEBTOR.
A. Debtor acquired the Kirkbride Property in 1997
from The Pennsylvania Hospital. The Pennsylvania Hospital was operating a 120
bed acute care psychiatric hospital on the Property. Debtor acquired the
Property in 1997 to attempt to capitalize on doing business with a newly formed
agency within the City of Philadelphia called Community Behavioral Health (CBH).
CBH was charged with the task of providing mental health services to the 500,000
Medicaid patients in the City of Philadelphia. Debtor hoped to capitalize on the
demand for psychiatric services generated by CBH, and its position as a low cost
provider within the City, by acquiring Kirkbride Center and negotiating a
profitable service provider contract with CBH. Debtor was indeed able to
negotiate a contract with CBH to provide acute, 23 hour, and sub-acute
psychiatric care services to CBH starting in 1997 and proceeded to do so.
Initially the vast percentage of patients sent to Kirkbride by CBH were acute
care patients for whom the reimbursement rate was $435 per day, which the
Company had projected. However, CBH increased the level of sub-acute and 23 hour
care with a daily reimbursement rate of only $290 and 23 hour patients with a
daily rate of $300.00. As the hospital expanded its non-hospital rehabilitation
services, its Medicare rate decreased from $700/da to $348/da causing
substantial recapture by Medicare. Additionally the Hospital was receiving a
significant level of County funding patients, which generated a significant
level of bad debt. Given these factors the business was not profitable. In
addition, Debtor was paying for the maintenance and upkeep of approximately
250,000 square feet of the Property which it was not using and had not
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yet been able to lease to other tenants. During 2000 the property lost a
significant tenant which lowered tenant revenue, and the planned sale of real
estate was disrupted by the 9-11 economic downturn.
B. Recognizing the predicament it was in, in 1998
Debtor began to shift its operating strategy away from the acute and sub-acute
psychiatric care model and towards the more profitable drug and alcohol
rehabilitation programs. While drug and alcohol programs have a lower
reimbursement rate than acute psychiatric care services, they have a far lower
cost to provide services because of lower staff to patient ratios, and less
potential for bad debts making them a profitable niche in the mental health
industry. From 1998 to the start of 2002, in incremental steps as it could
obtain additional bed licenses, Debtor increased its drug and alcohol beds from
0 to 148 and has reduced its acute psychiatric beds from 120 to down to 25.
C. In addition to shifting its operating model from
acute psychiatric care to drug and alcohol treatment, Debtor took steps to lease
space in the Property to third parties and to relocate affiliated programs from
off-site to the Property when possible. This initiative required a significant
investment in improvements to certain buildings to make them suitable for
tenants, not all of whom remained long term. However, this effort has now
resulted in 72,500 SF of the Property being leased to third parties and 19,000
SF being leased to an affiliate, grossing a total of $1,329,000 in rental income
as of 2002.
D. As the percentage of business shifted between 1998
and 2002 from high reimbursement and high overhead acute psychiatric care, to
lower reimbursement but significantly lower overhead drug and alcohol programs,
patient revenue dropped by 20% (reflecting the lower reimbursement rate) , but
operating expenses dropped even more sharply, by approximately 40% (reflecting
the lower operating expenses of these programs, primarily in the staff to
patient ratios). The net effect has been that the Company's EBITDA has gone from
a loss of ($640,000) in 1999 to a gain of $3,174,500 in 2002. As the Company
improves overhead efficiency, payor mix and, tenants revenue, EBITDA is expected
to improve per the projections. Meanwhile the Company is improving from a
pre-tax loss of ($3,272,000) in 1999 to a pre-tax gain of $998,000 in 2002. This
dramatic turnaround is a direct result of the shift in the business model from
acute care to drug and alcohol treatment and the occupancy of empty space by
third party tenants.
E. Unfortunately, the years of operating losses which
accumulated between 1997 and 2000 while the transformation of the business model
was underway have resulted in a debt load and other accrued obligations
including taxes which are too great to manage, even with the vastly improved
operating performance. Given an impending mortgage expiration and uncertainty
about obtaining an extension, the Company was forced to seek Bankruptcy
protection in May of 2002.
5.2 BANKRUPTCY PROCEEDING
A. Voluntary Petition. On May 6, 2002, the Debtor filed a Voluntary
Petition under Chapter 11 with the Bankruptcy Court in the Eastern District of
Pennsylvania.
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B. Post-Petition Operations. During the Post-Petition period,
operations have returned to a normal state. The Debtor has been above budget and
cash flow has been adequate to meet current needs and obligations.
C. Cash Collateral Orders. Since the filing of the case, the Debtor had
operated under a series of cash collateral orders.
D. Future Outlook of the Debtor's Business. The Debtor estimates that
its gross income for 2003 will surpass all previous years that it has been in
operation. With an emphasis on drug and alcohol rehabilitation programs and a
downsizing of its acute and sub-acute programs, the Debtor anticipates
increasing revenues and decreasing operating expenses. Debtor expects to
increase its rental income by leasing space to more third parties. Debtor also
expects to sell approximately four acres of its land that is currently not in
use.
E. Important Events. Several events have occurred since the Petition
Date which have impacted or enhanced the Debtor's ability to reorganize:
a. Since the filing date, the Debtor has signed several
new leases with Pennsylvania Hospital, Baptist
Children Services, and Travelers Aid which have
dramatically increased rental revenue which are only
reflected partially reflected in Debtor's financial
reports. Third party rental revenue has grown from
$893,000 in 2002 to a projected $1,277,000 in 2003.
Based on currently signed leases, this total is
projected to grow to $1,585,000 in 2004.
b. If the Debtor executes a lease with the City of
Philadelphia, the Debtor will have obtained 95%
occupancy of its rentable space with total third
party rent revenue of $2,157,000. This would
represent a 108 % increase since the filing date.
c. The Debtor has increased average daily census in its
hospital and rehabilitation program since its filing
date. A comparison of census for the year to date
period ending 5/31/02 shows average daily census of
142.6 patients, for that same period of year to date
5/31/03 the Debtor reports an average daily census of
153.8 patients evidencing an improvement of 8% post
chapter.
d. Hospital revenue (adjusted for pro-rate effect of
tobacco funds) increased from $6,490,719 (year to
date 5/31/02) to $7,630,956 (year to date 5/31/03)
evidencing an increase of 17.57% post-chapter. The
increase without the tobacco fund effect was 11%.
Further, the Debtor has just received additional
contracts with Magellan Health. The effect of these
contacts are not yet evident in the Debtor's census.
e. Debtor has paid $718,000 to the Internal Revenue
Service, $56,000 to Commonwealth of Pennsylvania,
Department of Revenue, and $75,000 to Commonwealth of
Pennsylvania, Department of Labor and Industry on
pre- petition taxes since the filing date.
f. Since June 2003, the Debtor has paid all current
interest to WRH and $20,000 per month towards the
fees or principal of WRH.
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g. The Debtor through the filing of the cost reports for
pre-petition periods has eliminated almost $1,200,000
from a $1,400,000 obligation to Medicare. The claim
of Community Behavioral Health at the petition date
of $239,000 has been paid in full. Further, as a
result of a new lease with Mill Creek School, the
pre-petition claim of Pennsylvania Hospital of over
$200,000 was eliminated.
5.3 MANAGEMENT
The operations of the Debtor have been conducted and will continue to
be conducted by the following officers. The Debtor reserves the right
to change its corporate officers as it deems appropriate. The salaries
of the corporate officers identified herein shall remain at the same
rate in effect as of the Effective Date for 2003.
5.3.1 Thomas T. Fleming-Chairman of the Board, Chief Executive
Officer. Mr. Fleming serves as Chairman of the Board and Chief Executive
Officer. In these positions he sets the strategic mission of the Debtor in
conjunction with the Board of Directors, serves as the liaison to all external
relationships with the shareholders and general public, serves as the
responsible fiduciary party for all corporate matters, manages all Corporate and
subsidiary financing, manages asset value and financial solvency and leads the
corporate and subsidiary marketing and business development activities. Mr.
Fleming has a salary of $120,000 per annum.
5.3.2 Rose S. DiOttavio-President and Chief Operating Officer.
Ms. DiOttavio serves as the President and Chief Operating Officer. In these
positions she sets the general leadership goals and objective for all operating
entities in conjunction with the Board of Directors and Management Team, leads
the Debtor's development and strategic planning activities to maximize asset
value, serves as Resource Allocations Manager in conjunction with the Accounting
Staff to mange and improve cash flow and economic viability, develops the
Debtor's operating budget in conjunction with the Administrator and Senior
Management Team, manages with Corporate Counsel all legal responsibilities as
well as risk management and lawsuit coordination and manages Senior Staff's
performance to effect the Debtor's mission, goals and objectives. Ms. DiOttavio
has a salary of $120,000 per annum.
5.3.3 Mark A. Novitsky, MD-Corporate Medical Director and
Executive Vice President. Dr. Novitsky serves as the Corporate Medical Director
and Executive Vice President. In these positions he sets the general quality of
care standards for the Debtor, serves as Senior Clinician leading the medical
staff, oversees the responsibilities and duties of the Debtor's Medical
Executive Committee and provides general oversight for regulatory compliance of
Debtor's healthcare services. Mr. Novitsky has a salary of $244,000 per annum.
5.3.4 Paul MacDonald-Assistant to the Office of the Chairman.
Mr. MacDonald serves as Executive Director/Senior Vice President. In this
position he reports to the Office of the Chairman in the implementation of the
Debtor's operating objectives, provides day to day management for the Debtor's
health care operations, manager to senior health staff, responsible for the
hospital, rehabilitation services; maintains hospital regulatory standards with
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licensed agencies and the Joint Commission, sets quality of care standards with
the corporate Medical Director, works with the President in the development and
management of the Debtor's organization and provides for the orderly management
of property services. Mr. MacDonald has a salary of $125,000 per annum.
5.3.5 Gardner Kahoe, Esquire-Corporate Counsel and Corporate
Secretary. Mr. Kahoe serves as Corporate Counsel and Corporate Secretary. In
these positions he maintains the Debtor's books and records pertaining to the
Board of Directors and the general Shareholders, serves as Manager of Debtor's
historical corporate records, manages the privacy and confidentiality rights of
the Debtor and its patient- related issues, assists the President in managing
fiduciary reporting requirements and legal affairs, serves as leasing agent for
Debtor's tenant management and provides management oversight of property service
such as engineering, security, environmental and handles hospital safety and
risk management issues. Mr. Kahoe has a salary of $59,000 per annum.
5.4 CLAIMS OF INSIDERS.
5.4.1 CoreCare Systems, Inc. has a Class 10 General Unsecured
Claim against the Debtor. This claim arises from the original working capital
infusion and continuing working capital advances. CoreCare Systems, Inc., shall
not have the right to vote its unsecured claim and shall receive no payment on
its claim until all Class 10 creditors are paid in full.
5.4.2 Westmeade Heathcare .Westmead Healthcare provides food
services to the Debtor pursuant to the agreement attached as Exhibit "3".
6. THE PLAN
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The following is a summary of the significant provisions of the Plan
and is qualified in its entirety by the provisions of the Plan, a copy of which
accompanies this Disclosure Statement. In the event and to the extent that the
description of the Plan contained in this Disclosure Statement is inconsistent
with any provision of the Plan, the provisions of the Plan shall control and
take precedence. All creditors are urged to carefully read the Plan.
A. Classes of Claims and Interests. The Plan classifies the various
claims against the Debtor. There are ten (10) separate classes of creditors
(Class 1 through 10) and one class of interest holders, Class 11 which consists
of the issued and outstanding shares of common stock of the Debtor. In addition,
administrative claims and priority tax claims are not classified for purposes of
voting or receiving distributions under the Plan, as is permitted by Section
1123(a)(1) of the Bankruptcy Code. Rather, all such claims are treated
separately as unclassified claims.
B. Unclassified Claims.
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1. Administrative Claims. All Administrative Claims shall be
treated as follows:
a. Time for Filing Administrative Claims. The holder
of an Administrative Claim, other than (i) a Fee Claim or (ii) a liability
incurred and paid in the ordinary course of business by the Debtor, must file
with the Bankruptcy Court and serve on the Debtor and its counsel and the
Committee's counsel, notice of such Administrative Claim within (30) days after
the Effective Date. Such notice must include at minimum (i) the name of the
holder of the claim, (ii) the amount of the claim and (iii) the basis of the
claim. Failure to file this notice timely and properly shall result in the
Administrative Claim being forever barred and discharged.
b. Time for Filing Fee Claims. Each professional
person who holds or asserts an Administrative Claim that is a Fee Claim incurred
before the Effective Date shall be required to file with the Bankruptcy Court a
fee application within sixty (60) days after the Effective Date for all services
provided through the Effective Date. Failure to file the fee application timely
shall result in the Fee Claim being forever barred and discharged.
c. Allowance of Administrative Claims. An
Administrative Claim with respect to which notice is required and has been
properly filed pursuant to Section 4.1(a) of this Plan shall become an Allowed
Administrative Claim if no objection is filed within thirty (30) days of the
filing and service of notice of such Administrative Claim. If an objection is
filed within such (30) day period, the Administrative Claim shall become an
Allowed Administrative Claim only to the extent allowed by Final Order. An
Administrative Claim that is a Fee Claim, and with respect to its fee
application has been properly filed pursuant to Section 4.1(b) of the Plan,
shall become an Allowed Administrative Claim only to the extent allowed by Final
Order.
d. Payment of Allowed Administrative Claim. Each
holder of an Allowed Administrative Claim shall receive (i) the amount of such
holder's Allowed Claim on the Effective Date, (ii) such other treatment as may
be agreed upon in writing by the Debtor and such holder as long as no payment is
made thereon prior to the Effective Date, or (iii) as may be otherwise ordered
by the Court, provided that an Administrative Claim representing a liability
incurred in the ordinary course of business by the Debtor may be paid in the
ordinary course of business. Fees for pre-Effective Date services not approved
until after the Effective Date shall be paid within ten (10) days of any order
approving said fees.
e. Professional Fees Incurred After the Effective
Date. Any professional fees incurred by the Debtor or Committee after the
Effective Date must be approved by the Debtor and the Committee and, thereafter,
paid. Any invoices for services rendered by professionals for the Debtor or the
Committee shall be paid within ten (10) days after a copy of the invoice
relating to those services has been served on counsel for the Debtor and
Committee, provided, however, in the event the Debtor or Committee objects to
the payment of any invoice shall not be made until further order of the Court.
Any dispute which may arise with regard to
15
professional fees after the Effective Date shall be submitted to the Bankruptcy
Court, which shall retain jurisdiction to settle these types of disputes. In the
event of such dispute, the Debtor shall pay that portion of the fees, if any,
which is not in dispute, punctually.
f. Administrative Claim Fund. The Debtor shall
establish an Administrative Claim Fund from the Tobacco Settlement Fund in the
amount of $300,000 which shall be used to pay the claims of professionals
employed by the Debtor and Committee for which fee orders have not been entered
prior to Confirmation. The fund shall be created prior to the Confirmation
Hearing from funds available from the Tobacco Settlement Funds and supplemented
with funds from operations.
2. Treatment of Priority Tax Claims. Each holder of an Allowed
Priority Tax Claim shall receive, at the sole option of the Debtor (i) the
amount of such holder's Allowed Claim on the Effective Date; (ii) the amount of
such holder's Allowed Claim, plus interest accrued at the applicable statutory
rate, in equal monthly cash payments in accordance with the provisions of
Subsection 1129(a)(9)(c) of the Bankruptcy Code commencing on the Effective Date
or (iii) such other treatment as may be agreed upon in writing by the Debtor and
such Creditor. To the extent, such taxing authority also has a secured claim
creditor shall retain its lien until paid in full and the treatment shall be as
set forth in the appropriate Class in Article III.
3. Treatment of Claims and Interests.
The Classes of Creditors and estimated principal amounts of
the claims in each Class as of the Effective Date are as follows:
Class 1 Kirkbride Holdings, LLC $13,700,000
Class 2 Internal Revenue Service $3,300,000
Class 3 Heller Healthcare Finance $445,000
Class 4 Commonwealth of Pennsylvania, Dept. of Revenue $656,000
Class 5 Commonwealth of Pennsylvania, Dept. of Labor $183,000
Class 6 Advanta Leasing Services $9,000
Class 7 CitiCorp Vendor Finance $320,000
Class 8 City of Philadelphia, Dept. of Revenue $3,000,000
Class 9 Priority Non-Tax Claims -0-
Class 10 Unsecured Claims $4,500,000
Only the holders of Allowed Claims - that is holders of claims which are not in
dispute, are not contingent, are not unliquidated in amount and are not subject
to objection or estimation - are entitled to receive distributions under the
Plan. Until a claim becomes an Allowed Claim, distributions will not be made to
the holder of such claim. The Plan provides for the division of holders of
Claims and interests into the following Classes:
16
Class 1. Secured Claim of KBH Mortgage Inc. or its Assignee. All Claims of the
Class 1 creditor are treated in this Class 1. The treatment in Class 1 is in
full and final satisfaction of all claims of the Class 1 Creditor. Class 1
Claims are impaired under the Plan.
A. Nature of Debt. The Class 1 Creditor holds a Mortgage and Note on
the Debtor's real estate and a lien on Debtor's accounts. Class 1 has a first
lien on all real estate and fixtures and certain personal property senior to all
other mortgages and liens of any nature under the Mortgage Modification
Agreement described herein below and a junior lien on all accounts and other
assets as set forth in the Mortgage Modification Agreement.
B. Treatment. Class 1 shall be treated as follows:
1. KBH shall have an allowed secured claim under the Plan in
the amount of Thirteen Million Seven Hundred and Eighteen Thousand One Hundred
and Forty-Eight Dollars and Twenty-Seven Cents ($13,718,148.27) (the "KBH
Secured Claim") plus reasonable attorney fees and costs and less any such
amounts paid under the cash collateral orders or otherwise which have not been
earmarked as interest, insurance or taxes. The exact amount of the KBH Secured
Claim shall be subject to adjustment as agreed to by KBH on the Confirmation
Date.
2. Upon the Effective Date of the Plan, KRC shall execute and
deliver to KBH an Amended and Restated Note in the amount of KBH Secured Claim
(the "Amended Note"), secured by the KBH Mortgage in the amount of the KBH
Secured Claim the form of which will be agreed prior to Confirmation. The loan
documents referenced herein are drafts and are subject to change. Final versions
of the loan documents and the Kirkbride Lease will be submitted at the
Confirmation Hearing. The Debtor shall be a guarantor of the Amended Note. KRC
shall also execute an Assignment of Leases and such other documents as are
reasonably necessary. A mortgage modification agreement in the form which will
be agreed to prior to Confirmation shall be executed on or before the
confirmation hearing. The Amended Note shall accrue interest at the same rate as
the present Mortgage Note and payment of principal shall be based on a twenty
(20) year amortization schedule. Interest shall accrue only on those amounts as
set forth in the Note or any Forbearance Agreement as interest bearing and shall
not accrue on interest, penalties or late charges. Payment of principal,
interest, insurance, and taxes shall be due monthly in arrears. The Debtor shall
make payments under the cash collateral orders thought January 31, 2004. The
treatment in this section 3.1.B.2 shall commence with the month of February 2004
with the payment due on or before February 28, 2004. Class 1 shall be permitted
in February 2004 and in all successive months to sweep from the KBH Lockbox on a
weekly basis an amount no greater that twenty-five percent of the principal,
interest, insurance, and tax payment ("KBH Monthly Payment") due by the end of
that month. The sweep shall occur on the Wednesday of each week. If, in a given
week, twenty-five percent of the KBH Monthly Payment is not available, KBH may
recover the deficiency in the following week. On the last Tuesday of the last
week of the thirty-sixth (36th) month after the Effective Date, the Amended Note
and all accrued interest thereon will be due and payable in full. In addition,
on April 15, 2004 and July 15, 2004,KBH shall receive additional principal
payments of $15,000.00, on October 15, 2004 and January 15, 2005, KBH shall
receive additional principal payment of $20,000. Commencing
17
April 15, 2005 and then quarterly KBH shall receive additional principal
payments of $25,000.00.
3. The Amended Note shall also provide that if any monthly
payment is not made to KBH under the terms of the Loan Documents within five (5)
days of the date due, KBH may exercise its remedies after twenty four (24) hours
written notice to the Debtor.
4. As part of the Plan, the Debtor's real estate and all of
its real property leases will be transferred as of the Effective Date to KRC
subject only to the liens of Class 1, Class 2, Class 3, Class 4, Class 5, Class
8, and Class 10. At time of transfer KRC shall provide KBH with an updated title
policy at KRC's cost insuring the first priority lien of KBH as the Class 1
Creditor.
5. With regard to the Class 1 Claim only, KRC shall be
permitted to sell the Kirkbride Building and any of the vacant land of KRC so
long as at the time of the sale, Class 1 through refinance or sale proceeds or a
combination of the same, is paid in full or if KBH consents. This provision
shall not affect other classes.
6. There shall be no prepayment penalty on the Class 1 claim.
7. KBH, Corecare Systems, Inc., Thomas Fleming, and Rose
DiOttavio shall enter into a separate agreement which shall provide for
discontinuance of pending litigation related to the existing guarantees and a
release of KBH. The Guarantors shall amend their Guaranty which was executed as
part of a pre-petition forbearance agreement to include the KRC Note.
8. The Lease between KRC and Debtor shall contain the terms
set forth in 5.13 and in the form which will be agreed prior to Confirmation.
9. Debtor, its parents, affiliates, officers, directors,
employees and assigns shall release and discharge KBH, its parents, affiliates,
officers, directors, employees and assigns from any and all claims existing as
of the Confirmation Date, whether known or unknown, contingent or liquidated,
direct or indirect, or whether arising pre-petition or post-petition, including
any and all claims which may otherwise be asserted under Section 5.7 or Section
6.1(d) of the Plan. Upon payment of the Class 1 claim, all guarantees, claims
and security of Debtor and the Guarantors shall be released by KBH.
10. The Cash Management Agreement, the form of which will be
agreed to prior to Confirmation, between the Debtor and KBH shall remain in
place, as modified by the parties thereto, until the KBH Secured Claim is paid
in full. To the extent, Debtor's new account receivable lender requires an
Inter-creditor Agreement, KBH shall reasonably negotiate the same and such
agreement shall be reasonably acceptable to KBH and its counsel. Furthermore,
the Debtor agrees to execute any and all additional documents reasonably
requested by KBH in order to effectuate the terms and conditions of the Plan.
11. The Amended Note, The Mortgage Modification Agreement, the
Deed-in-Lieu Agreement, the Lease, the Guarantees, and the Cash Management
Agreement referred to in
18
this Section and any and all related documents evidencing the obligation of KRC,
the Debtor and/or the guarantors to KBH are collectively referred to as the "KBH
Loan Documents". In the case of any conflict between the terms of the Plan, the
Order confirming the Plan and terms of the KBH Loan Documents, the of the KBH
Loan Documents shall control and shall be effective as the terms and conditions
of the Plan.
12. The Class 1 Creditor has asserted that there is
pre-petition interest due of approximately $80,000 in addition to the amount set
forth in 3.1.B.1. of the Plan. The Debtor has asserted that there may be
improper interest and/or late charges included in the 3.1.B.1 of the Plan
amount. Class 1 Creditor disputes this and both parties prior to confirmation
shall endeavor to resolve the disputed amounts, and absent such resolution, the
Court shall decided. To the extent there is any unpaid pre-petition interest,
such amounts shall be paid in sixteen equal weekly payments commencing February
15, 2004.
Class 2. (Internal Revenue Service) Class 2 consists of the Secured and Priority
Claims of the Internal Revenue Service. This Class is impaired.
A. Secured Claim. The Secured Claim of the Internal Revenue Service is
$2,200,000 which is the original secured claim of $3,100,000.00 less all
adequate protection payments made through the Effective Date subject to increase
for post-petition interest under 11 U.S.C. ss. 506(b). This Claim will be paid
as follows:
1. One Million Dollars or the actual proceeds of the
financing, whichever is greater, shall be paid on the Effective Date from the
proceeds of the refinancing of the accounts receivable and then equal monthly
installments of principal and interest at the statutory rate for seventy-two
months. If the IRS receives an additional principal payment during the Plan, the
payment under this paragraph shall adjust, at the option of the Debtor, to the
reduced principal amount plus interest over the remaining months under the
original seventy-two month schedule. If the secured claim is satisfied with less
than $1,000,000, the balance of the refinance shall be applied to the IRS
Priority Claim.
2. Class 2 shall retain its lien on all assets but said lien
shall be subordinate to the lien of lender providing the accounts receivable
refinancing on the Debtor's accounts. The IRS shall retain its lien, to the
extent it remains, on the real estate to be transferred to KRC. Upon payment of
the Allowed Class 2 Secured Claim of the IRS, such liens shall be extinguished
and the IRS shall provide the Debtor and KRC with any and all documentation
reasonably requested to release the lien of record.
3. $375,000 shall be paid to the IRS on account of the Tobacco
Settlement Funds distribution.
4. To the extent the Debtor is entitled to over payment from
CMS through the 1999 Cost Report Year, such overpayments will be applied to the
IRS secured claim and then Priority Claim.
19
B. Priority Claim. The Priority Claim of the Internal Revenue Service
is $1,022,000. This claim will be paid as follows:
1. Equal monthly installments of principal and interest at the
statutory rate for seventy-two months.
C. Unsecured Claim. This Unsecured Claim of the Internal Revenue
Service shall receive treatment as a Class 10 Claim.
Class 3 (Secured Claim of Heller Healthcare Finance). Class 3 consists of the
Secured Claim of Heller Healthcare Finance. Class 3 is impaired.
A. Nature of Debt. Class 3 is owed $445,000 and is secured by a lien in
accounts and a second priority mortgage on Debtor's real property. Heller is
currently receiving monthly payments through confirmation from the Debtor and a
non-debtor. These payments will reduce the claim which will be determined as of
the Confirmation Hearing.
B. Treatment. Class 3 will be paid as follows:
1. Heller shall be paid in full on a weekly basis from
Westmeade. The Debtor shall make no further payments to Heller but shall remain
liable for all Heller obligations. Westmeade's weekly payments to Class 2 shall
aggregate $59,000 per month.
2. Heller shall also have received $75,000 from the Tobacco
Settlement Funds Distribution.
3. Heller shall retain its Second Mortgage on the Real
Property until its claim is paid in full. Upon payment of the Allowed Class 2
Secured Claim of Heller, such lien shall be extinguished and Heller shall
provide the Debtor and KRC with any and all documentation reasonably requested
to release the lien of record.
Class 4. (Commonwealth of Pennsylvania Department of Revenue) Class 4 consists
of the Secured and Priority Claims of the Commonwealth of Pennsylvania
Department of Revenue. This Class is unimpaired.
A. Secured Claim. The Secured Claim of the Commonwealth of Pennsylvania
Department of Revenue is $ 425,690.85 which includes adequate protection
payments made through December 31, 2003. This Claim will be paid as follows:
1. Equal monthly installments of principal and interest at the
statutory rate for seventy-two months.
2. Class 4 shall also receive $75,000 from the Tobacco
Settlement Funds distribution.
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B. Priority Claim. The Priority Claim of the Commonwealth of
Pennsylvania Department of Revenue is $249,461.95. This claim will be paid as
follows:
1. Equal monthly installments of principal and interest at the
statutory rate for seventy-two months.
C. Unsecured Claim. This Unsecured Claim of the Commonwealth of
Pennsylvania Department of Revenue in the amount of $84,659.38 shall receive
treatment as a Class 10 Claim.
D. All liens of the Class 4 creditor are retained until the secured
claim is paid in full.
E. The Administrative Tax Claim of the Commonwealth of Pennsylvania
Department of Revenue is $173,294.24 and shall be paid prior to confirmation.
Class 5. (Commonwealth of Pennsylvania Department of Labor) Class 5 consists of
the Secured and Priority Claims of the Commonwealth of Pennsylvania Department
of Labor. This Class is unimpaired.
A. Secured Claim. The Secured Claim of the Commonwealth of Pennsylvania
Department of Labor is $73,360.53 less all adequate protection payments made
through the Effective Date. This Claim will be paid as follows:
1. Equal monthly installments of principal and interest at the
statutory rate for seventy-two months.
2. Class 5 shall also receive $50,000 from the Tobacco
Settlement Funds distribution.
B. Priority Claim. The Priority Claim of the Commonwealth of
Pennsylvania Department of Labor is 162,083.27. This claim will be paid as
follows:
1. Equal monthly installments of principal and interest at the
statutory rate for seventy-two months.
21
C. Unsecured Claim. This Unsecured Claim of the Commonwealth of
Pennsylvania Department of Labor shall receive treatment as a Class 10 Claim.
Class 6. Secured Claims of Advanta Leasing Services. Class 6 consists of the
Secured Claim of Advanta Leasing Services. Class 6 is impaired. The treatment in
Class 6 is in full and final satisfaction of all claims of the Class 6 Creditor.
Class 6 is unimpaired.
A. Nature of Debt.
1. The Class 6 Creditor has a Secured Claim in the amount of
$8,403.00.
B. Treatment. The claim will be treated in accordance with the
pre-petition loan agreements.
Class 7. Secured Claims of Citicorp Vendor Finance. Class 7 consists of the
Secured Claim of Citicorp Vendor Finance. Class 7 is impaired. The treatment in
Class 7 is in full and final satisfaction of all claims of the Class 7 Creditor.
Class 7 is impaired.
A. Nature of Debt.
1. The Class 7 Creditor has a Secured Claim in an amount to be
determined at Confirmation.
B. Treatment. The claim will be treated as follows:
1. The finance agreement will be modified to allow for equal
monthly installments of principal and interest over seven years with interest at
the contract rate with principal reduced to the Secured Claim. Any deficiencies
will be a Class 10 Claim.
Class 8. Secured Claim of the City of Philadelphia - Department of Revenue.
Class 8 consists of the Secured Claim of the City of Philadelphia Department of
Revenue. Class 8 Claims are impaired under the Plan. This Class does not include
CBH.
A. Secured Claim. The Secured Claim of the City of Philadelphia
Department of Revenue is $2,100,000.00 plus all administrative tax claims
through the Effective Date. This Claim will be paid as follows:
1. Equal monthly installments of principal and interest at the
statutory rate for one hundred twenty months.
B. Priority Claim. The Priority Claim of the City of Philadelphia
Department of Revenue will be paid in equal monthly installments of principal
and interest at the statutory rate for one hundred and twenty (120) months.
22
C. Unsecured Claim. This Unsecured Claim of the City of Philadelphia
Department of Revenue shall receive treatment as a Class 10 Claim.
D. Other Conditions:
1. The Class 8 creditor shall retain the lien and judgment for
$2,100,000 referenced above until the secured claim is paid in full.
2. The Debtor shall maintain its current deposit with PECO
until Class 8 is paid in full.
3. The Debtor shall file any tax returns necessary to bring
the Debtor into compliance by the Confirmation Hearing.
Class 9. (Priority Non-Tax Claims). Class 9 is not impaired. The treatment and
consideration to be received by holders of Class 9 Allowed Claims shall be
deemed to be in full settlement, satisfaction, release and discharge of their
respective Claims and Liens. All Class 9 claims shall be paid on the Effective
Date.
Class 10. (Unsecured Claims). Class 10 is impaired. The treatment and
consideration to be received by holders of Class 10 Allowed Claims shall be in
full settlement, satisfaction, release and discharge of their respective Claims
and Liens. Class 10 consists of all Allowed Claims not otherwise classified
herein, including all judgment creditors whose claims are not separately
classified. To the extent a Class 10 creditor has an identical claim in the case
of a related debtor, the creditor shall receive distribution only on one claim.
If the creditor has separate and distinct claims in both cases, such creditor
shall receive distribution on both claims. Class 10 creditors shall receive the
following treatment:
(a) Debtor shall execute a Note which KRC shall guarantee
requiring the following payments:
(i) commencing ninety (90) days after the Effective
Date and continuing monthly for an aggregate of 12 months, payments of $41,667;
(ii) commencing thirty (30) days after completion of
the payments in (i), twelve equal monthly payments of $42,592;
(iii) commencing thirty (30) days after completion of
the payments in (ii), twelve equal monthly payments of $62,094; and
(iv) commencing thirty (30) days after completion of
the payments in (iii), twelve equal monthly payments of $75,000, and then
monthly payments of $100,000 until the Class 10 Claims have received sufficient
funds to satisfy one hundred percent of principal, interest, and all other sums
due under the note.
23
(b) KRC shall deliver a Mortgage (as defined below) securing
the Note to the Distribution Trust to hold for the benefit of Class 10, which
shall be junior to all existing lien holders. The mortgage provided to Class 10
shall require subordination of the mortgagee's interest to any refinancing of
any obligation with a lien priority higher than Class 10, so long as all
proceeds are used to satisfy or reduce lien claims superior to Class 10 lien
claims. Further, until the Class 1 Claim is satisfied, the Class 10 Disbursing
Agent shall release the mortgage or such portion thereof on a sale by the Debtor
to a bona fide third party purchaser in an arms length transaction, so long as
the purchase price is at least equal to the fair market value to the property
being conveyed. If the Class 10 Disbursing Agent has an objection to the
purchase price, the Class 10 Disbursing Agent may seek to have the Bankruptcy
Court stay the sale, however, the only grounds for objection shall be (a)
whether the sale is for fair market value or (b) proceeds will be received by a
junior class. The Bankruptcy Court will retain jurisdiction as of this case to
heart of any such dispute. The Class 10 Distribution Trust and Disbursing Agent
shall have the right to foreclose under such mortgage any time following 90 days
after the occurrence of a default under the mortgage and automatically upon
certification of the Bankruptcy Court any time following 90 days after the
occurrence of a default under the mortgage.
(c) Payments under the note shall first be applied to interest
and then principal. Total interest due shall be calculated after the total
amount of Allowed Class 10 Claims have been determined. Interest shall accrue on
the original principal balance of the Note at six percent (6%) per annum.
(d) The Class 10 Distribution Trust shall distribute on a
semi-annual basis to Allowed Class 10 Creditors subject to the Distribution
Reserve.
(e) In addition to monthly payments, as aforesaid, on or
before February 28 of each year, the Debtor shall distribute Free Cash Flow over
$300,000 ("Excess Free Cash Flow") for the immediately prior calendar year, as
follows:
(i) Twenty percent (20%) of Excess Free Cash Flow
shall be distributed to a repair and reserve account (the "Reserve Fund") for
Debtor's discretionary use in repairs, maintenance and tenant improvements.
(ii) Eighty percent (80%) of Excess Free Cash Flow
shall be distributed to the Class 10 Disbursing Agent. The distribution of
amounts to the Class 10 Disbursing Agent pursuant to this Section 3.10(f)(ii)
shall constitute prepayments to the Class 10 Disbursing Agent on account of the
unpaid principal balance of the Note in the reverse order of their maturity
(last installment credited first).
(iii) For purposes of this Section, the following
terms have the meanings specified.
(A) "Free Cash Flow" means net income/(loss)
in each fiscal year ending December 31, less the change in working capital
(defined as current assets excluding
24
cash minus current liabilities, excluding current portion of long term debt)
plus depreciation, amortization, and proceeds from any asset sales including
non-core real estate, less capital expenditures and any principal payments on
debt from the Debtors, KRC or Westmeade as consolidated entities.
(f) The obligations of the Debtors under the Note shall be
secured by the following, each of which shall be subordinate to the liens and
security interests of Class 1 and all other prior classes, each of which shall
be documented in a manner satisfactory to Class 10 Disbursing Agent
(collectively, the "Collateral Documents") and the Debtors, KRC, and their
affiliates shall execute document, appropriate to effectuate, junior to all
existing lienholders:
(i) a lien on and security interest in all of the
Debtors' respective assets;
(ii) a lien on and security interest in all of KRC's
assets;
(iii) a mortgage lien on certain premises (the
"Mortgage Premises") situated at 111 North 49th Street, Philadelphia,
Philadelphia County, Pennsylvania (the "Mortgage");
(iv) an assignment of all leases and rents arising
with respect to the Mortgage Premises.
(g) If any amount due under the Note is not paid within
fifteen (15) days after such payment is due, then there shall also be
immediately due and payable a late charge at the rate of five percent (5%) of
the delinquent payment for each month of delinquency.
(h) All payments made to the Class 10 Disbursing Agent under
the Note shall be made by wire transfer to accounts designated in writing by the
Class 10 Disbursing Agent.
Class 11. (Interest Holder ). Class 11 is impaired. The holder of Class 11
interest shall retain all of its interest.
7. PROVISIONS FOR EXECUTION OF THE PLAN
------------------------------------
7.1 Funding of the Plan. The Debtor's Plan shall be funded from the
Debtor's current operations. The Debtor has sufficient cash flow from operations
to make all plan payments required. In addition, the Debtor shall obtain funds
from the following sources:
A. Debtor shall refinance its accounts for $1,000,000 based
upon a first lien in Debtor's accounts. The proceeds of this loan shall be paid
to the Class 2 creditor. The Debtor is currently negotiating with Meridian
Healthcare Finance, LLC.
B. The Debtor shall employ such appropriate entity to assist
in the refinance of the Class 1 creditor or the sale of all or part of its
assets.
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C. The Debtor shall use the Tobacco Settlement Fund of
$997,000 as follows:
1. IRS $375,000
2. Admin. Claims $300,000
3. Comm of PA $ 75,000
4. Labor & Ind. $ 50,000
5. Heller $ 75,000
The release of these funds is contingent on confirmation of
the Plan and the payment of $1,000,000 generated by the refinance of Debtor's
accounts to the IRS. If the Plan is not confirmed, all parties reserve all
rights as to the Tobacco Settlement Funds. The balance of the Tobacco Settlement
Funds shall be retained by the Debtor for working capital.
7.2 Execution of Documents. Prior to the Effective Date, the Debtor is
authorized and directed to execute and deliver all documents and to take and to
cause to be taken all action necessary or appropriate to execute and implement
the provisions of this Plan.
7.3 Alterations, Amendments or Modifications. This Plan may be altered,
amended, or modified by the Proponent before or after the Confirmation Date, as
provided in Section 1127 of the Code.
7.4 Disbursing Agent. There shall be no Disbursing Agent other than for
Class 10. The Debtor shall make all plan payments directly.
7.5 Final Decree. After the Effective Date, the Reorganized Debtor may
file a Motion to close the case and request that a final decree be issued.
7.6 Corporate Charter. The Debtor's corporate charter will be amended
after the Effective Date to any extent necessary to permit the Debtor to
implement the terms of this Plan.
7.7 Retention and Enforcement of Claims. Pursuant to Section
1123(b)(3)(B) of the Bankruptcy Code, except as set forth herein, the Committee,
through the Class 10 Disbursing Agent, shall retain and may enforce any and all
claims of the Debtor on behalf of, and as a representative of, the Debtor or its
estate, including, without limitation, all claims arising or assertable at any
time under the Bankruptcy Code, including under Sections 510, 542, 543, 544,
545, 547, 548, 549, 550, 552 and 553 thereof. In particular, Debtor shall pursue
all litigation against Travis TBS, Inc. d/b/a Brown Schools et al. The Debtor
shall also pursue all appeals of its Disproportionate Share calculation with the
Commonwealth of Pennsylvania and any cost report appeals, audits or reviews with
CMS.
7.8 Transfer of Real Property, Personal Property and Leases. On the
Effective Date, Debtor shall transfer the Real Property, fixtures, and personal
property excluding all
26
computer hardware and software owned by the Debtor, to KRC subject to the liens
of Classes 1,2, 3, 4, 5, 8, and 10. KRC and Debtor shall execute the Kirkbride
Lease and Debtor shall cause Realty to transfer to KRC all of the leases and any
agreement relating to the Real Property. This transfer shall be tax neutral and
the Debtor reserves the right to modify the structure to preserve any tax loss
carryforwards and prevent the imposition of a tax on any gain on the transfer.
This transfer shall not affect the lien priority of any creditor who holds a
lien on the Real Estate after the Court has determined such priority pursuant to
the Debtor's Complaint to Determine Extent, Priority and Validity, nor shall it
affect the tax consequences to the Class 1 Creditor. The IRS has made no comment
or opinion as to whether the transfer will be tax neutral. This transfer shall
not trigger any right of first refusal of Pennsylvania Hospital.
7.9 Section 1146(c) Exemptions. The transfer under Section 5.8 and, if
appropriate, the Deed in Lieu under Section 3.1(b)(3), shall be exempt from
state or local transfer tax and shall be considered transfers under a Plan.
7.10 Subordination on Refinance of Class 1. All creditors in Classes 2
through 10 shall subordinate their liens, if any, to the first mortgage lien of
any lender which agrees to refinance the Class 1 claim or the claims of Class 2
through 9 so long as proceeds are applied in order of lien priority to satisfy
debt.
7.11 Complaint to Determine Extent, Priority and Validity of Liens. The
Debtor shall file a Complaint to Determine the extent, priority and validity of
all liens on its assets. To the extent a lien is determined to be wholly
unsecured, the confirmation order shall contain a specific directive to the
Office of the Prothonotary, Recorder of Deeds, Secretary of State or such other
agency to remove said lien from any records relating to the Debtor.
7.12 Capital Contribution of Corecare Systems, Inc. Corecare Systems,
Inc. is the sole stockholder of the Debtor. Corecare Systems, Inc. shall cause
its subsidiary, Westmeade Healthcare to satisfy the Class 3 claim in the
approximate amount of $445,000 plus any additional funds contributed under the
excess cash flow formula for Class 10. This shall represent a capital
contribution of Corecare Systems, Inc. and the Debtor intends to consider this
contribution New Value, if Class 10 shall reject the Plan. The Debtor will
consider the requests of other parties to contribute capital in order to test
the value of the retained interest of Class 11 and such other parties may
present offers for capital contribution through the date of the Confirmation
Hearing.
7.13 Debtor Lease with KRC. On the Effective Date, Debtor shall execute
a Lease with KRC with term of three years.
7.14 KRC Board of Directors. Four directors shall be chosen by Corecare
Systems, Inc. and one by KBH Mortgage, Inc. KBH shall be issued one (1) share of
KRC and shall hold such share until the KBH Secured Claim is paid in full. KRC
shall be prohibited by its charter and by-laws from filing a voluntary petition
for bankruptcy or amending its charter and by-laws without the unanimous written
consent of all five (5) Board Members and all shareholders. A copy of the by
laws will be provided at the Confirmation Hearing. KRC will provide an opinion
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letter of counsel regarding the validity and enforceability of the charter and
bylaw provisions restricting the ability to file a bankruptcy which shall be
reasonably acceptable to KBH.
7.15 Post-Petition Tax Obligations. Any obligation of the Debtor to any
taxing authority which arose post-petition shall be cured on or before the
Effective Date unless the taxing authority has agreed in writing to a different
treatment.
7.16 Balance Sheet. Debtor shall file with the Court on or before the
Confirmation Date a starting balance sheet for the reorganized Debtor and for
KRC, which shall be made available to all Creditors. Such balance sheet shall
not be audited but reviewed by accountants to the Committee.
8. GENERAL PROVISIONS
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8.1 Retention of Jurisdiction. The Plan provides that the Bankruptcy
Court shall retain jurisdiction under the Plan for any and all purposes as are
necessary or proper for the consummation of the Plan until the Plan is fully
consummated and the case closed to further administration.
8.2 Possible Tax Ramifications. Each creditor and interest holder
should consult their own tax advisor as to the specific tax consequences to such
person of any term of the Plan, including the application and effect of federal,
state and local income and other tax laws before determining whether to accept
or reject the Plan.
8.3 Executory Contracts and Unexpired Leases.
A. Assumption. As of the Effective Date, the Debtor will
assume all executory contracts and tenant leases on Exhibit "A" to the Plan,
which have not already (a) been subject to a Final Order or decree entered by
the Bankruptcy Court or (b) been subject to a prior stipulation or other
agreement entered into and approved by the Bankruptcy Court during the pendency
of these proceedings. As of the Effective Date, Debtor will assume all tenant
leases which are nominally in the name of Corecare Realty, Corp. and assign the
same to Kirkbride Realty Corp.
B. Rejection. All executory contracts and unexpired leases
that are not assumed as provided in Section 7.1 as of the Confirmation Hearing
or rejected during this case shall be deemed rejected pursuant to Section 365 of
the Bankruptcy Code as of the Petition Date.
C. Damages. Any Claim for damages arising by reason of the
rejection of any executory contract or unexpired lease will constitute a
Rejection Claim, if, but only if, a proof of claim therefore shall be filed with
the Clerk of the Court within thirty days after the date of rejection. If a
Rejection Claim becomes an Allowed Claim then it shall constitute a general
unsecured claim under Class 10.
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D. Notice of Rejection. The Debtor shall serve a notice by
regular mail to all parties whose contracts are rejected immediately following
the Confirmation Hearing advising of the date by which any claim shall be filed.
E. Assumption of CBH and Medicare Provider Agreements. Debtor
shall assume on the Effective Date all of its provider agreements with CBH and
CMS subject to any over payment obligations. To the extent an overpayment exists
as of the Effective Date, the Debtor shall enter into a separate agreement with
CMS prior to Confirmation. Debtor shall assume all other provider agreements
whether specifically listed on Exhibit "A" to the Plan or not. To the extent any
provider believes a default exists under the provider agreement, notice of the
claim shall be filed with the Debtor and Debtor's Counsel as well as with the
Court no later than the Confirmation Hearing.
8.4 Objections to Claims. If the Debtor intends to object to any
claims, then within thirty (30) days of the Effective Date the Debtor shall file
objections to such Claims and all objections to the allowance of Claims shall be
litigated to Final Order or compromised and settled, subject to approval of the
Bankruptcy Court after notice only to the Debtor, the holder of such Claim, the
Committee, and a hearing.
8.5 Discharge of Debtor. Except as otherwise provided in the Plan and
subject to the occurrence of the Effective Date and except for priority and
secured tax creditors in Section 4.2, the rights afforded in the Plan and the
treatment of all Claims and Equity Interests in the Plan shall be in exchange
for and in complete satisfaction, discharge, and release of Claims and Equity
Interests of any nature whatsoever, including any interest accrued on such
Claims from and after the Petition Date, against the Debtor, any of its assets
or properties and the Debtor's Estate. Except as otherwise provided in this Plan
(i) on the Effective Date, all Claims against the Debtor will be satisfied,
discharged and released in full and (ii) all Persons shall be precluded from
asserting against Debtor, its successors, or its assets or properties any other
or further Claims or Equity Interests based upon any act or omission,
transaction, or other activity of any kind or nature that occurred before the
Confirmation Date.
8.6 Automatic Stay. The automatic stay of Section 362 of the Code shall
remain in effect until the Effective Date.
CORECARE BEHAVIORAL HEALTH MANAGEMENT, INC.
By: /S/ Mr. Thomas Fleming
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Mr. Thomas Fleming
Chief Executive Officer
CIARDI, MASCHMEYER & KARALIS, P.C.
By: /S/ Albert A. Ciardi, III, Esquire
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Albert A. Ciardi, III, Esquire
1900 Spruce Street
Philadelphia, PA 19103
(215) 546-4500
Attorney for Debtor
Dated: December 29, 2003
LIST OF SCHEDULES
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SCHEDULE 1 - LIQUIDATION ANALYSIS
SCHEDULE 2 - PROJECTED FINANCIAL STATEMENTS
SCHEDULE 3 - WESTMEADE AGREEMENT
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