Proton Solutions Loans and Investments

12 Months Ended

Oct. 02, 2020

PROTON SOLUTIONS LOANS AND INVESTMENTSIn limited cases, the Company participates, along with other investors and at market terms, in the financing of proton therapy centers. Over time, the Company has divested some of its investments, including investments in CPTC, the New York Proton Center ("NYPC"), Georgia Proton Treatment Center and the Delray Radiation Therapy Center.

The following table lists the Company's notes receivable including accrued interest, senior secured debt, available-for-sale securities, loans outstanding and future commitments for funding the development, construction and operation of various proton therapy centers:


	October 2, 2020				September 27, 2019
(In millions)	Balance		Commitment		Balance		Commitment
Notes receivable and secured debt: (1)
NYPC loan	$	34.9	$	—	$	31.8	$	—
RPTC senior secured debt	25.2		—		23.5		—
Proton International LLC loan	1.8		—		1.8		—


	$	61.9	$	—	$	57.1	$	—
Available-for-sale Securities: (1)
MPTC Series B-1 Bonds	$	18.9	$	—	$	27.1	$	—
MPTC Series B-2 Bonds	20.6		—		25.1		—

APTC securities	5.4		—		6.6		—


	$	44.9	$	—	$	58.8	$	—

CPTC Loans:

CPTC Loans (2)	$	11.8	$	—	$	49.3	$	1.9

(1)Included in other assets on the Company's Consolidated Balance Sheets, except for amounts related to short-term interest receivable.

(2)Included in prepaid and other current assets on the Company's Consolidated Balance Sheets at October 2, 2020. At September 27, 2019, $5.3 million of the CPTC Loans balance was included in prepaid and other current assets and $44.0 million of the CPTC Loans balance was included in other assets on the Company's Consolidated Balance Sheets.

Alabama Proton Therapy Center ("APTC") Securities

In December 2017, the Company purchased $6.0 million in Subordinate Revenue Bonds which financed the APTC. The Subordinate Revenue Bonds carry an interest rate of 8.5% and pay interest semi-annually. The Company is scheduled to start receiving annual principal payments on the Subordinate Revenue Bonds beginning on November 1, 2022. The Subordinate Revenue Bonds will mature on October 1, 2047. In fiscal year 2020, the Company determined the APTC securities were other-than-temporarily impaired due to a decrease in trade prices of comparable bonds. The Company believed that it is more likely than not that it would not recover the losses before these securities are sold and as such, it recorded an impairment charge of $0.9 million.

At October 2, 2020, and September 27, 2019, the Company had $6.9 million and $2.1 million in trade and unbilled receivables, respectively, which included $5.7 million and $2.1 million, in long-term unbilled receivables, respectively, from APTC.

Rinecker Proton Therapy Center ("RPTC") Senior Secured Debt

In July 2017, the Company purchased the outstanding senior secured debt related to the RPTC in Munich, Germany for 21.5 million Euros or $24.5 million. By purchasing the senior secured debt, the Company has a right to 77 million Euros in claims against all of RPTC's assets. In September 2017, the management of RPTC filed for bankruptcy in Germany. In January 2018, the final insolvency proceedings commenced, and in December 2019 the center closed for clinical operations and decommissioning began. Upon finalization of bankruptcy proceedings, the Company believes it is probable it will recover the outstanding senior secured debt balance and trade accounts receivable, net. The Company has classified its senior secured debt as long-term other assets because it expects the bankruptcy proceedings to be complete in greater than one year.

At October 2, 2020, and September 27, 2019, the Company had $4.2 million and $4.6 million, respectively, in long-term trade receivables, net, from RPTC, which does not include any unbilled receivables.

New York Proton Center ("NYPC") Loan

In July 2015, the Company committed to loan up to $91.5 million to MM Proton I, LLC. In June 2016, the Company assigned $73.0 million of this loan to Deutsche Bank AG. The remaining balance is comprised of an $18.5 million “Subordinate Loan” with a six-and-a-half-year term at up to 13.5% interest. As of October 2, 2020, the Subordinate Loan is $34.9 million, including accrued interest. In December 2019, the interest rate on the loan was reduced to 10%, effective May 1, 2019. The principal balance and accrued interest on the Subordinate Loan are due in full at maturity in January 2022.

At October 2, 2020 and September 27, 2019, the Company had $20.0 million and $16.6 million, respectively, in trade and unbilled receivables, which included $5.0 million and $6.0 million in unbilled receivables, respectively, from NYPC.

Maryland Proton Treatment Center ("MPTC") Loans and Securities

In August 2018, MPTC refinanced its then outstanding subordinated debt, including accrued interest, and notes receivable balances. As part of the refinancing, in exchange for its then outstanding subordinated loan, the Company received $22.9 million in Subordinate Revenue Bonds ("MPTC Series B-2 Bonds") that carry an interest rate of 8.5% per annum with interest accruing up to the MPTC Series B-2 Bonds face amount of $33.9 million until January 1, 2022 and then will pay cash interest semi-annually. The MPTC Series B-2 Bonds will mature on January 1, 2049. In exchange for its outstanding deferred equipment payment arrangement, the Company also received $6.0 million in cash and $25.0 million in Subordinate Revenue Bonds ("MPTC Series B-1 Bonds") that carry an interest rate of 7.5% with interest accruing up to the MPTC Series B-1 Bonds face amount of $32.0 million until January 1, 2022 and then will pay cash interest semi-annually. The MPTC Series B-1 Bonds will mature on January 1, 2048. The MPTC Series B-1 Bonds are senior in right and time to the MPTC Series B-2 Bonds. In fiscal year 2020, the Company determined the MPTC Series B-1 Bonds and MPTC Series B-2 Bonds were both other-than-temporarily impaired due to a decrease in trade prices of comparable bonds. The Company believed that it is more likely than not that it would not recover the losses before these bonds are sold and as such, it recorded $16.9 million in impairment charges.

As of October 2, 2020 and September 27, 2019, the Company had $0.6 million and zero net trade and unbilled receivables, respectively from MPTC.

California Proton Therapy Center ("CPTC") Loans and Investment

Between September 2011 and November 2015, the Company, ORIX and J.P. Morgan (“the Lenders”) funded loans (“Original CPTC Loans”) to the Scripps Proton Therapy Center in San Diego, California. ORIX is the loan agent.

In March 2017, California Proton Treatment Center, LLC ("Original CPTC") filed for bankruptcy and concurrently entered into a Debtor-in-Possession facility (the "DIP Facility") with the Lenders where the Company's pro-rata share of the DIP Facility was $7.3 million. In September 2017, the Lenders and Scripps signed a Transition Agreement to transition the operations of the center from Scripps to Proton Doctors Professional Corporation (“Practice”). As a result of these events the Company recorded an impairment charge of $51.4 million to its Original CPTC Loans in fiscal year 2017.

Pursuant to an order of the Bankruptcy Court, Original CPTC conducted an auction of the Scripps Proton Therapy Center. On December 6, 2017 (“Closing Date”), the Bankruptcy Court approved the sale of Scripps Proton Therapy Center to the California Proton Therapy Center, LLC (“CPTC”), an entity owned by the Lenders. The Lenders purchased all assets and assumed $112.0 million of Original CPTC’s outstanding liabilities. On December 13, 2017, the Bankruptcy Court dismissed the bankruptcy filing of Original CPTC.

On the Closing Date, the Lenders entered into a Credit Agreement with Original CPTC of which the terms of the Original CPTC Loans, DIP Facility and accrued interest (collectively “Former Loans”) were modified. In addition to the partially satisfied Original CPTC Loans reinstated by the Bankruptcy Court, the Company received a 47.08% equity ownership in CPTC. Original CPTC has assigned all its Former Loans to CPTC at an amount of $112.0 million, the partially satisfied loan balance. Per the terms of the Credit Agreement, the Company's portion of the $112.0 million is $53.5 million; the remainder is allocated between ORIX and J.P. Morgan. The $53.5 million is composed of four Tranches: Tranche A of $2.0 million, Tranche B of $7.2 million, Tranche C of $15.6 million, and Tranche D of $28.7 million (collectively the "Term Loan"). The maturity date of the Term Loan is December 6, 2020. The Term Loan is secured by the assets of CPTC.

In addition, the Lenders committed to lend up to $15.0 million in a Revolving Loan with a maturity date of one year from the Closing Date. The Company's share of the funding commitment from the Revolving Loan was $7.2 million, and as of October 2, 2020, the Company has fully funded the Revolving Loan.

All of the Tranches accrue paid-in-kind interest at 7.5% per annum, except the Tranche B and Revolving Loan which accrue paid-in-kind interest at 10% per annum. The seniority of these loans is as follows: Revolving Loan, Tranche A, Tranche B, Tranche C and Tranche D. If CPTC is in default, the interest rate of the Tranche A, C and D will increase to 9.5% and the interest rate on the Tranche B and the Revolving Loan will increase to 12.0%.

Primarily as a result of the COVID-19 pandemic, during March and April 2020, CPTC suffered material negative impacts to its operating plan, including declines in current and projected patient volume and delays in partnership with a significant clinical

partner. Management evaluates its CPTC Loans for impairment on a quarterly basis under the incurred loss model. Therefore, the Company concluded it was no longer probable that it will collect the amounts owed under the Term Loan and Revolving Loan (collectively "CPTC Loans") when due and recorded a $40.5 million impairment charge to its CPTC Loans using the probability weighted expected return model, utilizing management's assumptions of different outcomes, in the Consolidated Statements of Earnings in the second quarter of fiscal year 2020. Management applied significant judgment with respect to the application of the probability weighted expected return model and the individual expected scenarios. As a result of this impairment charge, the CPTC Loans were written down to their estimated fair value of $10.0 million. As of October 2, 2020, the fair value of the CPTC Loans was $11.8 million.

As of October 2, 2020, and September 27, 2019, the Company had recorded $3.1 million and $2.6 million in trade receivables, net, respectively, from CPTC.

Variable Interest Entities

The Company has determined that, CPTC, MM Proton I, LLC and RPTC are variable interest entities and that the Company holds a significant variable interest of each of the entities through its participation in the loan facilities and its agreements to supply and service the proton therapy equipment. The Company has no voting rights, has no special approval authority or veto rights for these centers' budget, and does not have the power to direct patient recruitment, clinical operations and management of these entities, which the Company believes are the matters that most significantly affect their economic performance. The Company has concluded that it is not the primary beneficiary of any of these entities. The Company’s exposure to loss as a result of its involvement with CPTC, MM Proton I, LLC and RPTC is limited to the carrying amounts of the above-mentioned assets on its Consolidated Balance Sheets.