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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 13, 1996
REGISTRATION NO. 333-4266
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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MARINER HEALTH GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 06-1251310
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8051
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
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125 EUGENE O'NEILL DRIVE
NEW LONDON, CONNECTICUT 06320
(860) 701-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------
JEFFREY W. KINELL
CHIEF FINANCIAL OFFICER
125 EUGENE O'NEILL DRIVE
NEW LONDON, CONNECTICUT 06320
(860) 701-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
MARK H. BURNETT, ESQ.
TESTA, HURWITZ & THIBEAULT, LLP
HIGH STREET TOWER
125 HIGH STREET
BOSTON, MASSACHUSETTS 02110
(617) 248-7000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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MARINER HEALTH GROUP, INC.
CROSS REFERENCE SHEET
SHOWING THE LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY PART I OF FORM S-4
<TABLE>
<CAPTION>
FORM S-4 ITEM NUMBER AND CAPTION CAPTION IN PROSPECTUS
-------------------------------- ---------------------
<S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus ......................... Facing Page of Registration Statement; Cross
Reference Sheet; Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus ............................................. Inside Front and Outside Back Cover Pages
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information .................................. Prospectus Summary; Risk Factors; Selected
Consolidated Financial Data
4. Terms of the Transaction ............................... Prospectus Summary; Exchange Offer;
Description of Exchange Notes
5. Pro Forma Financial Information ........................ Prospectus Summary; Unaudited Pro Forma
Combined Financial Information
6. Material Contracts with Company Being Acquired ......... Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters .......... Not Applicable
8. Interests of Named Experts and Counsel ................. Legal Matters; Experts
9. Disclosure of Commission Position on Indemnifica-
tion for Securities Act Liabilities .................... Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants ............ Not Applicable
11. Incorporation of Certain Information by Reference ...... Not Applicable
12. Information with Respect to S-2 or S-3 Registrants ..... Not Applicable
13. Incorporation of Certain Information by Reference ...... Not Applicable
14. Information with Respect to Registrants Other Than
S-2 or S-3 Registrants ................................. Prospectus Summary; Risk Factors; Selected
Consolidated Financial Data; Business;
Selected Consolidated Financial Data; Man-
agement's Discussion and Analysis of Finan-
cial Condition and Results of Operations;
Business
C. INFORMATION ABOUT COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies .............. Not Applicable
16. Information with Respect to S-2 or S-3 Companies ....... Not Applicable
17. Information with Respect to Companies Other Than
S-2 or S-3 Companies ................................... Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations
are to be Solicited .................................... Not Applicable
19. Information if Proxies, Consents or Authorizations
are not to be Solicited in an Exchange Offer ........... Management; Incorporation of
Certain Documents by Reference
</TABLE>
Information contained herein is subject to completion or amendment. A Securities
and Exchange Commission. These securities may not be sold nor becomes effective.
This prospectus shall not constitute an offer to sell or the in any State in
which such offer, solicitation or sale would be unlawful prior registration
statement relating to these securities has been filed with the may offers to buy
be accepted prior to the time the registration statement solicitation of an
offer to buy nor shall there be any sale of these securities to registration or
qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JUNE 13, 1996
PROSPECTUS
- ----------
[Logo]
MARINER HEALTH GROUP, INC.
OFFER TO EXCHANGE ITS 9 1/2 % SENIOR SUBORDINATED NOTES DUE 2006,
SERIES B, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, FOR ANY AND ALL OF ITS OUTSTANDING
9 1/2 % SENIOR SUBORDINATED NOTES DUE 2006, SERIES A
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON JULY , 1996, UNLESS EXTENDED.
--------------
Mariner Health Group, Inc., a Delaware corporation (the "Company"), hereby
offers (the "Exchange Offer"), upon the terms and conditions set forth in this
Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange $1,000 principal amount of its 9 1/2 %
Senior Subordinated Notes due 2006, Series B (the "Exchange Notes"), which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement of which this Prospectus is a part,
for each $1,000 principal amount of its outstanding 9 1/2 % Senior Subordinated
Notes due 2006, Series A (the "Notes"), of which $150,000,000 aggregate
principal amount is outstanding. The form and terms of the Exchange Notes are
the same as the form and terms of the Notes (which they replace), except that as
of the date hereof the Exchange Notes have been registered under the Securities
Act and, therefore, will not bear legends restricting their transfer and will
not contain certain provisions included in the terms of the Notes relating to an
increase in the interest rate in certain circumstances relating to the timing of
the Exchange Offer. The Exchange Notes will evidence the same debt as the Notes
(which they replace) and will be issued under and be entitled to the benefits of
the Indenture, dated as of April 4, 1996 (the "Indenture"), between the Company
and State Street Bank and Trust Company, as trustee (the "Trustee"), which also
governs the Notes. See "The Exchange Offer" and "Description of Exchange Notes."
The Company will accept for exchange any and all Notes duly tendered and not
validly withdrawn prior to 5:00 p.m., New York City time, on July , 1996, unless
extended by the Company in its sole discretion (the "Expiration Date"). Tenders
of Notes may be withdrawn at any time prior to 5:00 p.m. New York City time on
the Expiration Date. The Exchange Offer is subject to certain customary
conditions. The Notes were sold by the Company on April 4, 1996 to the Initial
Purchasers (as defined) in transactions not registered under the Securities Act
in reliance upon an exemption from registration under the Securities Act (the
"Offering"). The Initial Purchasers subsequently resold the Notes to qualified
institutional buyers in reliance upon Rule 144A under the Securities Act and to
a limited number of institutional accredited investors that agreed to comply
with certain transfer restrictions and other conditions. Accordingly, the Notes
may not be reoffered, resold or otherwise transferred in the United States
unless registered under the Securities Act or unless an applicable exemption
from the registration requirements of the Securities Act is available. The
Exchange Notes are being offered hereunder in order to satisfy the obligations
of the Company under the Registration Rights Agreement (as defined) entered into
by the Company in connection with the Offering. See "Exchange Offer."
Under existing interpretations of the staff of the Securities and Exchange
Commission (the "Commission") contained in several no-action letters to third
parties, the Exchange Notes will in general be freely tradable after the
Exchange Offer without further registration under the Securities Act. However,
any purchaser of Notes who is an "affiliate" of the Company or who intends to
participate in the Exchange Offer for the purpose of distributing the Exchange
Notes (i) will not be able to rely on such interpretations of the staff of the
Commission, (ii) will not be able to tender its Notes in the Exchange Offer and
(iii) must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any sale or transfer of the Notes, unless
such sale or transfer is made pursuant to an exemption from such requirements.
See "Exchange Offer" and "-- Resale of the Exchange Notes." Each broker-dealer
(a "Participating Broker-Dealer") that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of Exchange Notes received in exchange
for Notes where such Notes were acquired by such Participating Broker-Dealer as
a result of market-making activities or other trading activities.
Holders of Notes not tendered and accepted in the Exchange Offer will
continue to hold such Notes and will be entitled to all the rights and benefits
and will be subject to the limitations applicable thereto under the Indenture
and with respect to transfer under the Securities Act. Holders of Notes not
tendered in the Exchange Offer will not retain any rights under the Registration
Rights Agreement, except in limited circumstances. The Company will pay all the
expenses incurred by it incident to the Exchange Offer. See "Exchange Offer."
There has not previously been any public market for the Exchange Notes. The
Company does not intend to list the Exchange Notes on any securities exchange or
to seek approval for quotation through any automated quotation system. There can
be no assurance that an active market for the Exchange Notes will develop.
Merill Lynch, Pierce, Fenner & Smith Incorporated, Alex. Brown & Sons
Incorporated, CS First Boston Corporation, Hambrecht & Quist LLC and Salomon
Brothers Inc (the "Initial Purchasers") have informed the Company that they
currently intend to make a market in the Exchange Notes, but are not obligated
to do so and any such market making may be discontinued at any time without
notice. The Initial Purchasers may act as principal or as agent in such
transactions. If a market for the Exchange Notes should develop, the Exchange
Notes could trade at a discount from their principal amount. See "Risk Factors
- -- Absence of Public Market." Moreover, to the extent that Notes are tendered
and accepted in the Exchange Offer, the trading market for untendered and
tendered but unaccepted Notes could be adversely affected.
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SEE "RISK FACTORS" ON PAGE 13 HEREIN FOR A DESCRIPTION OF CERTAIN RISKS TO
BE CONSIDERED BY HOLDERS WHO TENDER THEIR NOTES IN THE EXCHANGE OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1996.
MARINER HEALTH LOCATIONS
[MAP SHOWING MARINER HEALTH LOCATIONS]
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MarinerCare(R) is a registered service mark of Mariner.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and the financial statements,
including notes thereto, appearing elsewhere or incorporated by reference in
this Prospectus. As used herein, the "Company" or "Mariner" refers to Mariner
Health Group, Inc. and its subsidiaries, unless the context indicates otherwise.
THE COMPANY
Mariner is a leading provider of outcomes-oriented, post-acute health care
services in selected markets, with a particular clinical expertise in the
treatment of short-stay subacute patients in cost-effective alternate sites. The
Company's services and products include inpatient care, comprehensive inpatient
and outpatient rehabilitation services, medical services and products (including
institutional and home pharmacy services, respiratory and infusion therapy and
durable medical equipment), home care and physician services. By providing this
continuum of care in selected markets, the Company believes that it will be
better able to maintain quality of care and control costs while coordinating the
treatment of patients from the onset of illness to recovery. The Company seeks
to cluster facilities and other post-acute health care services around large
metropolitan areas and major medical centers with large acute care hospitals
from which to generate post-acute admissions. Mariner currently operates 70
inpatient facilities with an aggregate of approximately 8,700 beds and 57
outpatient rehabilitation clinics and currently provides contract rehabilitation
services within 413 skilled nursing facilities. On a pro forma basis, EBITDA was
$58.3 million and $70.0 million for the years ended December 31, 1994 and 1995,
respectively, and $20.6 million for the three months ended March 31, 1996. See
"-- Summary Consolidated and Pro Forma Financial Information."
Mariner has established standardized clinical programs based on defined
protocols to address the medical requirements of large groups of patients with
similar diagnoses in a high-quality, cost-effective manner. The Company's
MarinerCare clinical programs, such as the orthopedic recovery, cardiac recovery
and pulmonary management programs, are short-stay regimens based on defined
protocols that address the needs of subacute patients. Subacute patients are
medically stable and generally require three to six hours of skilled nursing
care per day. MarinerCare programs typically involve 20 to 45 days of inpatient
care and utilize the Company's nursing, rehabilitation, pharmacy and other
ancillary medical services, with patients generally discharged directly to their
homes. Mariner is also developing standardized clinical home care programs. The
Company believes that careful adherence to its clinical programs enables it to
produce consistent and measurable clinical and financial outcomes for patients
and payors and to conduct clinical programs consistently in all of its sites.
Using a case management approach, patients' progress is carefully monitored so
that the appropriate level of care is being delivered at the right time and in
the appropriate setting under the applicable clinical program. Mariner believes
that its standardized approaches to delivering care and measuring outcomes is
particularly attractive to managed care organizations and large payors and
positions the Company to contract with payors on a case rate or capitated basis.
Mariner's goal is to be the lowest cost provider of high-quality, post-acute
health care services in its markets with a particular emphasis on short-stay
subacute patients. Hospitals have been under increasing pressure to reduce the
length of patient stays as a means of containing costs. In addition, employers
have begun using managed care providers, such as health maintenance
organizations and preferred provider organizations, to limit hospitalization
costs by controlling hospital utilization and by negotiating discounted fixed
rates for hospital services. Accordingly, Mariner believes an opportunity exists
to provide health care services to subacute patients more efficiently and
cost-effectively than traditional health care providers. The Company's strategy
is to position itself to capitalize on the increased managed care participation
and the trend toward a prospective payment system through the following:
Patient Focused Programmatic Care: Continue to implement its standardized
clinical programs and programmatic approach throughout the health care
continuum.
Outcomes and Case Management: Develop a system that utilizes case
management and information systems to measure clinical and financial
outcomes of patients' rehabilitation.
3
Regional Post-Acute Networks of Care: Integrate the Company's health care
services in local markets and coordinate the treatment of patients from the
onset of illness to recovery.
Partnering with Key Referral Sources: Partner with physicians, payors and
managed care organizations, as well as skilled nursing facilities and other
traditional health care providers.
Commitment to Employee Training: Conduct extensive and on-going training
of the Company's management and health care employees designed to ensure the
integrity and consistency of its clinical programs and delivery of service.
Market Driven Development: Introduce its clinical programs and post-acute
networks of care in strategically selected metropolitan areas throughout the
United States through (i) acquisitions or development of businesses that
operate one or more inpatient facilities or other health care service
businesses and (ii) expanding the broad array of post-acute services
provided directly by the Company.
The emphasis on MarinerCare programs has been the primary reason for the
Company's decreasing length of stay, improved payor mix and increasing patient
turnover rate and revenue per bed.
RECENT DEVELOPMENTS
Recent Acquisitions
In January 1996, the Company completed its merger (the "CSI Merger") with
Convalescent Services, Inc. ("CSI"). CSI operated subacute-oriented skilled
nursing facilities that provide restorative nursing care and specialty medical
services, including rehabilitation programs, respiratory therapy, infusion
therapy and wound care treatment. At the time of the CSI Merger, CSI operated 25
skilled nursing facilities, one rehabilitation hospital and one continuing care
retirement community with an aggregate of approximately 3,800 beds primarily in
Texas and Florida. As part of the consideration for the CSI Merger, the Company
issued 5,853,656 shares of Common Stock. From late May 1995 through the
completion of the CSI Merger, Mariner managed the CSI facilities under an
interim management agreement. The CSI Merger enhanced the Company's presence in
certain of its existing markets, expanded its reach into new markets and
provided the Company with significant opportunities to implement MarinerCare
programs at CSI facilities.
During the fourth quarter of 1995, the Company acquired six skilled nursing
facilities with an aggregate of 686 beds in central and northern Florida (the
"Heritage Acquisition"). In May 1996, the Company acquired a company that
operated seven skilled nursing facilities and one assisted living facility with
an aggregate of 960 beds in Florida, Tennessee and Kansas (the "1996 Florida
Acquisition"). Mariner began managing the facilities acquired in the 1996
Florida Acquisition on March 1, 1996. In March 1996, the Company completed its
merger (the "MedRehab Merger") with MedRehab, Inc. ("MedRehab") which, at the
time of the MedRehab Merger, provided contract physical medicine and
rehabilitation services to approximately 227 sites (of which 149 sites were
skilled nursing facilities and the remaining 78 sites included hospitals and
schools). The CSI Merger, Heritage Acquisition and 1996 Florida Acquisition are
referred to herein as the "Recent Acquisitions." See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Unaudited Pro Forma Consolidated Financial Statements."
AmHS/Premier/Sun Health Agreement
In January 1996, Mariner entered into an agreement to be the preferred
provider of subacute services to AmHS/Premier/Sun Health ("APS"), which is the
largest hospital-health care alliance in the United States with approximately
1,700 member hospitals. As the preferred subacute provider, Mariner may contract
individually with member hospitals and systems to provide subacute services.
This agreement provides the Company the opportunity to more quickly expand its
services in certain of its existing markets and enter new markets with lower
capital commitments. See "Business -- Mariner's Strategy."
4
THE OFFERING
Notes..................... The Notes were sold by the Company on April 4, 1996
to Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Alex. Brown & Sons Incorporated, CS
First Boston Corporation, Hambrecht & Quist LLC and
Salomon Brothers Inc (the "Initial Purchasers")
pursuant to a Purchase Agreement, dated March 29,
1996 (the "Purchase Agreement"). The Initial
Purchasers subsequently resold the Notes to
qualified institutional buyers pursuant to Rule 144A
under the Securities Act and to a limited number of
institutional accredited investors that agreed to
comply with certain transfer restrictions and other
conditions.
Registration Rights
Agreement............... Pursuant to the Purchase Agreement, the Company and
the Initial Purchasers entered into a Registration
Rights Agreement, dated as of April 4, 1996 (the
"Registration Rights Agreement"), which granted the
holders of the Notes certain exchange and
registration rights. The Exchange Offer is being
made pursuant to the Registration Rights Agreement,
and such exchange rights terminate upon the
consummation of the Exchange Offer.
THE EXCHANGE OFFER
Securities Offered........ $150,000,000 aggregate principal amount of 9 1/2 %
Senior Notes due 2006, Series B.
The Exchange Offer........ $1,000 principal amount of the Exchange Notes in
exchange for each $1,000 principal amount of Notes.
As of the date hereof, $150,000,000 aggregate
principal amount of Notes are outstanding. The
Company will issue the Exchange Notes on or promptly
after the Expiration Date.
Under existing interpretations of the staff of the
Commission contained in several no-action letters to
third parties, the Exchange Notes will in general be
freely tradeable after the Exchange Offer without
further registration under the Securities Act.
However, any purchaser of Notes who is an
"affiliate" of the Company or who intends to
participate in the Exchange Offer for the purpose of
distributing the Exchange Notes (i) will not be able
to rely on such interpretations of the staff of the
Commission, (ii) will not be able to tender its
Notes in the Exchange Offer and (iii) must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection
with any sale or transfer of the Notes, unless such
sale or transfer is made pursuant to an exemption
from such requirements.
Each Participating Broker-Dealer that receives
Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resale of such
Exchange Notes. The Letter of Transmittal states
that, by so acknowledging and by delivering a
prospectus, a Participating Broker-Dealer will not
be deemed to admit that it is
5
an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection
with resales of Exchange Notes received in exchange
for Notes where such Notes were acquired by such
Participating Broker- Dealer as a result of
market-making activities or other trading
activities.
Any holder who tenders in the Exchange Offer with
the intention to participate or for the purpose of
participating in a distribution of the Exchange
Notes cannot rely on the position of the staff of
the Commission enunciated in no-action letters and,
in the absence of an exemption therefrom, must
comply with the registration and prospectus delivery
requirements of the Securities Act in connection
with any resale transaction. Failure to comply with
such requirements in such instance may result in
such holder incurring liability under the Securities
Act for which the holder is not indemnified by the
Company.
Expiration Date........... 5:00 p.m., New York City time, on July , 1996,
unless the Exchange Offer is extended by the Company
in its sole discretion, in which case the term
"Expiration Date" means that latest date and time to
which the Exchange Offer is extended.
Accrued Interest on the
Exchange Notes and
Notes................... Interest on each Exchange Note will accrue from the
last date on which interest was paid on the Notes
surrendered in exchange therefor or, if no interest
has been paid on the Notes, from the date of
original issuance of such Note. No interest will be
paid on the Notes accepted for exchange, and holders
of Notes whose Notes are accepted for exchange will
be deemed to have waived the right to receive any
payment in respect of interest on the Notes accrued
up to the date of the issuance of the Exchange
Notes. Holders of Notes that are not exchanged will
receive the accrued interest payable on October 1,
1996 in accordance with the Indenture. See "Exchange
Offer -- Interest on the Exchange Notes."
Conditions to the Exchange
Offer................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See
"Exchange Offer -- Conditions."
Procedures for Tendering
Notes................... Each holder of Notes wishing to accept the Exchange
Offer must complete, sign and date the accompanying
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with the Notes to be exchanged and any other
required documentation to the Exchange Agent (as
defined) at the address set forth herein or effect a
tender of such Notes pursuant to the procedures for
book-entry transfer as provided herein. By executing
the Letter of Transmittal, each holder will
represent to the Company that, among other things,
the Exchange Notes acquired pursuant to the Exchange
Offer are being obtained in the ordinary course of
6
business of the person receiving such Exchange
Notes, whether or not such person is the holder,
that neither the holder nor any such other person
has any arrangement or understanding with any person
to participate in the distribution of such Exchange
Notes and that neither the holder nor any such other
person is an "affiliate," as defined under Rule 405
of the Securities Act, of the Company. See "Exchange
Offer -- Purpose and Effect of the Exchange Offer"
and "-- Procedures for Tending." Each holder of the
Notes who is not a broker-dealer will represent to
the Company that it is not engaged in and does not
intend to engage in a distribution of the Exchange
Notes. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Notes,
where such Notes were acquired by such broker-dealer
as a result of market-making activities or other
trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale
of such Exchange Notes. See "Exchange Offer --
Procedures for Tendering" and "Plan of
Distribution."
Untendered Notes.......... Following the consummation of the Exchange Offer,
holders of Notes eligible to participate but who do
not tender their Notes will not have any further
registration rights and such Notes will continue to
be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such
Notes could be adversely affected.
Consequences of Failure to
Exchange................ The Notes that are not exchanged pursuant to the
Exchange Offer will remain outstanding and continue
to accrue interest and will also remain restricted
securities. Accordingly, such Notes may be resold
only (i) to the Company, (ii) pursuant to Rule 144A
or Rule 144 under the Securities Act or pursuant to
some other exemption from registration under the
Securities Act, (iii) outside the United States to a
foreign person pursuant to the requirements of
Regulation S under the Securities Act, or (iv)
pursuant to an effective registration statement
under the Securities Act. See "Exchange Offer --
Consequences of Failure to Exchange."
Shelf Registration
Statement............... In the event that any changes in law or the
applicable interpretations of the staff of the
Commission do not permit the Company to effect the
Exchange Offer or if the Exchange Offer Registration
Statement is not declared effective within 90 days
or consummated within 120 days following the
original issue of the Notes, or upon the request of
any of the Initial Purchasers under certain
circumstances or if any holder of the Notes is not
permitted by applicable law to participate in the
Exchange Offer or elects to participate in the
Exchange Offer but does not receive fully tradeable
Exchange Notes pursuant to the Exchange Offer, the
Company will use its best efforts to cause a shelf
registration statement with respect to the resale of
the Notes (the "Shelf Registration Statement") to
become effective as soon as practicable after being
required to file the Shelf Registration Statement
and to keep the Shelf Registration Statement
effective for up to three years (or one year in the
case of a request by an Initial Purchaser) from the
date the Shelf Registration Statement is declared
effective by the Commission.
7
Special Procedures for
Beneficial Owners....... Any beneficial owner whose Notes are registered in
the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender
should contact such registered holder promptly and
instruct such registered holder to tender on such
beneficial owner's behalf. If such beneficial owner
wishes to tender on such owner's own behalf, such
owner must, prior to completing and executing the
Letter of Transmittal and delivering its Notes,
either make appropriate arrangements to register
ownership of the Notes in such owner's name or
obtain a properly completed bond power from the
registered holder. The transfer of registered
ownership may take considerable time.
Guaranteed Delivery
Procedures.............. Holders of Notes who wish to tender their Notes and
whose Notes are not immediately available or who
cannot deliver their Notes, the Letter of
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent (or
comply with the procedures for book-entry transfer)
prior to the Expiration Date must tender their Notes
according to the guaranteed delivery procedures set
forth in "Exchange Offer -- Guaranteed Delivery
Procedures."
Withdrawal Rights......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
Acceptance of Notes and
Delivery of
Exchange Notes.......... The Company will accept for exchange any and all
Notes which are duly tendered in the Exchange Offer
and not validly withdrawn prior to 5:00 p.m., New
York City time, on the Expiration Date. The Exchange
Notes issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date.
See "Exchange Offer -- Terms of the Exchange Offer."
Certain Tax Consequences.. The exchange pursuant to the Exchange Offer should
not be a taxable event for Federal income tax
purposes. See "Tax Considerations."
Use of Proceeds........... There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer. See
"Use of Proceeds."
Exchange Agent............ State Street Bank and Trust Company.
THE EXCHANGE NOTES
General................... The form and terms of the Exchange Notes are the
same as the form and terms of the Notes (which they
replace) except that (i) the Exchange Notes have
been registered under the Securities Act and,
therefore, will not bear legends restricting the
transfer thereof, (ii) the Exchange Notes do not
include provisions providing for an increase in the
interest rate in certain circumstances relating to
the timing of the Exchange Offer and (iii) the
8
holders of Exchange Notes will not be entitled to
certain rights under the Registration Rights
Agreement, which rights will terminate when the
Exchange Offer is consummated. The Exchange Notes
will evidence the same debt as the Notes and will be
entitled to the benefits of the Indenture. See
"Description of Exchange Notes."
Securities Offered........ $150,000,000 principal amount of 9 1/2 % Senior
Subordinated Notes due 2006, Series B.
Maturity Date............. April 1, 2006.
Interest Payment Dates.... April 1 and October 1 of each year, commencing
October 1, 1996.
Optional Redemption....... The Exchange Notes are redeemable at the option of
the Company, in whole or in part, in cash, at any
time on or after April 1, 2001 at the redemption
prices set forth herein, together with accrued and
unpaid interest, if any, to the date of redemption.
Change of Control......... Upon the occurrence of a Change of Control (as
defined), each holder of the Exchange Notes may
require the Company to repurchase all or a portion
of such holder's Exchange Notes at a purchase price
in cash equal to 101% of the principal amount
thereof, together with accrued and unpaid interest,
if any, to the date of repurchase.
Ranking................... The Exchange Notes will be unsecured senior
subordinated obligations of the Company and, as
such, will be subordinated in right of payment to
all existing and future Senior Indebtedness (as
defined) of the Company, including indebtedness
under the Credit Facility (as defined). The Exchange
Notes will rank pari passu with all senior
subordinated indebtedness of the Company and will
rank senior to all other subordinated indebtedness
of the Company. The Exchange Notes will also be
effectively subordinated to all existing and future
liabilities of the Company's subsidiaries. As of
March 31, 1996, on a pro forma basis after giving
effect to the Recent Acquisitions and the sale of
the Exchange Notes and the application of the
estimated net proceeds therefrom, the aggregate
amount of Senior Indebtedness and indebtedness of
the Company's subsidiaries (excluding intercompany
indebtedness) that would have effectively ranked
senior to the Exchange Notes would have been
approximately $154.7 million.
Restrictive Covenants..... The indenture relating to the Exchange Notes (the
"Indenture") contains certain covenants, including,
but not limited, to covenants with respect to the
following matters: (i) limitation on indebtedness;
(ii) limitation on restricted payments; (iii)
limitation on the incurrence of liens; (iv)
restriction on the issuance of preferred stock of
subsidiaries; (v) limitation on transactions with
affiliates; (vi) limitation on sale of assets; (vii)
limitation on other senior subordinated
indebtedness; (viii) limitation on guarantees by
subsidiaries; (ix) limitation on
9
the creation of any restriction on the ability of
the Company's subsidiaries to make distributions;
and (x) restrictions on mergers, consolidations and
the transfer of all or substantially all of the
assets of the Company to another person.
Absence of a Public Market
for the Notes........... The Exchange Notes will be new securities for which
there currently is no market. Although the Initial
Purchasers have informed the Company that they
currently intend to make a market in the Exchange
Notes, they are not obligated to do so, and any such
market making may be discontinued at any time
without notice. Accordingly, there can be no
assurance as to the development or liquidity of any
market for the Exchange Notes. The Company does not
intend to list the Exchange Notes on any securities
exchange or to seek approval for quotation through
any automated quotation system.
RISK FACTORS
Prospective investors should consider all of the information contained in
this Prospectus before making an investment in the Exchange Notes. In
particular, prospective investors should carefully consider the factors set
forth under "Risk Factors."
10
SUMMARY CONSOLIDATED AND PRO FORMA FINANCIAL INFORMATION (A)
(IN THOUSANDS, EXCEPT RATIOS AND SELECTED STATISTICAL DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
YEAR THREE MONTHS ENDED THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31, ENDED
----------------------- DECEMBER 31, --------------- MARCH 31,
1992 1993 1994 1995 1995 1995 1996 1996 (B)(C)
---- ---- ---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total operating revenue .............. $170,411 $210,806 $264,144 $354,806 $533,633 $80,159 $135,179 $143,899
Income from operations before
interest, rent, merger and other
non-recurring costs, depreciation
and amortization (d)(e) ............ 21,647 23,576 33,155 50,749 74,117 10,789 19,872 21,484
Interest expense, net ................ 10,113 7,379 1,819 3,598 22,570 279 4,392 6,706
Facility rent expense, net ........... 307 1,079 1,739 1,830 4,132 355 474 845
Depreciation and amortization ........ 6,282 6,843 8,091 11,397 19,212 2,660 5,196 5,537
Net income (loss) .................... 3,287 (15,920) 7,867 12,482 8,653 4,619 2,045 1,168
OTHER FINANCIAL DATA:
EBITDA (d)(e) ........................ $ 21,340 $ 22,497 $ 31,416 $ 48,919 $ 69,985 $10,434 $ 19,398 $ 20,639
Capital expenditures ................. $ 7,327 $ 10,228 $ 8,875 $ 11,943 N/A $ 2,374 $ 3,500 N/A
Ratio of EBITDA to interest expense,
net ................................ 2.1x 3.0x 17.3x 13.6x 3.1x 37.4x 4.4x 3.1x
Ratio of earnings to fixed charges (f) 1.5x 0.2x 3.6x 4.6x 2.2x 10.4x 1.6x 1.2x
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
PRO FORMA
ACTUAL PRO FORMA (B) AS ADJUSTED (B)(C)
------ ------------- ------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ........................................... $ 2,184 $ 368 $ 8,286
Working capital ..................................................... 71,252 68,366 76,488
Total assets ........................................................ 648,084 702,233 714,651
Long-term debt and capital lease obligations, less current portion .. 239,302 285,853 298,475
Total stockholders' equity .......................................... 305,530 305,530 305,530
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------- MARCH 31,
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
SELECTED STATISTICAL DATA:
Sites of Service (g):
Owned and leased freestanding inpatient facilities ...................... 19 26 33 57
Managed freestanding inpatient facilities and hospital-based units ...... 9 5 29 13
Rehabilitation management programs with skilled nursing facilities ...... 407 447 440 413
Outpatient rehabilitation clinics ....................................... 74 65 57 57
Inpatient Operations:
Licensed beds (g) ....................................................... 2,326 3,114 7,685 8,705
Average occupancy rates ................................................. 91% 89% 88% 88%
Median length of stay (h) ............................................... 27 days 25 days 20 days 22 days
Bed turnover rate (i) ................................................... 2.3x 2.6x 2.7x 2.4x
Revenue per occupied bed per year (j):
Private payors and Medicare (k) ........................................ $ 80,648 $ 97,932 $101,863 $ 92,520
Medicaid ............................................................... $ 33,690 $ 36,254 $ 36,685 $ 33,729
Company as a whole ..................................................... $ 51,243 $ 60,126 $ 61,495 $ 61,243
Rehabilitation Operations (l):
Revenue per rehabilitation management program per year (m) .............. $181,983 $234,800 $318,088 $396,553
Outpatient clinic visits ................................................ 346,631 297,699 272,423 57,800
Payor Mix (Company revenue as a whole):
Private payors and Medicare (k) ......................................... 78% 80% 79% 76%
Medicaid ................................................................ 22% 20% 21% 24%
</TABLE>
(footnotes on following page)
11
(footnotes from previous page)
- --------------
(a) On March 1, 1996, the Company completed the MedRehab Merger, which was
accounted for as a pooling of interests. Accordingly, the historical
financial statements of the Company for all periods presented give
retroactive effect to the MedRehab Merger.
(b) The pro forma financial information gives effect to the Recent Acquisitions.
See "Recent Developments" and "Unaudited Pro Forma Combined Financial
Statements."
(c) Adjusted to give effect, on a pro forma basis, to the sale of the Notes and
the issuance of the Exchange Notes pursuant to the Exchange Offer and the
application of the net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
(d) During 1993, the Company accrued costs totaling $15,457,000 related to
closing of certain rehabilitation operations in Florida, Texas, Illinois and
Wisconsin. Of this charge, approximately $11,185,000 related to the
write-down of goodwill, $575,000 related to the write-down of property and
equipment, $1,141,000 for severance, $1,659,000 for lease obligations,
$265,000 for allowance for doubtful accounts, $491,000 related to losses on
facilities to date of closing and $141,000 for other expenses.
During 1994, the Company recorded a charge of $9,327,000, of which
$7,952,000 relates to the merger with Pinnacle Care Corporation, which was
accounted for as a pooling of interests, and $1,375,000 relates to the
accelerated vesting of certain stock options. Of the merger costs,
approximately $4,627,000 was reserved for employee severance, payroll and
relocation, $2,878,000 was reserved for transaction costs including
investment bankers', legal and accounting fees, $172,000 was reserved for
customer relations, $150,000 for operations relocation, $66,000 for investor
relations and $59,000 was reserved for employee relations.
During 1995, the Company accrued costs totaling $8,073,000 related to the
CSI Merger and the consolidation of various regional and satellite offices
to the New London, Connecticut office. Of this total charge, approximately
$3,691,000 related to severance and related payroll costs and approximately
$4,382,000 related to expenses incurred to close the Company's regional
offices. In addition, the Company incurred operating losses and other
charges of $4,333,000 related to a significant change in business focus at
the Company's Baltimore facility.
During the first quarter of 1996, the Company recorded charges of $5,661,000
associated with the completion of the MedRehab Merger and a one-time charge
of $850,000 associated with the APS alliance. Of the $5,661,000 in merger
charges, approximately $2,280,000 relates to severance and related payroll
charges, $1,061,000 relates to property write-downs, $1,143,000 relates to
transaction costs, $682,000 relates to relocation costs, and $495,000
relates to miscellaneous expenses.
(e) EBITDA represents operating income before interest expense, depreciation and
amortization and merger and other non-recurring costs (including all the
costs described in note (c) above). These amounts should not be considered
alternative measures of the Company's net income, operating performance,
cash flow or liquidity. They are included herein to provide additional
information related to the Company's ability to service debt.
(f) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of the sum of earnings before income taxes and
extraordinary items plus fixed charges. Fixed charges consist of interest on
all indebtedness, amortization of debt discount and expenses, and that
portion of rental expense that the Company believes to be representative of
the interest factor. The definition of fixed charges used in this
calculation differs from that used in the Fixed Charge Coverage Ratio
contained in the Indenture.
(g) As of the end of the applicable period, includes 23 skilled nursing
facilities and one rehabilitation hospital with an aggregate of 3,288 beds
which became owned or leased by the Company on January 2, 1996 upon
completion of the CSI Merger, which are reflected as managed on December 31,
1995. Also includes two other skilled nursing facilities and one continuing
care retirement community with an aggregate of 513 beds which continue to be
managed by the Company after the completion of the CSI Merger. Also includes
seven skilled nursing facilities and one assisted living facility with an
aggregate of 960 beds which became owned or leased by the Company on May 2,
1996 upon completion of the 1996 Florida Acquisition, which are reflected as
managed on March 31, 1996. See "-- Recent Developments."
(h) Based on those patients who were discharged during the applicable period
from facilities owned or leased by Mariner.
(i) Represents total discharges divided by the average number of licensed beds
during the applicable period.
(j) Represents applicable net patient service revenue divided by the average
daily census of patients generating such revenue. Three month information
presented on an annualized basis.
(k) Private payors includes indemnity insurers, health maintenance
organizations, employers, individuals and other non-governmental payors, and
for payor mix, payments from skilled nursing facilities for services
performed under rehabilitation management programs and revenue classified as
"other income."
(l) Three month information presented on an annualized basis.
(m) Represents aggregate revenue from rehabilitation programs with skilled
nursing facilities during the applicable period divided by the number of
such programs as of the end of the applicable period.
12
RISK FACTORS
The following risk factors should be considered carefully in addition to the
other information contained in this Prospectus in evaluating an investment
decision in the Exchange Notes. This Prospectus, including the information
incorporated by reference, contains forward looking statements. These statements
are subject to a number of risks and uncertainties, certain of which are beyond
the Company's control. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations."
LEVERAGE
As of March 31, 1996, on a pro forma basis, after giving effect to the
Recent Acquisitions and the sale of the Notes and the application of the
estimated net proceeds therefrom, the Company would have had approximately
$304.3 million of outstanding Indebtedness (not including Attributable Debt (as
defined) under operating leases), which would have represented 49.9% of total
capitalization (including current maturities). In addition, on such pro forma
basis, the Company would have had $177 million of availability under the Credit
Facility. The Company increased the size of the Credit Facility to $200 million
on April 30, 1996 and is currently negotiating an amendment to the Credit
Facility to further increase the size of the Credit Facility to $250 million and
further reduce the restrictions which the Credit Facility imposes on the
operations of the Company's business. Although the Company's cash flow from
operations has been sufficient to meet its debt service obligations in the past,
there can be no assurance that the Company's operating results will continue to
be sufficient for the Company to meet its obligations. The Company's ability to
comply with the terms of the Indenture and the Credit Facility, to make cash
payments with respect to the Exchange Notes and the Notes and under the Credit
Facility and to satisfy its other debt or to refinance any of such obligations
will depend on the future performance of the Company, which in turn, is subject
to prevailing economic conditions and financial and other factors beyond its
control. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources," "Description of the
Exchange Notes" and "Description of Other Indebtedness."
The degree to which the Company is leveraged could have important
consequences to the holders of the Exchange Notes, including the following: (i)
the Company's ability to obtain additional financing for acquisitions, capital
expenditures, working capital or general corporate purposes may be impaired in
the future; (ii) a substantial portion of the Company's cash flow from
operations must be dedicated to the payment of principal and interest on the
Exchange Notes and borrowings under the Credit Facility and other indebtedness,
thereby reducing the funds available to the Company for its operations and other
purposes; (iii) certain of the Company's borrowings are and will continue to be
at variable rates of interest, which exposes the Company to the risk of
increased interest rates; (iv) the indebtedness outstanding under the Credit
Facility is secured by the capital stock of the subsidiaries of the Company and
certain of the assets of the Company and its subsidiaries and will mature prior
to the maturity of the Exchange Notes or the Notes; and (v) the Company may be
substantially more leveraged than certain of its competitors, which may place
the Company at a relative competitive disadvantage and make the Company more
vulnerable to changing market conditions and regulations. See "Description of
the Exchange Notes" and "Description of Other Indebtedness."
SUBORDINATION
The Exchange Notes will be senior subordinated obligations of the Company
and, as such, will be subordinated in right of payment to all existing and
future Senior Indebtedness of the Company, including indebtedness under the
Credit Facility. The Exchange Notes will rank pari passu with all senior
subordinated indebtedness of the Company and will rank senior to all other
subordinated indebtedness of the Company. The Exchange Notes will also be
effectively subordinated to all existing and future liabilities of the Company's
subsidiaries. As of March 31, 1996, on a pro forma basis, after giving effect to
the Recent Acquisitions and the sale of the Notes and the application of the
estimated net proceeds therefrom, the aggregate amount of Senior Indebtedness of
the Company and indebtedness of the Company's subsidiaries (excluding
intercompany indebtedness) that would have effectively ranked senior to the
Exchange Notes would have been approximately $154.7 million. In addition, on
such pro forma basis, under the Indenture, the Company would have been permitted
to borrow up to an additional $177 million under the Credit Facility and,
provided certain tests are met, will be able to borrow additional Senior
Indebtedness. In the event of a bankruptcy, liquidation or reorganization of
13
the Company or in the event that any default in payment of, or the acceleration
of, any debt occurs, holders of Senior Indebtedness of the Company will be
entitled to payment in full from the proceeds of all assets of the Company prior
to any payment of such proceeds to holders of the Exchange Notes. In addition,
the Company may not make any principal or interest payments in respect of the
Exchange Notes if any payment default exists with respect to Senior Indebtedness
or any other default on Designated Senior Indebtedness (as defined in the
Indenture) occurs and the maturity of such indebtedness is accelerated, or in
certain circumstances prior to such acceleration for a specified period of time,
unless, in any case, such default has been cured or waived, any such
acceleration has been rescinded or such indebtedness has been repaid in full.
Consequently, there can be no assurance that the Company will have sufficient
funds remaining after such payments to make payments to the holders of the
Exchange Notes. See "Description of the Exchange Notes -- Ranking."
RESTRICTIONS IMPOSED BY INDEBTEDNESS
The Credit Facility contains a number of covenants that, among other things,
restrict the ability of the Company to incur additional indebtedness, pay
dividends, prepay subordinated indebtedness, dispose of certain assets, enter
into sale and leaseback transactions, create liens, make capital expenditures
and make certain investments or acquisitions and otherwise restrict corporate
activities. In addition, under the Credit Facility, the Company will be required
to satisfy specified financial covenants, including total indebtedness to cash
flow, fixed charge coverage ratio, current assets to current liabilities and
minimum net worth tests. The ability of the Company to comply with such
provisions may be affected by events beyond the Company's control. The breach of
any of these covenants could result in a default under the Credit Facility. In
the event of any such default, depending on the actions taken by the lenders
under the Credit Facility, the Company could be prohibited from making any
payments on the Exchange Notes. In addition, such lenders could elect to declare
all amounts borrowed under the Credit Facility, together with accrued interest,
to be due and payable. The Credit Facility is secured by the capital stock of
the Company's subsidiaries and certain other assets of the Company and its
subsidiaries, and if the Company were unable to repay borrowings under the
Credit Facility, the lenders under the Credit Facility (the "Banks") could
proceed against their collateral. If the Banks or the holders of any other
secured indebtedness were to foreclose on the collateral securing the Company's
obligations to them, it is possible that there would be insufficient assets
remaining after satisfaction in full of all such indebtedness to satisfy in full
the claims of the holders of the Exchange Notes. The Indenture subjects the
Company to certain restrictive covenants. In addition, the loan instruments
governing the indebtedness of certain of the Company's subsidiaries contain
certain restrictive covenants which limit the payment of dividends and
distributions, and the transfer of assets to, the Company and require such
subsidiaries to satisfy specific financial covenants. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources," "Description of the Exchange Notes" and
"Description of Other Indebtedness."
HOLDING COMPANY STRUCTURE
Substantially all of the Company's assets are held by its subsidiaries. As a
result, the Company's rights, and the rights of its creditors (including holders
of the Exchange Notes), to participate in the distribution of assets of any
subsidiary upon such subsidiary's liquidation or reorganization will be subject
to the prior claims of such subsidiary's creditors, except to the extent that
the Company is itself recognized as a creditor of such subsidiary, in which case
the claims of the Company would still be subject to the claims of any secured
creditor of such subsidiary and of any holder of indebtedness of such subsidiary
senior to that held by the Company. As of March 31, 1996, on a pro forma basis
after giving effect to the Recent Acquisitions and the sale of the Notes and the
application of the estimated net proceeds therefrom, the Company's subsidiaries
would have had approximately $131.7 million of indebtedness (excluding
intercompany indebtedness and indebtedness outstanding under the Credit Facility
which is guaranteed by the Company's subsidiaries) outstanding.
The Exchange Notes are obligations exclusively of the Company. The Exchange
Notes will not be guaranteed by any of the Company's subsidiaries. Since the
operations of the Company are currently conducted through subsidiaries, the
Company's cash flow and its ability to service its debt, including the Exchange
Notes, is dependent upon the earnings of its subsidiaries and distributions to
the Company. The subsidiaries are separate and distinct legal entities and have
no obligation, contingent or otherwise, to pay
14
amounts due pursuant to the Exchange Notes or to make any funds available
therefor. In addition, all of the Company's subsidiaries have guaranteed the
obligations of the Company under the Credit Facility. Moreover, the payment of
dividends and the making of loan advances to the Company by its subsidiaries are
contingent upon the earnings of those subsidiaries and are subject to various
business considerations and, for certain subsidiaries, restrictive loan
covenants contained in the instruments governing the indebtedness of such
subsidiaries, including covenants which restrict in certain circumstances the
payment of dividends and distributions and the transfer of assets to the
Company. See "Description of Other Indebtedness."
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS
Mariner derives a significant portion of its revenue from the Medicaid and
Medicare programs. In the years ended December 31, 1993, 1994 and 1995 and the
three months ended March 31, 1996, the Company derived 22%, 20%, 21% and 24%,
respectively, of its revenue from Medicaid programs and 23%, 26%, 29% and 37%,
respectively, of its revenues from the Medicare program. These programs are
subject to retroactive rate adjustments, administrative rulings and government
funding restrictions, all of which may decrease the level of program
reimbursements to the Company. Funds received by the Company from the Medicare
and Medicaid programs are subject to audit which can result in the Company
having to refund overpayments. See "Business -- Sources of Revenue -- Audits,
Settlements and Reserves." In addition, there can be no assurance that
facilities owned, leased or managed by Mariner now or in the future that
participate in the Medicare and Medicaid programs will initially meet or
continue to meet the requirements for participation in the Medicare and Medicaid
programs. Legislation and regulations have been proposed on the federal and
state levels that would have the effect of materially limiting or reducing
reimbursement levels for the Company's programs and services. Mariner cannot
predict whether any of these proposals will be adopted or, if adopted, the
effect (if any) such proposals will have on the Company.
In April 1995, the Health Care Financing Administration ("HCFA"), the federal
agency responsible for administering the Medicare program, issued a memorandum
to its Medicare fiscal intermediaries as a guideline to assess costs incurred by
inpatient providers relating to payment of occupational and speech language
pathology services furnished under arrangements that include contracts between
therapy providers and inpatient providers. While not binding on the fiscal
intermediaries, the memorandum suggested certain rates to assist the fiscal
intermediaries in making annual "prudent buyer" assessments of speech and
occupational therapy rates paid by inpatient providers. In addition, HCFA
through its intermediaries is subjecting physical therapy, occupational therapy
and speech therapy to a heightened level of scrutiny resulting in increasing
audit activity. A majority of Mariner's provider and rehabilitation contracts
provide for indemnification of the facilities for potential liabilities in
connection with Rehabilitation Services. In light of the uncertainty regarding
health care reform, Mariner cannot now determine whether HCFA will continue to
recommend the rates suggested in the memorandum or whether such rates will be
used by HCFA as a basis for developing a salary equivalency based reimbursement
system for speech and occupational therapy services. The Company's gross margins
for its physical therapy services under Medicare's salary equivalency guidelines
are significantly less than for its speech and occupational therapy services
which are currently reimbursed by Medicare under the prudent buyer standard.
There can be no assurance that actions ultimately taken by HCFA with regard to
reimbursement rates for such therapy services will not materially adversely
affect the Company's results of operations. See "Business -- Sources of
Revenue."
In addition to reducing revenue from federal and state payors, the
imposition of more stringent reimbursement guidelines or a decrease in the level
of Medicare or Medicaid reimbursement for these services could adversely affect
the ability of skilled nursing facilities or other health care providers that
depend on Medicare or Medicaid reimbursement to pay the Company for
rehabilitation program management services and may cause such facilities to
reduce the rates that they are willing to pay the Company for such services. Any
significant decrease in Medicare or Medicaid reimbursement levels, or the
imposition of significant restrictions on participation in Medicare or Medicaid
programs, could have a material adverse effect on the Company. Certain states in
which Mariner operates have undertaken a study of acuity levels and are
considering changes in their reimbursement systems to take levels of acuity into
account. Accordingly, there can be no assurance that the rates paid to Mariner
by Medicare, Medicaid, private payors or by skilled nursing facilities under
rehabilitation management programs will
15
continue to be adequate to reimburse the Company for the costs of providing
services to covered beneficiaries. Mariner has also agreed under certain of its
contracts with private payors (and intends to continue to agree as part of its
business strategy) to provide certain health care services to covered patients
on a case rate or capitated basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Sources of
Revenue."
HEALTH CARE REFORM
Current political, economic and regulatory influences are likely to lead to
fundamental changes in the health care industry in the United States. Numerous
proposals for comprehensive reform of the nation's health care system have been
introduced over the past year in Congress. Many potential approaches are under
consideration, including controls on health care spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending and other fundamental changes to the health care delivery system. In
addition, some of the states in which the Company operates are considering or
have adopted various health care reform proposals and are considering reductions
in their state Medicaid budgets. Mariner anticipates that Congress and state
legislatures will continue to review and assess alternative health care delivery
systems and payment methodologies and that public debate of these issues will
likely continue in the future. Due to uncertainties regarding the ultimate
features of reform initiatives and their enactment and implementation, the
Company cannot predict which, if any, of such reform proposals will be adopted,
when they may be adopted or what impact they may have on the Company. In
addition, the cost and service considerations which have generated proposals for
health care reform have also resulted in, and are expected to continue to result
in, strategic realignments and combinations in the health care industry which
may, over time, have a significant impact on the Company's strategic direction
and operating results. There can be no assurance that future legislation, health
care or budgetary, or other changes in the administration or interpretation of
governmental health care programs will not materially adversely affect the
results of operations of Mariner. Concern about the potential effects of the
proposed reform measures have contributed to the volatility of prices in
securities of companies in health care and related industries, including the
Company, and may similarly affect the price of the Exchange Notes in the future.
In November 1995, Congress passed the 1995 Balanced Budget Act providing
for, among other things, the reshaping of the Medicare and Medicaid programs and
a proposal to provide funds in the form of block grants to the states to
administer the Medicaid program and certain other existing programs for the
elderly. In December 1995, President Clinton vetoed the 1995 Balanced Budget Act
and proposed alternative Medicare and Medicaid legislation. Each of the
legislative proposals offered by the President and Congress provides for
significant reductions in the overall rate of Medicare and Medicaid spending
growth. In addition to the foregoing, the National Governors Association has
issued a proposal which would allow states the option to reduce or eliminate
benefits to the "medically needy" and other changes to the Medicaid system.
There is active discussion concerning the foregoing and the balancing of the
federal and state budgets, and the form of any final legislation signed into law
could differ significantly from current proposals.
Aspects of certain of the health care proposals, such as reductions in
funding of the Medicare and Medicaid programs, potential changes in
reimbursement regulations by HCFA for contract therapy, containment of health
care costs, proposals to reimburse health care providers on a basis not linked
to costs on an interim basis that could include a short-term freeze on prices
charged by health care providers and greater state flexibility in the
administration of Medicaid could materially adversely affect the Company.
UNCERTAINTY OF REGULATION
The Company and the health care industry generally are subject to extensive
federal, state and local regulation governing licensure and conduct of
operations at existing facilities, construction of new facilities, acquisition
of existing facilities, addition of new services, certain capital expenditures,
reimbursement for services rendered and disposal of medical waste. Changes in
applicable laws and regulations or new interpretations of existing laws and
regulations could have a material adverse effect on licensure, eligibility for
participation, permissible activities, operating costs and the levels of
reimbursement from governmental and other sources. There can be no assurance
that regulatory authorities will not adopt changes or new interpretations of
existing regulations that could adversely affect the Company. The failure to
maintain or renew any required regulatory approvals or licenses
16
could prevent the Company from offering existing services or from obtaining
reimbursement. In certain circumstances, failure to comply at one facility may
affect the ability of the Company to obtain or maintain licenses or approvals
under Medicare and Medicaid programs at other facilities.
Recently effective provisions of the regulations adopted under the Omnibus
Budget Reconciliation Act of 1987 ("OBRA") have expanded remedies available to
HCFA to enforce compliance with the detailed regulations mandating minimum
health care standards and may significantly affect the consequences to the
Company if annual or other facility surveys identify noncompliance with these
regulations. Remedies include fines, new patient admission moratoriums, denial
of reimbursement, federal or state monitoring of operations, closure of
facilities and termination of provider reimbursement agreements. In the ordinary
course of its business, the Company receives notices from time to time of
deficiencies for failure to comply with various regulatory requirements.
Although the Company reviews such notices and takes appropriate corrective
action, there can be no assurance that the Company's facilities will be able to
remedy the deficiencies in all situations or remain continuously in compliance
with regulatory requirements. Adverse actions against a facility by applicable
regulatory agencies may adversely affect the facility's ability to continue to
operate, the ability of the Company to provide certain services, and the
facility's eligibility to participate in the Medicare or Medicaid programs.
These actions may adversely affect the Company's business and results of
operations. Two of the Company's facilities have received notice that, if
certain alleged deficiencies are not remedied in a timely manner, the agency
will decertify the facility from participation in the Medicare and Medicaid
programs. The Company currently intends to take all reasonable actions necessary
to remedy such deficiencies in a timely manner. In this regard, with respect to
one of such facilities, the Company has retained independent third parties to
assist in evaluating and remedying the deficiencies and to assist in managing
the facility. There can be no assurances that the Company will be able to remedy
the deficiencies cited in a manner satisfactory to, and the time specified by,
the regulatory agencies.
The Company is also subject to federal and state laws which govern financial
and other arrangements between health care providers. These laws often prohibit
certain direct and indirect payments or fee-splitting arrangements between
health care providers that are designed to induce or encourage the referral of
patients to, or the recommendation of, a particular provider for medical
products and services. These laws include the federal "Stark legislations" which
prohibit, with limited exceptions, physician ownership of ancillary service
providers and the federal "anti-kickback law" which prohibits, among other
things, the offer, payment, solicitation, or receipt of any form of remuneration
in return for the referral of Medicare and Medicaid patients. The Office of the
Inspector General of the Department of Health and Human Services, the Department
of Justice and other federal agencies interpret these fraud and abuse provisions
liberally and enforce them aggressively. Members of the House and Senate have
proposed legislation that would significantly expand the federal government's
involvement in curtailing fraud and abuse and increase the monetary penalties
for violation of these provisions. In addition, some states restrict certain
business relationships between physicians and other providers of health care
services. Many states prohibit business corporations from providing, or holding
themselves out as a provider of, medical care. Possible sanctions for violation
of any of these restrictions or prohibitions include loss of licensure or
eligibility to participate in reimbursement programs (including Medicare and
Medicaid), asset forfeitures and civil and criminal penalties. These laws vary
from state to state, are often vague and have seldom been interpreted by the
courts or regulatory agencies. From time to time, the Company has sought
guidance as to the interpretation of these laws; however, there can be no
assurance that such laws will ultimately be interpreted in a manner consistent
with the practices of the Company. See "Business -- Government Regulation."
Many states have adopted certificate of need or similar laws which generally
require that the appropriate state agency approve certain acquisitions or
capital expenditures in excess of defined levels and determine that a need
exists for certain new bed additions, new services, and the acquisition of such
medical equipment or capital expenditures or other changes prior to beds and/or
services being added. Many states have placed a moratorium on granting
additional certificates of need or otherwise stated their intent not to grant
approval for new beds. To the extent certificates of need or other similar
approvals are required for expansion of Company operations, either through
facility acquisitions or expansion or provision of new services or other
changes, such expansion could be adversely affected by the failure or inability
to obtain the necessary approvals, changes in the standards applicable to such
approvals and possible delays the expenses associated with obtaining such
approvals.
17
The Company's pharmacy business is also subject to inspection by state
agencies regarding record keeping, inventory control and other aspects of the
pharmacy business.
The Company is unable to predict the future course of federal, state and
local regulation or legislation, including Medicare and Medicaid statutes and
regulations. Further changes in the regulatory framework could have a material
adverse effect on the financial results of the Company's operations.
EXPANSION RISKS AND IMPACT ON FUTURE OPERATING RESULTS
Mariner's strategy includes expanding by establishing or acquiring
additional freestanding subacute care facilities and managing subacute care
units within general acute care hospitals. As part of its strategy, the Company
may acquire businesses that operate one or more freestanding inpatient
facilities or rehabilitation, pharmacy, home care, medical equipment and other
health care businesses. There is significant competition for acquisition and
expansion opportunities in the Company's businesses. As this competition
intensifies due to ongoing consolidation in the health care industry, the costs
of capitalizing on such opportunities may increase. Mariner competes for
acquisition and expansion opportunities with companies that have significantly
greater financial and management resources. There can be no assurance that the
Company will be able to compete successfully for these opportunities, operate
the acquired businesses profitably or otherwise implement successfully its
expansion strategy. Mariner's expansion will depend on its ability to create
demand in new markets for its clinical programs and to staff new facilities and
rehabilitation management programs, as well as on the availability of facilities
for acquisition or management. Such expansion and growth place significant
demands on the Company's financial and management resources. If Mariner is
unable to manage its growth effectively, the quality of its services, its
ability to recruit and retain key personnel and its results of operations could
be materially and adversely affected.
An acquired facility may contain an existing patient population and,
consequently, a significant length of time may be required before such patient
population changes sufficiently to require a level of care, and to have a length
of stay, comparable to that provided in the Company's existing facilities.
During this conversion period, Mariner would generally expect to realize lower
reimbursement rates for these existing patients than could otherwise be obtained
for new patients. If the Company acquires a business that operates multiple
facilities, the time required to convert the acquired facilities may be longer
than that required to convert individual facilities. As a result, the expected
lower reimbursement rates could persist for a longer period, having a material
adverse effect on the Company's operating results. Further, the effort required
to make such newly acquired facilities more comparable to the Company's existing
facilities may place significant demands on Mariner's financial and management
resources.
The Company may also open new freestanding inpatient facilities, which
typically have low initial occupancy rates. Because newly opened facilities
require a basic complement of staff on the day the facility opens regardless of
the patient census, these facilities initially generate significant operating
losses.
As a result of these factors, as well as expansion into new markets and the
addition of ancillary services, Mariner could experience significant
fluctuations in operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DIFFICULTY OF INTEGRATING RECENT ACQUISITIONS
The successful integration of the businesses Mariner acquires is important
to the Company's future financial performance. The anticipated benefits from any
of these acquisitions may not be achieved unless the operations of the acquired
businesses are successfully combined with those of the Company in a timely
manner. The integration of the Company's recent acquisitions will require
substantial attention from management. The diversion of the attention of
management, and any difficulties encountered in the transition process, could
have a material adverse effect on Mariner's revenue and operating results. In
addition, the process of integrating the various businesses could cause the
interruption of, or a loss of momentum in, the activities of some or all of
these businesses, which could have a material adverse effect on the Company's
operations and financial results. There can be no assurance that Mariner will
realize any of the anticipated benefits from these acquisitions.
18
DEPENDENCE ON KEY PERSONNEL; DEMAND FOR PERSONNEL
Mariner believes that it has benefited substantially from the leadership and
experience of its executive officers and members of its management team. If such
executive officers were to leave the Company, the Company's business and results
of operations could be materially adversely affected. Further, the Company's
growth strategy is dependent in large part on its ability to attract and retain
management, marketing and other personnel at its facilities. From time to time,
there have been shortages in the supply of available registered nurses and
various types of therapists. Mariner's ability to provide rehabilitation
services is dependent on its ability to recruit and retain licensed therapists.
The Company competes with general acute care hospitals, skilled nursing
facilities, rehabilitation hospitals, contract rehabilitation companies and
other health care providers for the services of physicians, registered nurses,
therapists and other professional personnel. There can be no assurance that the
Company will be able to attract and retain the qualified personnel necessary for
its business and planned growth. The loss of a significant number of members of
the Company's management team, or the failure to attract or retain the qualified
personnel necessary for its business and planned growth, could have a material
adverse effect on the Company's business and results of operations. See
"Business -Employees" and "Management."
COMPETITION
The health care industry is highly competitive. Mariner competes with
general acute care hospitals, skilled nursing facilities, rehabilitation
hospitals, contract rehabilitation companies and other health care providers.
Many of the Company's competitors have underutilized facilities and are
expanding into subacute care by converting some of their facilities into
subacute units. In particular, a number of nursing care facilities and acute
care hospitals are adding subacute units. The Company's facilities generally
operate in communities that are also served by competing facilities, some of
which may be newer or offer more programs. Many of these competitors have
significantly greater resources than the Company and are affiliated with
institutions or chains that are larger and have greater access to capital than
the Company or operate on a non-profit or charitable basis. Cost containment
efforts, which encourage more efficient utilization of hospital services, have
resulted in decreased hospital occupancy in recent years. These cost containment
efforts, as well as the prospect of health care reform, have also caused many
health care providers to combine with other health care providers to achieve
greater efficiencies and to reduce costs. The Company expects this trend, which
may increase competition in its markets, to continue. See "Business --
Competition."
DEPENDENCE ON CONTRACT RENEWALS
The Company provides rehabilitation program services pursuant to contracts
with skilled nursing facilities and other parties. These contracts are generally
for terms of one year and cancelable on 30 to 90 days' notice by either party.
Although the number of rehabilitation contracts with skilled nursing facilities
has increased from 407 as of December 31, 1993 to 413 as of March 31, 1996, each
year a number of contracts have been cancelled or not renewed by the Company or
its clients. The decision by a significant number of Mariner's skilled nursing
facility clients to cancel or not renew these contracts could have a material
adverse effect on the Company's results of operations. See "Business -- Mariner
Clinical Programs and Services."
ABSENCE OF PUBLIC MARKET
The Notes currently are owned by a relatively small number of beneficial
owners. The Notes have not been registered under the Securities Act and will
continue to be subject to restrictions on transferability to the extent that
they are not exchanged for the Exchange Notes. The Exchange Notes will
constitute a new issue of securities with no established trading market.
Although the Exchange Notes generally will be permitted to be resold or
otherwise transferred by the holders (who are not affiliates of the Company)
without compliance with the registration requirements under the Securities Act,
the Company does not intend to list the Exchange Notes on any national
securities exchange or to seek the admission thereof to trading on any automated
quotation system. If the Notes or, if issued, the Exchange Notes, are traded
after their initial issuance, they may trade at a discount from their initial
offering
19
price, depending upon prevailing interest rates, the market for similar
securities, the performance of the Company and certain other factors. The
Company has been advised by the Initial Purchasers that they intend to make a
market in the Exchange Notes, as permitted by applicable laws and regulations;
however, the Initial Purchasers are not obligated to do so and any such market
making activities may be discontinued at any time without notice. In addition,
such market-making activity will be subject to the limits imposed by the
Securities Act and the Exchange Act and may be limited during the Exchange
Offer. Accordingly, no assurance can be given that an active public or other
market will develop for the Exchange Notes or as to the liquidity of or the
trading market for the Exchange Notes. Pursuant to the Registration Rights
Agreement, Mariner is required to consummate the Exchange Offer for the Notes or
file the Shelf Registration Statement covering resales of the Notes within 120
days following the original issue of the Notes. Until Mariner performs its
obligations under the Registration Rights Agreement, the Notes may only be
offered or sold pursuant to an exemption from the registration requirements of
the Securities Act and applicable state securities laws or pursuant to an
effective registration statement under the Securities Act and applicable state
securities laws
EXCHANGE OFFER PROCEDURES
Issuance of Exchange Notes in exchange for Notes pursuant to the Exchange
Offer will be made only after a timely receipt by the Company of such Notes, a
properly completed and duly executed Letter of Transmittal and all other
required documents. Therefore, holders of the Notes desiring to tender such
Notes in exchange for Exchange Notes should allow sufficient time to ensure
timely delivery. The Company is under no duty to give notification of defects or
irregularities with respect to the tenders of Notes for exchange. Notes that are
not tendered or are tendered but not accepted will, following the consummation
of the Exchange Offer, continue to be subject to the existing restrictions upon
transfer thereof and, upon consummation of the Exchange Offer, the registration
rights under the Registration Rights Agreement will terminate. In addition, any
holder of Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Notes, where such Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See "Plan of Distribution."
To the extent that Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Notes could be
adversely affected. See "-- Consequences of the Exchange Offer on Non-Tendering
Holders of the Notes."
CONSEQUENCES OF THE EXCHANGE OFFER ON NON-TENDERING HOLDERS OF THE NOTES
The Company intends for the Exchange Offer to satisfy its registration
obligations under the Registration Rights Agreement. If the Exchange Offer is
consummated, the Company does not intend to file further registration statements
for the sale or other disposition of Notes. Consequently, following completion
of the Exchange Offer, holders of Notes seeking liquidity in their investment
would have to rely on an exemption from the registration requirements under
applicable securities laws, including the Securities Act, with respect to any
sale or other disposition of the Notes
CONTROL BY SIGNIFICANT STOCKHOLDERS
As of March 1, 1996 and based on their most recent filings with the
Commission on Schedule 13D, one stockholder group (the former owners of CSI)
reported beneficial ownership of 22.9% of the Company's Common Stock. As a
result of such holding and one seat on the board of directors, this stockholder
group may have the ability to exert significant influence over the outcome of
all matters submitted to the Company's stockholders for approval, including the
election of directors.
20
THE COMPANY
The Company's executive offices are located at 125 Eugene O'Neill Drive, New
London, Connecticut 06320. The Company's telephone number at such address is
(860) 701-2000.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the Exchange Offer.
From the net proceeds from the sale of the Notes of approximately $144.5
million, $131.0 million (including interest and certain other fees) was used to
repay all outstanding indebtedness under the Credit Facility and the remainder
was used to pay a portion of the purchase price for the 1996 Florida
Acquisition. The outstanding indebtedness under the Credit Facility matures on
April 30, 1999 and as of May 1, 1996 bore interest at a weighted average rate of
interest of approximately 6.97% per annum. Of the borrowings under the Credit
Facility repaid with a portion of the net proceeds from the sale of the Notes,
approximately $48.0 million were used to finance a portion of the consideration
paid in the CSI Merger, approximately $29.0 million were used to finance the
Heritage Acquisition, approximately $14.0 million were used to pay off debt in
connection with the MedRehab Merger, approximately $1.5 million were used in
connection with the acquisition of a primary care physician organization in the
Orlando, Florida area and approximately $1.5 million were used to finance a
deposit made by the Company in connection with the 1996 Florida Acquisition. The
Company currently has the ability to borrow up to approximately an additional
$177 million under the Credit Facility, subject to certain covenants and
restrictions. See "Prospectus Summary -- Recent Developments" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
21
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996, the pro forma capitalization of the Company to give effect to the
Recent Acquisitions (see "Prospectus Summary -- Recent Developments" and
"Unaudited Pro Forma Combined Financial Statements"), and the pro forma
capitalization as adjusted to give effect to the receipt and application by the
Company of the net proceeds of the Notes and the issuance of the Exchange Notes
pursuant to the Exchange Offer:
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
PRO FORMA
ACTUAL PRO FORMA (A) AS ADJUSTED (A)(B)
------ ------------- ------------------
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C>
Current maturities oflong-term debt and
capital lease obligations ............................ $ 5,359 $ 6,064 $ 5,860
========= ========= =========
Long-term debt (less current portion):
Credit Facility ..................................... $ 130,481 $ 153,481 $ 23,000
Exchange Notes and Notes, if any .................... -- -- 149,666
Capital lease obligations ........................... 70,503 70,503 70,503
Mortgage loans ...................................... 25,062 46,211 42,050
Other ............................................... 13,256 15,658 13,256
------ ------ ------
Total long-term debt ............................ 239,302 285,853 298,475
Stockholders' equity:
Preferred Stock, $.01 par value;
1,000,000 shares authorized;
none issued ....................................... -- -- --
Common Stock, $.01 par value;
50,000,000 shares authorized,
22,540,008 shares issued
and outstanding ................................... 285 285 285
Additional paid-in capital .......................... 307,691 307,691 307,691
Unearned compensation ............................... (13) (13) (13)
Accumulated deficit.................................. (2,433) (2,433) (2,433)
------ ------ ------
Total stockholders' equity ..................... 305,530 305,530 305,530
------- ------- -------
Total capitalization ......................... $ 544,832 $ 591,383 $ 604,005
========= ========= =========
</TABLE>
- ----------
(a) Pro forma to give effect to the Recent Acquisitions.
(b) Adjusted for the sale of the Notes and the issuance of the Exchange Notes
pursuant to the Exchange Offer and the application of the net proceeds
therefrom.
22
EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Notes were originally sold by the Company on April 4, 1996 to the
Initial Purchasers pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Notes to qualified institutional buyers in reliance on
Rule 144A under the Securities Act and to a limited number of institutional
accredited investors that agreed to comply with certain transfer restrictions
and other conditions. As a condition to the closing under the Purchase
Agreement, the Company entered into the Registration Rights Agreement with the
Initial Purchasers, pursuant to which the Company agreed, for the benefit of the
holders of the Notes, at the Company's cost, among other things, to (i) prepare
and, as soon as practicable but not later than 30 days after the original
issuance of the Notes a registration statement on Form S-4 (the "Exchange Offer
Registration Statement," which term shall encompass all amendments, exhibits,
annexes and schedules thereto and of which this Prospectus is a part), (ii) use
its best efforts to cause to become effective within 90 days, of the date of the
original issuance of the Notes, the Exchange Offer Registration Statement, and
(iii) use its best efforts to cause the Exchange Offer to be consummated within
120 days of the original issuance of the Notes. Promptly after the Exchange
Offer Registration Statement has been declared effective, the Company will offer
the Exchange Notes in exchange for the Notes.
The Company will keep the Exchange Offer open until the Expiration Date. For
each Note validly tendered to the Company pursuant to the Exchange Offer and not
withdrawn by the holder thereof, the holder of such Note will receive an
Exchange Note having a principal amount equal to that of the tendered Note.
Interest on each Exchange Note will accrue from the last interest payment date
on which interest was paid on the tendered Note in exchange therefor or, if no
interest has been paid on such Note, from the date of the original issuance of
the Note.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the Exchange Notes will in general
be freely tradable after the Exchange Offer without further registration under
the Securities Act. However, any purchaser of Notes who is an "affiliate" of the
Company or who intends to participate in the Exchange Offer for the purpose of
distributing the Exchange Notes (i) will not be able to rely on such
interpretations of the staff of the Commission, (ii) will not be able to tender
its Notes in the Exchange Offer and (iii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or transfer of the Notes, unless such sale or transfer is made pursuant to
an exemption from such requirements.
Each holder of the Notes who wishes to exchange Notes for Exchange Notes in
the Exchange Offer will be required to make certain representations, including
that (i) it is neither an affiliate of the Company nor a broker-dealer tendering
Notes acquired directly from the Company for its own account, (ii) any Exchange
Notes to be received by it will be acquired in the ordinary course of its
business and (iii) at the time of commencement of the Exchange Offer, it has no
arrangement with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes. Each holder of the Notes
who is not a broker-dealer will be required to represent that it is not engaged
in and does not intend to engage in a distribution of the Exchange Notes. In
addition, in connection with any resales of Exchange Notes, any broker-dealer (a
"Participating Broker-Dealer") who acquired the Notes for its own account as a
result of market-making activities or other trading activities must deliver a
prospectus meeting the requirements of the Securities Act. The Commission has
taken the position that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to the Exchange Notes (other than
a resale of an unsold allotment from the original sale of the Notes) with the
prospectus contained in the Exchange Offer Registration Statement, as it may be
amended or supplemented from time to time.
In the event that any changes in law or the applicable interpretations of
the staff of the Commission do not permit the Company to effect the Exchange
Offer or if the Exchange Offer Registration Statement is not declared effective
within 90 days or consummated within 120 days following the original issue of
the Notes, or upon the request of any of the Initial Purchasers or if any holder
of the Notes is not permitted by applicable law to participate in the Exchange
Offer or elects to participate in the Exchange Offer but does not receive fully
tradable Exchange Notes pursuant to the Exchange Offer, the Company will use its
best efforts to cause a shelf registration statement with respect to the resale
of the Notes (the "Shelf Registration Statement") to become effective as soon as
practicable after
23
being required to file the Shelf Registration Statement and to keep the Shelf
Registration Statement effective for up to three years (or one year in the case
of a request by an Initial Purchaser) from the date the Shelf Registration
Statement is declared effective by the Commission. In the event that (i) the
Exchange Offer Registration Statement is not filed with the Commission on or
prior to the 30th day following the date of the original issue of the Notes,
(ii) the Exchange Offer Registration Statement is not declared effective on or
prior to the 90th day following the date of original issue of the Notes, (iii)
the Exchange Offer is not consummated on or prior to the 120th day following the
date of the original issue of the Notes or (iv) a Shelf Registration Statement
which is required to be filed under the Registration Rights Agreement with
respect to the Notes is not declared effective by the later of (A) 120 days
following the date of original issue of the Notes or (B) if a Shelf Registration
Statement is required to be filed because of the request of an Initial
Purchaser, 30 days following the request by any such Initial Purchaser that the
Company file the Shelf Registration Statement (or 45 days in the event that the
Shelf Registration Statement is reviewed by the Commission), the interest rate
borne by the Notes (except in the case of clause (iv), in which case only the
Notes which have not been exchanged in the Exchange Offer) shall be increased by
one quarter of one percent per annum, which rate will be increased by an
additional one quarter of one percent per annum for each 90-day period that any
such additional interest continues to accrue; provided that the aggregate
increase in such interest rate may in no event exceed one percent. Upon (w) the
filing of the Exchange Offer Registration Statement in the case of clause (i)
above, (x) the effectiveness of the Exchange Offer Registration Statement in the
case of clause (ii) above, (y) the date of consummation of the Exchange Offer in
the case of clause (iii) above or (z) the effectiveness of this Shelf
Registration Statement in the case of clause (iv) above, the interest rate borne
by the Notes from the date of such filing, effectiveness or the date of such
consummation or effectiveness, as the case may be, will be reduced to the
original interest rate set forth on the cover of this Prospectus; provided,
however, that, if after any such reduction in interest rate, a different event
specified in clause (i), (ii), (iii) or (iv) above occurs, the interest rate
shall again be increased pursuant to the foregoing provisions.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available upon request to the Company and which is
incorporated by reference as an exhibit to this Exchange Offer Registration
Statement. See "Available Information."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of Exchange
Notes in exchange for each $1,000 principal amount of outstanding Notes accepted
in the Exchange Offer. Holders may tender some or all of their Notes pursuant to
the Exchange Offer. However, Notes may be tendered only in integral multiples of
$1,000. The Company has fixed the close of business on June , 1996 as the record
date for the Exchange Offer for purposes of determining the persons to whom this
Prospectus and the Letter of Transmittal will be mailed initially.
The form and terms of the Exchange Notes are the same as the form and terms
of the Notes (which they replace), except that as of the date hereof the
Exchange Notes have been registered under the Securities Act and, therefore,
will not bear legends restricting their transfer and will not contain certain
provisions included in the terms of the Notes relating to an increase in the
interest rate in certain circumstances relating to the timing of the Exchange
Offer. The holders of the Exchange Notes will not be entitled to certain rights
under the Registration Rights Agreement, which rights will terminate when the
Exchange Offer is consummated. The Exchange Notes will evidence the same debt as
the Notes and will be entitled to the benefits of the Indenture.
Holders of the Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder.
24
The Company shall be deemed to have accepted validly tendered Notes when, as
and if the Company has given written notice thereof to the Exchange Agent. The
Exchange Agent will act as agent for the tendering holders for the purpose of
receiving the Exchange Notes from the Company.
If any tendered Notes are not accepted for exchange because of an invalid
tender, the occurrence of certain other events set forth herein or otherwise,
the certificates for any such unaccepted Notes will be returned to the tendering
holder thereof, at the Company's expense, as promptly as practicable after the
Expiration Date.
Holders who tender Notes in the Exchange Offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of Notes pursuant to
the Exchange Offer. The Company will pay all charges and expenses, other than
transfer taxes in certain circumstances, in connection with the Exchange Offer.
See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on ,
1996, unless the Company in its sole discretion extends the Exchange Offer, in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by written notice prior to 9:00 a.m., New York City time,
on the next business day after the previously scheduled expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Notes, to extend the Exchange Offer or to terminate the Exchange
Offer if any of the conditions set forth below under "Conditions" shall not have
been satisfied, by giving written notice of such delay, extension or termination
to the Exchange Agent, or (ii) to amend the terms of the Exchange Offer in any
manner. Any such delay in acceptance, extension, termination or amendment will
be followed as promptly as practicable by written notice thereof to the
registered holders.
INTEREST ON THE EXCHANGE NOTES
Interest on each Exchange Note will accrue from the last date on which
interest was paid on the Notes surrendered in exchange therefor or, if no
interest has been paid on the Notes, from the date of original issuance of such
Note. No interest will be paid on the Notes accepted for exchange, and holders
of Notes whose Notes are accepted for exchange will be deemed to have waived the
right to receive any payment in respect of interest on the Notes accrued up to
the date of the issuance of the Exchange Notes. Holders of Notes whose Notes are
not exchanged will receive the accrued interest payable thereon on October 1,
1996, in accordance with the Indenture.
Interest on the Exchange Notes is payable semi-annually on each April 1 and
October 1, commencing on October 1, 1996.
PROCEDURES FOR TENDERING
Only a holder of Notes may tender such Notes in the Exchange Offer. To
tender in the Exchange Offer, a holder must complete, sign and date the Letter
of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed
if required by the Letter of Transmittal, and mail or otherwise deliver such
Letter of Transmittal or such facsimile, together with the Notes and any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. To be tendered effectively, the Notes, Letter of
Transmittal and other required documents must be completed and received by the
Exchange Agent at the address set forth below under "Exchange Agent" prior to
5:00 p.m., New York City time, on the Expiration Date. Delivery of the Notes may
be made by book-entry transfer in accordance with the procedures described
below. Confirmation of such book-entry transfer must be received by the Exchange
Agent prior to the Expiration Date.
25
By executing the Letter of Transmittal, each holder will make to the Company
the representations set forth above in the fourth paragraph under "Purpose and
Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute an agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK OF THE
HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO CONSIDER
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered holder promptly and instruct such registered
holder to tender on such beneficial owner's behalf. See "Instruction to
Registered Holder and/or Book-Entry Transfer Facility Participant from Owner"
included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or any other "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act that is a participant in the Securities Transfer
Agents Medallion Program, the New York Stock Exchange, Inc. Medallion Program or
the Stock Exchange Medallion Program (an "Eligible Institution"), unless the
Notes tendered pursuant thereto are tendered (i) by a registered holder who has
not completed the box entitled "Special Registration Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution. In the event that signatures on a Letter of Transmittal
or a notice of withdrawal, as the case may be, are required to be guaranteed,
such guarantee must be by an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the registered
holder of any Notes listed therein, such Notes must be endorsed or accompanied
by a properly completed bond power, signed by such registered holder as such
registered holder's name appears on such Notes with the signature thereon
guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and (except when Exchange Notes are
being issued to replace Notes registered in the same name) evidence satisfactory
to the Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Notes at the book-entry transfer facility, The Depository Trust Company (the
"Book-Entry Transfer Facility"), for the purpose of facilitating the Exchange
Offer, and subject to the establishment thereof, any financial institution that
is a participant in the Book-Entry Transfer Facility's system may make
book-entry delivery of Notes by causing such Book-Entry Transfer Facility to
transfer such Notes into the Exchange Agent's account with respect to the Notes
in accordance with the Book-Entry Transfer Facility's procedures for such
transfer. Although delivery of the Notes may be effected through book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility,
an appropriate Letter of Transmittal properly completed and duly executed with
any required signature guarantee and all other required documents must in each
case be transmitted to and received or confirmed by
26
the Exchange Agent at its address set forth below on or prior to the Expiration
Date, or, if the guaranteed delivery procedures described below are compiled
with, within the time period provided under such procedures. Delivery of
documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Notes and withdrawal of tendered Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Notes not properly tendered or any Notes the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right in its sole discretion to waive any defects, irregularities
or conditions of tender as to particular Notes. The Company's interpretation of
the terms and conditions of the Exchange Offer (including the instructions in
the Letter of Transmittal) will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Notes must
be cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Notes, neither the Company, the Exchange Agent nor any other person shall
incur any liability for failure to give such notification. Tenders of Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Notes and (i) whose Notes are not
immediately available, (ii) who cannot deliver their Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the Expiration
Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Notes and principal amount of Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within three New York
Stock Exchange trading days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof) together with the certificate(s)
representing the Notes (or a confirmation of book-entry transfer of such
Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof, as well as the certificate(s) representing all tendered
Notes in proper form for transfer (or a confirmation of book-entry transfer
of such Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and all other documents required by the Letter of Transmittal are
received by the Exchange Agent upon three New York Stock Exchange trading
days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
27
To withdraw a tender of Notes in the Exchange Offer, a telegram, telex,
facsimile transmission or letter must be received by the Exchange Agent at its
address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Notes to be withdrawn (the "Depositor"), (ii)
identify the Notes to be withdrawn (including the certificate number(s) and
principal amount of such delivered Notes, or, in the case of Notes transferred
by book-entry transfer, the name and number of the account at the Book-Entry
Transfer Facility to be credited and the transaction code number), (iii) state
that such Depositor is withdrawing its election to have the Notes exchanged and
specify the name in which any such Notes are to be registered, if different from
that of the Depositor and (iv) be signed by the holder in the same manner as the
original signature on the Letter of Transmittal by which such Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the Notes
register the transfer of such Notes into the name of the person withdrawing the
tender. All questions as to the validity, form and eligibility (including time
of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Notes so withdrawn
will be deemed not to have been validly tendered for purposes of the Exchange
Offer and no Exchange Notes will be issued with respect thereto unless the Notes
so withdrawn are validly retendered. Any Notes which have been tendered but
which are not accepted for exchange will be returned to the holder thereof
without cost to such holder as soon as practicable after withdrawal, rejection
of tender or termination of the Exchange Offer. Properly withdrawn Notes may be
retendered by following one of the procedures described above under "Procedures
for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Exchange Notes for, any Notes,
and may terminate or amend the Exchange Offer as provided herein before the
acceptance of such Notes, if:
(a) the Exchange Offer or the making of any exchange by a holder
of Notes violates applicable law or any applicable interpretation by
the staff of the Commission; or
(b) the due tendering of the Notes is in accordance with the
Exchange Offer;
(c) each holder of Notes to be exchanged in the Exchange Offer has not
represented that all Exchange Notes to be received by it shall be acquired
in the ordinary course of business and that at the time of the consummation
of the Exchange Offer it has no arrangement or understanding with any person
to participate in the distribution (within the meaning of the Securities
Act) of the Exchange Notes and has not made such other representations as
may be reasonably necessary under applicable Commission rules, regulations
or interpretations to render the use of the Exchange Offer Registration
Statement or other appropriate form under the Securities Act available; or
(d) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the judgment of the Company, would reasonably be expected to
impair the ability of the Company to proceed with the Exchange Offer.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Notes and return all
tendered Notes to the tendering holders, (ii) extend the Exchange Offer and
retain all Notes theretofore tendered in the Exchange Offer, subject, however,
to the rights of holders to withdraw such Notes (see "Withdrawal of Tenders") or
(iii) waive such unsatisfied conditions with respect to the Exchange Offer and
accept all properly tendered Notes which have not been withdrawn.
28
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
By Registered or Certified Mail:
State Street Bank and Trust Company
Corporate Trust Department
P.O. Box 778
Boston, MA 02102-0778
Attention: Decker Adams
By Overnight Mail or Hand:
State Street Bank and Trust Company
Corporate Trust Department
Two International Place -- Fourth Floor
Boston, MA 02110
Attention: Decker Adams
By Facsimile:
(617) 664-5365
Confirm: (617) 664-5610
Attention: Decker Adams
For general information contact the Exchange Agent's Bondholder Relations
Department at (617) 664-5750.
Delivery to an address other than as set forth above, or transmission of
instructions via a facsimile number other than the one set forth above, will not
constitute a valid delivery.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Notes,
which is face value, as reflected in the Company's accounting records on the
date of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company. The expenses of the Exchange Offer will be expensed
over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Notes that are not exchanged for Exchange Notes pursuant to the Exchange
Offer will remain outstanding and continue to accrue interest and will also
remain restricted securities. Accordingly, such Notes may be resold only (i) to
the Company, (ii) pursuant to a registration statement which has been declared
effective under the Securities Act, (iii) for so long as the Notes are eligible
for resale pursuant to Rule 144A under the Securities Act, to a person the
seller reasonably believes is a "qualified institutional buyer" within
29
the meaning of Rule 144A that purchases for its own account or for the account
of a qualified institutional buyer and to whom notice is given that the transfer
is being made in reliance on Rule 144A, (iv) pursuant to offers and sale to
non-U.S. persons that occur outside the United States within the meaning of
Regulation S under the Securities Act, (v) to an institutional "accredited
investor" within the meaning of subparagraphs (a)(1), (a)(2), (a)(3) or (a)(7)
of Rule 501 under the Securities Act that is acquiring the Notes for its own
account or for the account of such an institutional "accredited investor" for
investment purposes and not with a view to, or for offer or sale in connection
with, any distribution in violation of the Securities Act or (vi) pursuant to
any other available exemption from the registration requirements of the
Securities Act, in each case in accordance with any applicable securities laws
of any state of the United States and in accordance with the Indenture. Holders
of Notes not tendered in the Exchange Offer will not retain any rights under the
Registration Rights Agreement, except in limited circumstances.
RESALE OF THE EXCHANGE NOTES
With respect to resales of Exchange Notes, based on an interpretation by the
staff of the Commission set forth in no-action letters issued to third parties,
the Company believes that a holder or other person who receives Exchange Notes,
whether or not such person is the holder (other than a person that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act), who receives Exchange Notes in exchange for Notes in the ordinary course
of business and who is not participating, does not intend to participate, and
has no arrangement or understanding with a person to participate, in the
distribution of the Exchange Notes, will be allowed to resell the Exchange Notes
to the public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. However, if any holder
acquires Exchange Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the Exchange Notes, such holder cannot rely
on the position of the staff of the Commission enunciated in such no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each Participating Broker-Dealer that receives
Exchange Notes for its own account in exchange for Notes, where such Notes were
acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, judicial
authority and administrative rulings and practice. There can be no assurance
that the Internal Revenue Service (the "Service") will not take a contrary view,
and no ruling from the Service has been or will be sought. Legislative, judicial
or administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders. Certain holders (including insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United States)
may be subject to special rules not discussed below. The Company recommends that
each holder consult such holder's own tax advisor as to the particular tax
consequences of exchanging such holder's Notes for Exchange Notes, including the
applicability and effect of any state, local or foreign tax laws.
The exchange of the Notes for Exchange Notes pursuant to the Exchange Offer
should not be treated as an "exchange" for federal income tax purposes because
the Exchange Notes should not be considered to differ materially in kind or
extent from the Notes. Rather, the Exchange Notes received by a holder should be
treated as a continuation of the Notes in the hands of such holder. As a result,
there should be no federal income tax consequences to holders exchanging Notes
for Exchange Notes pursuant to the Exchange Offer.
30
SELECTED CONSOLIDATED FINANCIAL DATA (1)
The selected consolidated financial information presented below for each of the
five years ended December 31, 1995 has been derived from the Company's audited
consolidated financial statements. The selected consolidated financial
information presented below for the three months ended March 31, 1995 and 1996
has been derived from unaudited financial statements of the Company which
include, in the opinion of management, all adjustments necessary to present
fairly the quarterly selected financial information. The results for the three
months ended March 31, 1996 are not necessarily indicative of the results of
operations for the entire fiscal year or any other period. The selected
consolidated financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and the notes thereto and other
financial information appearing elsewhere or incorporated by reference in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- ---------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Net patient service revenue .......... $ 130,151 $ 169,132 $ 209,238 $ 260,357 $ 337,635 $ 79,339 $ 132,629
Other income ......................... 428 1,279 1,568 3,787 17,171 820 2,550
--- ----- ----- ----- ------ --- -----
Total operating revenue .............. 130,579 170,411 210,806 264,144 354,806 80,159 135,179
Operating expenses:
Facility operating costs(2) .......... 101,067 130,803 167,785 208,691 276,633 62,822 104,591
Corporate general and
administrative(3) .................. 14,111 17,961 34,902 30,935 39,830 6,548 17,227
Depreciation and amortization ........ 5,452 6,282 6,843 8,091 11,397 2,660 5,196
Interest expense, net ................ 10,356 10,113 7,379 1,819 3,598 279 4,392
Facility rent expense, net ........... 308 307 1,079 1,739 1,830 355 474
Write-off of development
costs(4) ........................... 445 -- -- -- -- -- --
Loss on abandonment of
projects ........................... 434 -- -- -- -- -- --
--- ----- ----- ----- ------ --- -----
Total operating expenses ............. 132,173 165,466 217,988 251,275 333,288 72,664 131,880
------- ------- ------- ------- ------- ------ -------
Operating income (loss) ................. (1,594) 4,945 (7,182) 12,869 21,518 7,495 3,299
Net gain (loss) on
sale of facilities .................... 286 415 364 932 (6) -- --
--- ----- ----- ----- ------ --- -----
Income (loss) beforeincome
taxes and extraordinary items ........ (1,308) 5,360 (6,818) 13,801 21,512 7,495 3,299
Net benefit from (provision for)
income taxes(5) ....................... 23 (1,634) (3,220) (5,848) (7,892) (2,876) (1,254)
-- -- ------ ------ ------ ------ ------ ------
Income (loss) from continuing
operations before extraordinary
items ................................. (1,285) 3,726 (10,038) 7,953 13,620 4,619 2,045
Extraordinary items ..................... (37) (439) (5,882) (86) (1,138) -- --
Loss from discontinued operations ....... (190) -- -- -- -- -- --
--- ----- ----- ----- ------ --- -----
Income (loss) from continuing
operations before cumulative
effect of a change in
accounting principle .................. (1,512) 3,287 (15,920) 7,867 12,482 4,619 2,045
Cumulative effect of a change in
accounting principle(5) ............... (391) -- -- -- -- -- --
--- ----- ----- ----- ------ --- -----
Net income (loss) ....................... $ (1,903) $ 3,287 $ (15,920) $ 7,867 $ 12,482 $ 4,619 $ 2,045
Income (loss) per common and
common equivalent shares:
Income (loss) from continuing
operations before
extraordinary items ................ $ (.23) $ .50 $ (.92) $ .41 $ .60 $ .20 $ .07
Extraordinary items .................. (.01) (.07) (.51) -- (.05) -- --
Cumulative effect of a change
in accounting principle ............ (.07) -- -- -- -- -- --
--- ----- ----- ----- ------ --- -----
Net income (loss) ................ $ (.34) $ .43 $ (1.43) $ .41 $ .55 $ .20 $ .07
========= ========= ========= ========= ========= ========= =========
Weighted average number of
shares outstanding .................. 5,862 5,917 11,608 19,251 22,755 22,677 29,235
</TABLE>
(continued on following page)
31
<TABLE>
<CAPTION>
DECEMBER 31,
------------
MARCH 31,
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ................................ $ 10,179 $ 25,205 $ 55,348 $ 71,217 $ 74,148 $ 71,252
Total assets ................................... 158,253 182,981 208,467 296,932 411,526 648,084
Long-term debt and capital
lease obligations, less
current portion .............................. 88,992 87,874 36,874 24,506 107,910 239,302
Subordinated debt .............................. 18,385 11,688 2,611 1,694 1,356 1,109
Convertible redeemable
preferred stock(6) ........................... 3,765 24,097 790 891 1,030 --
Nonconvertible redeemable preferred
stock(7) ..................................... -- 6,580 -- -- -- --
Total stockholders' equity ..................... 22,495 21,205 127,229 228,148 242,392 305,530
</TABLE>
- ------------
(1) On March 1, 1996, the Company completed the MedRehab Merger, which was
accounted for as a pooling of interests. Accordingly, the historical
financial statements of the Company for all periods presented give
retroactive effect to the MedRehab Merger.
(2) Includes $4,333,000 related to a significant change in business focus at the
Company's Baltimore facility in 1995. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(3) During 1993, the Company accrued costs totaling $15,457,000 related to
closing of certain rehabilitation operations in Florida, Texas, Illinois and
Wisconsin. Of this charge, approximately $11,185,000 related to the
write-down of goodwill, $575,000 related to the write-down of property and
equipment, $1,141,000 for severance, $1,659,000 for lease obligations,
$265,000 for allowance for doubtful accounts, $491,000 related to losses on
facilities to date of closing and $141,000 for other expenses.
During 1994, the Company recorded a charge of $9,327,000, of which
$7,952,000 relates to the merger with Pinnacle Care Corporation, which was
accounted for as a pooling of interests, and $1,375,000 relates to the
accelerated vesting of certain stock options. Of the merger costs,
approximately $4,627,000 was reserved for employee severance, payroll and
relocation, $2,878,000 was reserved for transaction costs including
investment bankers', legal and accounting fees, $172,000 was reserved for
customer relations, $150,000 for operations relocation, $66,000 for investor
relations and $59,000 was reserved for employee relations.
During 1995, the Company accrued costs totaling $8,073,000 related to the
CSI Merger and the consolidation of various regional and satellite offices
to the New London, Connecticut office. Of this total charge, approximately
$3,691,000 related to severance and related payroll costs and approximately
$4,382,000 related to expenses incurred to close the Company's regional
offices. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
During the first quarter of 1996, the Company recorded charges of $5,661,000
associated with the completion of the merger with MedRehab, Inc. and a one
time charge of $850,000 associated with the APS alliance. Of the $5,661,000
in merger charges, approximately $2,280,000 relates to severance and related
payroll charges, $1,061,000 relates to property write-downs, $1,143,000
relates to transaction costs, $682,000 relates to relocation costs, and
$495,000 relates to miscellaneous expenses.
(4) Represents assets related to three development facilities on which
construction was discontinued.
(5) The amount in 1991 represents the net deferred tax asset associated with the
implementation of Statement of Financial Accounting Standards No. 109, less
(i) the benefit relating to an extraordinary item and (ii) the current state
income tax provision.
(6) Converted into shares of Common Stock upon the closing of the Company's
initial public offering of its common stock, par value $.01 per share (the
"Common Stock").
(7) Redeemed during 1993.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Mariner's net patient service revenue is derived primarily from providing
inpatient health care services to subacute patients, rehabilitation programs in
skilled nursing facilities, outpatient rehabilitation services in freestanding
clinics and other post-acute medical services. The growth in Mariner's net
patient service revenue and operating profitability is attributable to two
principal factors: (i) the shift by the Company toward treatment of short-stay,
medically demanding subacute patients and away from less medically demanding
patients, and (ii) the addition of a variety of alternate sites and expansion of
post-acute health care services. Subacute patients typically require three to
six hours of skilled nursing care per day, in contrast to the more than six
hours of skilled nursing care per day required by acute care hospital patients
and the less than two hours of custodial nursing care per day required by
traditional nursing home residents. These subacute patients typically are
recuperating from a major injury, surgery or illness and, after a relatively
short transition period, generally are discharged to their homes. The Company's
clinical programs, including MarinerCare programs, have been designed for these
patients.
On March 1, 1996, the Company completed the MedRehab Merger. In the MedRehab
Merger, Mariner issued approximately 2,312,500 shares of Common Stock in
exchange for all of MedRehab's outstanding capital stock and rights to acquire
capital stock. This transaction was accounted for as a pooling of interests.
Accordingly, the historical financial statements of the Company for all periods
presented give retroactive effect to the MedRehab Merger.
Patient Focus. Mariner believes that short length of patient stay and high
bed turnover maximize net patient service revenue and operating margins. As
compared to less medically demanding patients, short-stay subacute patients
generally require more intense skilled nursing care and more rehabilitation,
pharmacy and other ancillary medical services. As a result of the Company's
ongoing shift to these short-stay subacute patients, the median length of stay
for patients discharged in the applicable period from facilities owned or leased
by the Company during the applicable period has decreased from 27 days in 1993
to 20 days in 1995. In the facilities the Company acquires, the Company intends
to focus on treating subacute patients and implementing appropriate MarinerCare
programs or other clinical programs. The bed turnover rate for the inpatient
facilities owned or leased by the Company during the applicable period has
increased from 2.3 times in 1993 to 2.7 times in 1995.
The shift in patient focus has also provided the Company with a more
attractive payor mix. Short-stay medical care is covered by a wider range of
payors, including indemnity insurers, health maintenance organizations,
employers, Medicare and Medicaid, while long-term (more than 100 days) medical
care typically is covered only by Medicaid. By continuing to emphasize
short-stay subacute patients, Mariner has increased the percentage of its
revenue generated from private payors (including indemnity insurers, health
maintenance organizations, employers and individuals) and Medicare.
Even among the Company's patients for whom Medicaid is the primary payor,
Mariner has focused increasingly on treating those patients with substantial
medical problems who require three or more hours of skilled nursing care per
day. Typically, Mariner is reimbursed by Medicaid at substantially higher rates
for these patients than for less medically demanding custodial care patients.
Primarily as a result of this shift, the net patient service revenue generated
by the Company's Medicaid patients increased from $33,690 per bed in 1993 to
$36,685 per bed in 1995.
Similarly, the Company's rehabilitation programs have been focused
increasingly on subacute patients in skilled nursing facilities who require
intensive rehabilitation therapy over a short period. The Company has actively
sought to provide rehabilitation services in skilled nursing facilities and to
deemphasize other treatment settings. As a result, the number of rehabilitation
programs with skilled nursing facilities has increased from 407 as of December
31, 1993 to 413 as of December 31, 1995, while the Company has terminated many
contracts with other parties. Revenue from private payors and reimbursement
under Medicare have also increased as a percentage of total revenue from these
programs.
33
In addition, the Company has expanded the range of post-acute health care
services it provides directly in selected local markets in an effort to treat
patients throughout their recovery. As a result, the Company receives revenues
from these services both during a patient's inpatient stay and after discharge.
As a result of these trends, Mariner's average revenue per occupied bed per
year increased from $51,243 in 1993 to $61,495 in 1995 and, on an annualized
basis, was $61,243 for the first three months of 1996. Revenue per
rehabilitation program increased from $181,983 in 1993 to $318,088 in 1995 and,
on an annualized basis, to $396,553 for the first three months of 1996. These
trends are illustrated in the following table:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------- MARCH 31,
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Inpatient Operations:
Licensed beds (1) ............................................... 2,326 3,114 7,685 8,705
Average occupancy rates ......................................... 91% 89% 88% 88%
Median length of stay (2) ....................................... 27 days 25 days 20 days 22 days
Bed turnover rate (3)(6) ........................................ 2.3x 2.6x 2.7x 2.4x
Revenue per occupied bed per year (4):
Private payors and Medicare (5) ............................. $ 80,648 $ 97,932 $101,863 $ 92,520
Medicaid .................................................... $ 33,690 $ 36,254 $ 36,685 $ 33,729
Company as a whole .......................................... $ 51,243 $ 60,126 $ 61,495 $ 61,243
Percentage of average daily census:
Private payors and Medicare (5) .............................. 38% 39% 38% 47%
Medicaid ...................................................... 62% 61% 62% 53%
Rehabilitation Operations (6):
Revenue per rehabilitation program per year (7) ................. $181,983 $234,800 $318,088 $396,553
Outpatient clinic visits ........................................ 346,631 297,699 272,423 57,800
Payor Mix (Company revenue as a whole):
Private payors and Medicare (5) ................................. 78% 80% 79% 76%
Medicaid ........................................................ 22% 20% 21% 24%
</TABLE>
- ----------
(1) As of the end of the applicable period. Includes managed inpatient
facilities and hospital based units.
(2) Based on those patients who were discharged during the applicable period
from facilities owned or leased by Mariner.
(3) Represents total discharges divided by average number of licensed beds
during the applicable period.
(4) Represents applicable net patient service revenue divided by the average
daily census of patients generating such revenue.
(5) Private payors includes indemnity insurers, health maintenance
organizations, employers, individuals and other non- governmental payors,
and for payor mix, payments from skilled nursing facilities for services
performed under rehabilitation management programs and revenue classified as
"other income."
(6) Three month information presented on an annualized basis.
(7) Represents aggregate revenue from rehabilitation programs with skilled
nursing facilities during the applicable period divided by the average
number of such programs as of the end of the applicable period.
34
Site Expansion. Mariner has expanded by acquiring, leasing and developing
freestanding inpatient facilities, by entering into arrangements to manage
hospital-based subacute units and to provide rehabilitation programs and by
expanding the other post-acute health care services it provides. The Company's
site expansion is illustrated in the following table:
<TABLE>
<CAPTION>
THREE MONTHS
DECEMBER 31, ENDED
------------ MARCH 31,
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sites of Service:
Owned and leased freestanding
inpatient facilities ................................... 19 26 33 57
Managed freestanding
inpatient facilities and
hospital- based units .................................. 9 5 29(1) 13(2)
Rehabilitation programs
with skilled nursing
facilities ............................................. 407 447 440 413
Outpatient clinics ....................................... 74 65 57 57
</TABLE>
- ----------
(1) Includes 23 skilled nursing facilities and one rehabilitation hospital with
an aggregate of 3,288 beds which became owned or leased by the Company on
January 2, 1996 upon completion of the CSI Merger, which are reflected as
managed on December 31, 1995. Also includes two other skilled nursing
facilities and one continuing care retirement community with an aggregate of
513 beds which continue to be managed by the Company after the completion of
the CSI Merger. See "Prospectus Summary -- Recent Developments."
(2) Includes seven skilled nursing facilities and one assisted living
facility with an aggregate of 960 beds which became owned or leased by
the Company on May 2, 1996 upon completion of the 1996 Florida
Acquisition, which are reflected as managed on March 31, 1996. See
"Prospectus Summary -- Recent Developments."
Mariner acquires established skilled nursing facilities and converts them
into facilities focusing increasingly on treating medically demanding subacute
patients. Historically, net patient revenue and operating margins from acquired
inpatient facilities have increased gradually over a period of years as
MarinerCare programs are implemented, and, as intensity of care and ancillary
service requirements increase, length of patient stay decreases and payor mix
improves. An acquired facility may contain an existing patient population, and
consequently a significant length of time may be required before such patient
population changes sufficiently to require a level of care, and to have a length
of stay, comparable to that experienced in the Company's existing facilities.
During this conversion period, Mariner would generally expect to realize lower
revenue for these existing patients than could otherwise be obtained for new
patients. Facilities undergoing conversion are expected to continue to generate
increased net patient service revenue and operating margins as they continue to
emphasize short-stay subacute patients.
Mariner also develops new freestanding inpatient facilities and renovates
acute care hospitals which are dedicated primarily to providing MarinerCare
programs and other services to subacute patients. Net patient service revenue
and operating margins typically increase gradually at newly opened facilities,
which have low initial occupancy rates. Because newly opened facilities require
a basic complement of staff on the day it opens regardless of patient census,
these facilities initially generate significant losses. As patient census
increases at a facility, margins improve, regardless of whether the patients are
subacute or medically less demanding. Margins typically increase at newly opened
facilities as patient and payor mix improve and ancillary service use increases.
These facilities generally have taken six to nine months before their revenues
have been sufficient to cover their operating costs, and nine to fifteen months
before they have contributed positively to the Company's net earnings. Leased
units have substantially the same operating characteristics as newly opened
facilities with less significant financing costs.
35
Managed freestanding inpatient facilities and hospital-based managed
subacute care units typically provide significantly higher profit margins with
substantially lower revenue than the Company's owned and leased facilities
because the host facility generally bears the related operating and capital
expenses while paying the Company a management fee. Unlike freestanding
inpatient facilities owned or leased by the Company, managed facilities and
units typically do not require significant start-up costs or capital outlays by
the Company.
The Company incurs start-up expenses for both new rehabilitation programs
and new outpatient rehabilitation clinics as therapists are hired and necessary
equipment is acquired. These programs and clinics typically become profitable
within six months of opening and generate positive cash flow in 12 to 18 months.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as a
percentage of total operating revenue for the three years ended December 31,
1993, 1994 and 1995 and the three months ended March 31, 1995 and 1996, and the
percentage changes in the dollar amounts of revenue and expenses for 1994 as
compared to 1993, and 1995 as compared to 1994 and the three months ended March
31, 1995 as compared to March 31, 1996.
<TABLE>
<CAPTION>
PERCENT OF REVENUE PERCENTAGE INCREASE (DECREASE)
------------------ ------------------------------
THREE MONTHS THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31, FISCAL FISCAL ENDED
----------------------- --------------- 1994 1995 1996
OVER OVER OVER
1993 1994 1995 1995 1996 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Net patient service revenue .................. 99.3% 98.6% 95.2% 99.0% 98.1% 24.4% 29.7% 67.2%
Other income ................................. .7 1.4 4.8 1.0 1.9 141.5 353.4 211.0
---- ----- ----- ----- -----
Total operating revenue ...................... 00.0% 100.0% 100.0% 100.0% 100.0% 25.3% 34.3% 68.6%
==== ===== ===== ===== =====
OPERATING AND ADMINISTRATIVE EXPENSES:
Facility operating costs (1) ................. 79.6% 79.0% 78.0% 78.4% 77.4% 24.4% 32.6% 66.5%
Corporate general and
administrative (2)(3)(4) ................... 16.6 11.7 11.2 8.2 12.7 (11.4) 28.8 163.1
Interest expense, net ........................ 3.5 .7 1.0 .3 3.2 (75.3) 97.8 1,474.2
Facility rent expense, net ................... .5 .7 .5 .4 .4 61.2 5.2 33.5
Depreciation and amortization ................ 3.2 3.1 3.2 3.3 3.8 18.2 40.9 95.3
---- ----- ----- ----- -----
Total operating expenses ..................... 103.4% 95.2% 93.9% 90.6% 97.5% 15.3% 32.6% 81.5
===== ===== ===== ===== =====
</TABLE>
- ----------
(1) Includes a charge related to a significant change in business focus at the
Company's Baltimore facility of 1.2% of total operating revenue for the year
ended December 31, 1995.
(2) Includes merger and other non-recurring costs amounting to 7.4% and 3.5% of
total operating revenue for the year ended December 31, 1993 and 1994,
respectively.
(3) Includes costs related to the CSI Merger and the consolidation of various
regional and satellite offices to the Company's New London, Connecticut
office amounting to 2.3% of total operating revenue for the year ended
December 31, 1995.
(4) Includes costs related to the MedRehab Merger and a onetime charge
associated with the APS alliance amounting to 4.8% of total operating
revenue for the three months ended March 31, 1996.
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
Revenue. Total operating revenues increased 69% from $80,159,000 during the
three months ended March 31, 1995 to $135,179,000 during the three months ended
March 31, 1996.
Net patient service revenue increased by approximately $53,290,000, or 67%,
from the first quarter of 1995 to the first quarter of 1996. Net patient service
revenue includes revenue from basic medical and ancillary services provided by
the Company, including rehabilitation, pharmacy and infusion therapy services
and the provision of medical equipment and supplies. The increase was primarily
the result of
36
the inclusion in 1996 of revenues from 31 facilities, two pharmacies and several
home health care agencies acquired after March 31, 1995, increased revenues per
rehabilitation site as well as continued improvements in payor mix at existing
facilities. The revenue increase was partially offset by reductions due to the
cancellation or non-renewal of contracts for certain rehabilitation programs.
Other income aggregated $2,550,000 during the quarter ended March 31, 1996.
These revenues were generated from the Company's management activities related
to subacute care units and facilities and consulting fees generated from
providing services to certain rehabilitation contract clients.
Facility Operating Costs. Facility operating costs consist primarily of
employee salaries, wages and benefits, food, ancillary supplies, pharmacy
supplies and plant operations. Most clinical staff and rehabilitation therapists
are paid an hourly wage. Salaries, wages and benefits as a percentage of
revenues are higher at newly opened facilities, which require a basic complement
of staff on the day the program opens regardless of the patient census, than at
continuing facilities. As the patient census increases and the payor mix
improves at its inpatient facilities, the Company has experienced decreases in
such expenses as a percent of revenues at those facilities. Various other types
of operating expenses, including medical supplies, pharmacy supplies,
nutritional support services and expenses associated with the provision of
ancillary services, vary more directly with patient census as well as general
rates of inflation.
Facility operating costs increased 67% from $62,822,000 in the first quarter
of 1995 to $104,591,000 in the first quarter of 1996. The increase was
principally the result of the inclusion of expenses for 31 facilities, two
pharmacies and several home health care companies purchased after March 31,
1995, as well as providing more ancillary medical services and adding therapists
and aides to service new rehabilitation programs. As a percentage of total
operating revenues, these costs were 78% and 77% in the first quarters of 1995
and 1996, respectively.
Corporate General and Administrative Expenses. Corporate general and
administrative expenses include the expenses of the Company's corporate office,
which provides marketing, financial and management services, and the expenses
associated with managing subacute care units and facilities. These expenses
increased 163% from $6,548,000 in the first quarter of 1995 to $17,227,000 in
the first quarter of 1996. Corporate general and administrative expenses for the
first three months of 1996 included a charge of $6,511,000 composed of
$5,661,000 related to the MedRehab Merger and a charge of $850,000 for warrants
issued in connection with the APS Alliance. The remaining increase was primarily
the result of incremental corporate personnel to support the additional
businesses acquired and opened during 1995 and 1996. As a percentage of total
revenues, these expenses were approximately 8% and 13% in the first quarters of
1995 and 1996, respectively.
Interest Expense, Net. Net interest expense increased from $279,000 in the
first quarter of 1995 to $4,392,000 in the first quarter of 1996. This increase
from 1995 to 1996 was primarily attributable to higher outstanding balances
under the Credit Facility which were used to fund acquisitions and working
capital as well as the inclusion in 1996 of the interest expense on capital
leases incurred in connection with the CSI Merger.
Facility Rent Expense, Net. The Company incurred $474,000 of rent expense in
the first quarter of 1996 related to a facility leased under a sale/leaseback
arrangement and two facilities leased from former CSI affiliates.
Depreciation and Amortization. Depreciation and amortization expense
increased 95% from $2,660,000 in the first quarter of 1995 to $5,196,000 in the
first quarter of 1996, principally as the result of acquisitions of facilities,
pharmacies and home health care companies completed after the first quarter of
1995.
Provision for Income Taxes. The effective tax rate for the first quarters of
1995 and 1996 was 38%. The Company currently expects its effective tax rate to
range from 38% to 41% in 1996 as the impact of the use of net operating losses
acquired in conjunction with the MedRehab Merger is uncertain.
37
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Revenue. Total operating revenue increased 25% from $210,806,000 in 1993 to
$264,144,000 in 1994 and 34% to $354,806,000 in 1995.
Net patient service revenue increased by $51,119,000, or 24%, from 1993 to
1994 and by $77,278,000, or 30%, from 1994 to 1995. The increase from 1993 to
1994 resulted primarily from the inclusion of revenue from the eight facilities
acquired during 1994, the inclusion of a full year of revenue from two leased
facilities opened in 1993 and another facility purchased during 1993, as well as
additional rehabilitation programs and increased revenue per rehabilitation
contract. The increase from 1994 to 1995 resulted primarily from the inclusion
of revenue generated from the facilities and businesses acquired during 1995, as
well as the inclusion of a full year of revenue from the eight facilities
acquired during 1994. The Company also experienced improvements in payor mix and
increases in the use of ancillary medical services at its inpatient facilities.
The revenue increases in each of 1994 and 1995 were partially offset by
reductions due to the cancellation or nonrenewal of contracts for certain
rehabilitation programs.
In 1994 and 1995, other income included fees earned from contracts to manage
inpatient subacute care units within selected health care facilities and in 1995
fees of $11,227,000 relating to the management of the CSI facilities.
Facility Operating Costs. Facility operating costs increased 24% from
$167,785,000 in 1993 to $208,691,000 in 1994 and 33% to $276,633,000 in 1995.
These increases were principally the result of adding new facilities, providing
more ancillary medical services and adding therapists and aides to service new
rehabilitation programs. In addition, these costs included $4,333,000 related to
a significant change in focus at the Company's Baltimore facility in 1995. As a
percentage of total operating revenue, these costs decreased from 79.6% in 1993
to 79.0% in 1994 and 78.0% in 1995.
Corporate General and Administrative. Corporate general and administrative
expenses decreased 11% from $34,902,000 in 1993 to $30,935,000 in 1994 and
increased 29% to $39,830,000 in 1995. Increases were, in part, a result of
additional personnel required to support the facilities acquired during 1994 and
1995.
During 1993, the Company accrued costs totaling $15,457,000 related to
closing of certain rehabilitation operations in Florida, Texas, Illinois and
Wisconsin. Of this charge, approximately $11,185,000 related to the write-down
of goodwill, $575,000 related to the write-down of property and equipment,
$1,141,000 for severance, $1,659,000 for lease obligations, $265,000 for
allowance for doubtful accounts, $491,000 related to losses on facilities to
date of closing and $141,000 for other expenses.
During 1994, the Company recorded a charge of $9,327,000, of which
$7,952,000 relates to the merger with Pinnacle and $1,375,000 relates to the
accelerated vesting of certain stock options. Of the merger costs, approximately
$4,627,000 was for employee severance, payroll and relocation, $2,878,000 was
incurred for transaction costs including investment bankers', legal and
accounting fees, $172,000 for customer relations, $150,000 for operations
relocation, $66,000 for investor relations and $59,000 for employee relations.
The charge for the options relates to a change in vesting criteria for
100,000 options granted in 1992. As a result of these changes, these options
become exercisable during the second quarter of 1994, thereby requiring the
charge in the second quarter.
During 1995, the Company accrued costs totaling $8,073,000 related to the
merger with CSI and the consolidation of various regional and satellite offices
to the New London, Connecticut office. Of this total charge, approximately
$3,691,000 related to severance and related payroll costs and approximately
$4,382,000 relates to expenses incurred to close the Company's regional offices.
Excluding the impact of these charges, the increases in 1993, 1994 and 1995
were, in part, a result of additional personnel required to support the
facilities acquired during these periods.
As a percentage of total operating revenue, corporate general and
administrative expenses were 17% in 1993, 12% in 1994, and 11% in 1995.
Interest Expense. Net interest expense decreased 75% from $7,379,000 in 1993
to $1,819,000 in 1994 and increased 98% to $3,598,000 in 1995. The decrease in
1994 was attributable primarily to the reductions of outstanding debt with a
portion of the proceeds from Mariner's initial public offering and the
refinancing of a significant portion of the remaining debt at more favorable
interest rates as well as the subsequent reduction of the refinanced amount with
the proceeds of a second public offering. The 1995 increase was due to
additional borrowings which were primarily used to fund acquisitions and to a
lesser extent fund working capital.
38
Facility Rent Expense, net. Net rent expense increased from $1,079,000 in
1993 to $1,739,000 in 1994 and $1,830,000 in 1995. The increase in 1994 resulted
from the lease costs associated with facilities opened in April 1993 and October
1993.
Depreciation and Amortization. Depreciation and amortization expense
increased 18% from $6,843,000 in 1993 to $8,091,000 in 1994, and 41% to
$11,397,000 in 1995, principally as a result of the opening of new facilities
and businesses as well as from the completion of facility renovations.
Provision for Income Taxes. During 1994, Mariner utilized its remaining net
operating loss carryforwards. The Company's effective rate decreased from 47% in
1993 to 42% in 1994 and to 37% in 1995. The Company currently expects the
effective tax rate to range from 38% to 41% in 1996 as the impact of the use of
net operating losses acquired in conjunction with the MedRehab Merger is
uncertain.
Extraordinary Items. During 1993, Mariner repaid approximately $49,000,000
principal amount of long-term mortgage indebtedness prior to its maturity. As a
result of the prepayment of this indebtedness, Mariner incurred an extraordinary
loss of approximately $5,546,000 attributable to prepayment fees and the
write-off of deferred financing fees. Also during 1993, Mariner recognized an
extraordinary loss in the amount of $336,000 relating to the after-tax costs
incurred in refinancing the bond issue on one of the skilled nursing facilities.
In 1994 Mariner incurred $86,000 of extraordinary losses, net of income tax
benefit, related to early repayment of mortgage obligations.
In 1995, the Company amended certain significant terms of its $120,000,000
credit facility. As a result of the amendment, the Company has charged off its
remaining unamortized deferred financing fees of $1,836,000 with a resulting tax
benefit of $698,000.
QUARTERLY RESULTS (UNAUDITED)
The following table presents summarized unaudited quarterly operating
results for the years ended December 31, 1994 and 1995 and the three months
ended March 31, 1996. Mariner believes all necessary adjustments have been
included in the amounts stated below to present fairly the following selected
information when read in conjunction with the Consolidated Financial Statements
and the notes thereto and the other financial information appearing elsewhere or
incorporated by reference in this Prospectus. The Company's income from
operations before fixed charges generally fluctuates from quarter to quarter.
The fluctuation is related to several factors: the timing of Medicaid rate
increases, the timing of acquisitions and improvements in operating results of
acquired facilities and business, seasonal census cycles and the number of
calendar days in a given quarter. As a result, the Company's income from
operations before fixed charges tends to be higher in its third and fourth
quarters when compared to the first and second quarters. Results of operations
for any particular quarter are not necessarily indicative of results of
operations for a full year or any other quarter.
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net patient service
revenue .................... $ 58,814 $ 60,594 $ 65,607 $ 75,342 $ 79,339 $ 81,753 $ 83,325 $ 93,218 $132,629
Other revenue ................ 682 608 1,085 1,412 820 1,812 6,484 8,055 2,550
--- --- ----- ----- --- ----- ----- ----- -----
Total operating
revenue .................... 59,496 61,202 66,692 76,754 80,159 83,565 89,809 101,273 135,179
Facility operating
costs(a) ................... 47,683 47,695 52,820 60,493 62,822 64,451 71,672 77,688 104,591
Corporate general and
administration
(b)(c)(d) .................. 4,920 13,080 5,480 7,455 6,548 16,015 8,690 8,577 17,227
Depreciation and
amortization ............... 1,806 1,891 1,827 2,567 2,660 2,631 2,612 3,494 5,196
Interest expense, net ........ 576 230 649 364 279 452 896 1,971 4,392
Rent expense, net ............ 346 523 435 435 355 563 528 384 474
Pre-tax income (loss)
before extraordinary
items ...................... 4,312 (1,626) 5,591 5,524 7,495 (558) 5,414 9,161 3,299
Extraordinary items .......... -- (74) -- (12) -- (1,138) -- -- --
Net income (loss) ............ $ 2,502 $ (1,935) $ 3,406 $ 3,894 $ 4,619 $ (1,341) $ 3,486 $ 5,718 $ 2,045
</TABLE>
- ----------
(a) Includes operating losses and other charges of $3,510,000 and $823,000 for
the third and fourth quarters of 1995, respectively, related to a
significant change in business focus at the Company's Baltimore facility.
(b) Includes merger and other non-recurring costs of $8,027,000 and $1,300,000
for the second and fourth quarters of 1994, respectively.
(c) Includes accrued costs totaling $8,073,000 related to the CSI Merger and the
consolidation of various regional and satellite offices to the New London,
Connecticut office. Of this total charge, approximately $3,691,000 related
to severance and related payroll costs and approximately $4,382,000 related
to expenses incurred to close the Company's regional offices.
(d) Includes charges of $5,661,000 associated with the completion of the
MedRehab Merger and a one-time charge of $850,000 associated with the APS
alliance. Of the $5,661,000 in merger charges, approximately $2,280,000
relates to severance and related payroll charges, $1,061,000 relates to
property write-downs, $1,143,000 relates to transaction costs, $682,000
relates to relocation costs, and $495,000 relates to miscellaneous expenses.
39
LIQUIDITY AND CAPITAL RESOURCES
Mariner has financed its operations, acquisitions and capital expenditures
primarily from cash provided by operations and proceeds from stock issuances and
borrowings. As of March 31, 1996, working capital and cash and cash equivalents
were $71,252,000 and $2,184,000, respectively.
Mariner has a $200,000,000 senior secured revolving credit facility with a
syndicate of banks (the "Credit Facility"). As of April 30, 1996, the Company
entered into an amendment to the Credit Facility to increase the size of the
Credit Facility to $200,000,000 from $175,000,000, extend the maturity of the
Credit Facility and reduce certain restrictions that the Credit Facility imposes
on the operations of the business of the Company and its subsidiaries. As of
December 31, 1995 and March 31, 1996, principal balances outstanding under the
Credit Facility were approximately $64,500,000 and $130,500,000, respectively,
and letters of credit outstanding under this facility were $2,612,000. On April
5, 1996, the Company repaid all outstanding indebtedness (other than letters of
credit outstanding under the Credit Facility) under the Credit Facility with
proceeds from the offering of the Notes described below. Mariner has used, and
intends to continue to use, borrowings under the Credit Facility to finance the
acquisition and development of additional subacute care facilities and related
businesses, and for general corporate purposes, including working capital.
Mariner's obligations under the Credit Facility are collateralized by a pledge
of the stock of its subsidiaries and are guaranteed by all of the Company's
subsidiaries. In addition, the Credit Facility is secured by mortgages on
certain of the Company's inpatient facilities, leasehold mortgages on certain
inpatient facilities leased by the Company, and security interests in certain
other properties and assets of the Company and its subsidiaries. The Credit
Facility matures on April 30, 1999 and provides for prime or LIBOR-based
interest rate options. The borrowing availability and rate of interest varies
depending upon specified financial ratios. The Credit Facility also contains
covenants which, among other things, require the Company to maintain certain
financial ratios and impose certain limitations or prohibitions on the Company
with respect to the incurrence of indebtedness, senior indebtedness, liens and
capital leases; the payment of dividends on, and the redemption or repurchase
of, its capital stock; investments and acquisitions, including acquisitions of
new facilities; the merger or consolidation of the Company with any person or
entity; and the disposition of any of the Company's properties or assets.
The Company is currently negotiating the terms of an amendment to further
increase the size of the Credit Facility to $250 million and further reduce
certain restrictions imposed by the Credit Facility on the Company and its
subsidiaries. No assurance can be given that the Company will enter into any
such amendment.
On April 4, 1996, the Company sold the Notes to the Intitial Purchasers. The
Notes are uncollateralized senior subordinated obligations of Mariner and, as
such, are subordinated in right of payment to all existing and future senior
indebtedness of Mariner, including indebtedness under the Credit Facility. From
the net proceeds of approximately $144,500,000 from the sale of the Notes,
approximately $131,000,000 was used to repay all outstanding indebtedness under
the Credit Facility (including interest and certain other fees) and the
remainder was used to pay a portion of the purchase price for the 1996 Florida
Acquisition. See "Description of the Exchange Notes."
Accounts receivable (net of allowances) were $92,537,000 and $108,556,000 at
December 31, 1995 and March 31, 1996, respectively. Estimated settlements due
from third party payors aggregated $12,915,000 and $27,375,000 at December 31,
1995 and March 31, 1996, respectively. The increases primarily reflect the
addition of the CSI facilities. The number of days sales in accounts receivable
and estimated settlements due from third party payors was approximately 96 at
December 31, 1995 and 92 days March 31, 1996. This decrease was primarily due to
improved collections and completion of billing systems conversions.
In March 1995, Mariner acquired a 60-bed skilled nursing facility located in
St. Petersburg, Florida, for $2,500,000 in available cash. In June 1995, Mariner
purchased a 150-bed skilled nursing facility in Nashville, Tennessee, for a
total purchase price of approximately $8,500,000. The purchase price was
financed under the Credit Facility.
40
In June 1995, the Company purchased an 80,000 square-foot building in New
London, Connecticut to serve as its corporate headquarters. The purchase price
of the new building was $3,050,000 and was financed under the Credit Facility.
The Company completed the relocation to its new headquarters in October 1995.
During the fourth quarter of 1995, Mariner completed the Heritage
Acquisition which involved six skilled nursing facilities with an aggregate of
686 beds in central and northern Florida. The purchase price for such
transaction was $42,800,000, consisting of the payment of $33,000,000 in cash,
the assumption of debt in the amount of $7,200,000 and the issuance of a note in
the principal amount of $2,600,000. The cash portion of the transaction was
financed through borrowings under the Credit Facility.
In October 1995, the Company acquired an institutional pharmacy operation
based in Dallas, Texas, for the total purchase price of approximately
$1,623,000. The purchase price was financed through the Company's Credit
Facility and the issuance of a note to the seller.
During the fourth quarter of 1995, the Company also borrowed approximately
$8,000,000 under the Credit Facility primarily to fund working capital
requirements.
In January 1996, Mariner completed the CSI Merger and its acquisition of
certain related assets. In the CSI Merger, all of the issued and outstanding
shares of capital stock of CSI were converted into the right to receive an
aggregate of 5,853,656 shares of the Company's Common Stock and $7,000,000 in
cash. In connection with the CSI Merger, Mariner acquired certain assets that
are related to CSI's business from affiliates of CSI's stockholders for an
aggregate of approximately $17,694,000 in cash and loaned an aggregate of
$1,619,000 to the partnerships that sold certain assets to the Company. In
addition, the Company acquired options to purchase 12 of the facilities leased
by CSI from affiliates of CSI's stockholders at fair market value and made
nonrefundable deposits of an aggregate of $13,155,000 with the lessors of the
facilities subject to such options. The options are exercisable during specified
periods between 1998 and 2010. The aggregate estimated fair market value as of
the earliest exercise date of the options of, and the aggregate purchase price
for, the 12 facilities subject to the options is approximately $59,585,000
(which includes the deposit of $13,155,000 paid by the Company). Mariner
financed the cash consideration paid in these transactions with borrowings under
the Credit Facility.
On March 1, 1996, the Company completed the MedRehab Merger. Mariner issued
an aggregate of approximately 2,312,500 shares of its Common Stock for all of
MedRehab's outstanding capital stock and options to purchase MedRehab capital
stock in a merger that was accounted for as a pooling of interests. In addition,
the Company prepaid an aggregate principal amount of approximately $14,000,000
of MedRehab's outstanding indebtedness at the closing of the MedRehab Merger.
The Company repaid this indebtedness with funds it borrowed under the Credit
Facility. Certain former MedRehab stockholders have the right to require the
Company to repurchase their shares of Mariner Common Stock for approximately
$1,500,000 during the period beginning June 30, 1996 and ending July 31, 1996.
In May, 1996 the Company completed the 1996 Florida Acquisition which
involved seven skilled nursing facilities and one assisted nursing facility with
an aggregate of 960 beds in Florida, Tennessee and Kansas. All of the issued and
outstanding shares of common stock were converted into the right to receive an
aggregate of approximately $28,050,000 in cash. The Company financed the
consideration paid in the 1996 Florida Acquisition with a portion of the net
proceeds from the sale of the Notes and borrowings under the Credit Facility.
Mariner began managing the facilities acquired in the 1996 Florida Acquisition
on March 1, 1996 for a monthly fee of 6.5% of net operating revenues of each
facility.
In March 1996, Mariner acquired a primary care physician organization in the
Orlando, Florida area. In this transaction, Mariner issued an aggregate of
48,722 shares of its Common Stock and paid an aggregate of approximately
$1,500,000 in cash which was financed under the Credit Facility.
During the first quarter of 1996, the Company also borrowed approximately
$7,000,000 under the Credit Facility primarily to fund working capital
requirements.
41
The Company's capital expenditures for the quarter ended March 31, 1996 were
approximately $3,500,000. The Company has currently budgeted approximately
$30,000,000 for capital expenditures during 1996. The Company's currently
planned capital expenditures include approximately $10,100,000 for upgrading the
Company's information systems, approximately $4,200,000 for deferred maintenance
for the inpatient facilities owned or leased by CSI and approximately
$15,700,000 for expansion of existing facilities and other construction, as well
as the costs of maintaining the Company's inpatient facilities and offices. The
Company currently estimates that it spends approximately $300 per bed per year
for maintenance of its inpatient facilities.
The Company intends to expand its clinical programs in strategically
selected metropolitan areas throughout the United States. The Company also
intends to expand its pharmacy, home care, physician practice management and
rehabilitation services. In addition to acquiring individual facilities, Mariner
may acquire businesses that operate multiple facilities or ancillary health care
services businesses. The Company continuously identifies and evaluates potential
acquisition candidates and, in many cases, engages in discussions and
negotiations regarding potential acquisitions. There can be no assurance that
any of the Company's discussions or negotiations will result in an acquisition.
Further, if the Company makes any acquisitions, there can be no assurance that
it will be able to operate any acquired facilities or businesses profitably or
otherwise successfully implement its expansion strategy.
Mariner believes that its future capital requirements will depend upon a
number of factors, including cash generated from operations and the rate at
which it acquires additional inpatient facilities or other health care services
businesses and the rate at which it adds rehabilitation programs. Mariner
expects to fund such capital expenditures with borrowings under its Credit
Facility, its existing cash resources and cash from operations. Mariner
currently believes that the cash from operations, its existing cash resources
and borrowings under the Credit Facility will be sufficient to meet its needs
for the foreseeable future.
RECENTLY ISSUED PRONOUNCEMENTS
Statement of Position 94-6, "Disclosure of Certain Significant Risks and
Uncertainties", (SOP 94-6) prepared by the Accounting Standards Executive
Committee addresses the required disclosures about the risks and uncertainties
which may exist as of the date of the financial statements in the following
areas: nature of operations, use of estimates in the preparation of financial
statements, certain significant estimates, and current vulnerability due to
certain concentrations. Adoption of SOP 94-6 did not have a material impact on
the Company's financial condition or results of operations.
Statement of Financial Accounting Standards No. 121 "Accounting for
Impairment of Long-Lived Assets to be disposed of" (SFAS 121), issued by the
Financial Accounting Standards Board in March 1995 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used for
long-lived assets and certain identifiable intangibles to be disposed of. This
statement is effective for financial statements for fiscal years beginning after
December 15, 1995. The Company does not believe the adoption of SFAS 121 will
have a material impact on the Company's financial condition or results of
operations.
Statements of Financial Accounting Standards No. 123 "Accounting for Stock
Based Compensation" (SFAS 123), issued by the Financial Accounting Standards
Board in October 1995 establishes financial accounting and reporting for stock
based employee compensation plans. This standard is effective for financial
statements for fiscal years beginning after December 15 1995. The Company will
adopt only the disclosure provisions of SFAS 123; the measurement criteria will
not be adopted. This SFAS will not have a material impact on the Company's
financial condition or results of operations.
IMPACT OF INFLATION
The health care industry is labor intensive. Wages and other labor costs are
especially sensitive to inflation. Increases in wages and other labor costs as a
result of inflation, or increases in federal or state minimum wages without a
corresponding increase in Medicare and Medicaid reimbursement rates, could
adversely impact the Company.
42
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
This Prospectus, including the information incorporated by reference,
contains forward- looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, including
statements regarding, among other items, (i) the Company's growth strategies,
including its intention to make acquisitions; (ii) anticipated trends in the
Company's business and demographics; (iii) the Company's ability to continue to
control costs and maintain quality of care; (iv) the Company's ability to
respond to changes in regulations; and (v) the Company's ability to enter into
contracts with managed care organizations and other payors. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, certain of which are beyond
the Company's control. Actual results could differ materially from these
forward-looking statements as a result of the factors described in "Risk
Factors" including, among others (i) changes in the health care industry as a
result of political, economic or regulatory influences; (ii) changes in
regulations governing the health care industry; and (iii) changes in the
competitive marketplace. In light of these risks and uncertainties, there can be
no assurance that the forward-looking information contained in this Prospectus
will in fact transpire. In this regard, certain three month information of the
Company has been presented herein on an annualized basis for comparative
purposes only. Such three month information, and the resulting annualized data,
is not necessarily indicative of the results that would be obtained for a full
year or any other three month period.
43
BUSINESS
Mariner is a leading provider of outcomes-oriented, post-acute health care
services in selected markets, with a particular clinical expertise in the
treatment of short-stay subacute patients in cost-effective alternate sites. The
Company's services and products include inpatient care, comprehensive inpatient
and outpatient rehabilitation services, medical services and products (including
institutional and home pharmacy services, respiratory and infusion therapy and
durable medical equipment), home care and physician services. By providing this
continuum of care in selected markets, the Company believes that it will be
better able to maintain quality of care and control costs while coordinating the
treatment of patients from the onset of illness to recovery. The Company seeks
to cluster facilities and other post-acute health care services around large
metropolitan areas and major medical centers with large acute care hospitals
from which to generate post-acute admissions. Mariner currently operates 70
inpatient facilities with an aggregate of approximately 8,700 beds and 57
outpatient rehabilitation clinics and currently provides contract rehabilitation
services within 413 skilled nursing facilities.
Mariner has established standardized clinical programs based on defined
protocols to address the medical requirements of large groups of patients with
similar diagnoses in a high-quality, cost-effective manner. The Company's
MarinerCare clinical programs, such as the orthopedic recovery, cardiac recovery
and pulmonary management programs, are short-stay regimens based on defined
protocols that address the needs of subacute patients. Subacute patients are
medically stable and generally require three to six hours of skilled nursing
care per day. MarinerCare programs typically involve 20 to 45 days of inpatient
care and utilize the Company's nursing, rehabilitation, pharmacy and other
ancillary medical services, with patients generally discharged directly to their
homes. Mariner is also developing standardized clinical home care programs. The
Company believes that careful adherence to its clinical programs enables it to
produce consistent and measurable clinical and financial outcomes for patients
and payors and to conduct clinical programs consistently in all of its sites.
Using a case management approach, patients' progress is carefully monitored so
that the appropriate level of care is being delivered at the right time and in
the appropriate setting under the applicable clinical program. Mariner believes
that its standardized approaches to delivering care and measuring outcomes is
particularly attractive to managed care organizations and large payors and
positions the Company to contract with payors on a case rate or capitated basis.
BACKGROUND
Traditionally, patients recuperating from a major injury, surgery or illness
remained in general acute care hospitals until they were sufficiently well to
return home. Such stays are relatively expensive, reflecting the cost of
extensive on-site equipment and services that, while necessary for hospitals to
accomplish their primary mission, are not necessary for the recuperation of
medically stable post-acute patients. Acute care hospital costs represent the
single largest component of United States health care spending.
Over the past ten years, hospitals have come under increasing pressure to
reduce the length of patient stays as a means of containing costs. Employers
have begun using managed care providers, such as health maintenance
organizations and preferred provider organizations, to limit hospitalization
costs by controlling hospital utilization and by negotiating discounted fixed
rates for hospital services. Traditional third-party indemnity insurers have
begun to limit reimbursement to pre-determined amounts of reasonable charges,
regardless of actual costs, and to increase the co-payments required to be paid
by patients, thereby requiring patients to assume more of the cost of hospital
care. In 1983, Congress sought to contain Medicare hospital costs by adopting a
system based on prospectively determined prices (the "PPS system") rather than
payment of actual costs plus a specified profit. Under the PPS system, hospitals
generally receive a specified reimbursement rate regardless of how long the
patient remains in the hospital or the volume of ancillary services ordered by
the attending physician. The emergence of managed care providers and the
implementation of the PPS system have provided hospitals with an incentive to
discharge patients more quickly.
The increasing desire of payors and managed care organizations to transfer
medically stable patients out of relatively expensive acute care hospitals to
less expensive sites has provided a significant opportunity for alternate site
health care providers. Specialty long-term care hospitals, rehabilitation
44
hospitals, skilled nursing facilities and home health care providers have all
been used to reduce the lengths of patient stays at more expensive general acute
care hospitals. Mariner believes that many traditional health care providers are
not well positioned to efficiently provide health care services to patients who
are medically stable and recuperating from a major injury, surgery or illness.
MARINER'S STRATEGY
Mariner's goal is to be the lowest cost provider of high-quality, post-acute
health care services in its markets with a particular emphasis on short-stay
subacute patients. The Company believes that being the lowest cost provider will
significantly enhance its ability to respond to potential changes in
reimbursement programs and managed care competition, including its ability to
contract with payors on a case rate or capitated basis. Mariner's strategies to
achieve this goal include the following:
Patient Focused Programmatic Care. Mariner has developed standardized
clinical programs based on defined protocols to address the medical requirements
of large groups of patients with similar diagnoses in a high-quality,
cost-effective manner at alternate site treatment settings. Each clinical
program incorporates an interdisciplinary approach to care and treatment with an
intense focus on rehabilitation and lifestyle retraining with the goal of
guiding patients to the best possible recovery in the shortest period of time
and improving patients' overall functional ability. The Company is also
designing its MarinerCare programs to include home health care. The Company
believes that careful adherence to these clinical programs enables it to better
produce consistent clinical and financial outcomes for patients and payors and
to implement clinical programs consistently in all its sites.
Outcomes and Case Management. The ability to measure clinical and financial
outcomes is central to Mariner's delivery of care. Mariner has implemented a
program to measure patients functional ability on admission, at discharge and,
for certain patients, six weeks after discharge. Each patient's rehabilitation
potential is evaluated using a standardized measurement system, which rates a
patient's independence in performing a number of basic activities of daily
living. This rating system permits Mariner to initially assess whether the
patient will benefit from the Company's programs, document the severity of a
patient's initial impairment and measure the outcome and cost of the patient's
recuperation. Using a case management approach, a patient's progress is
continually monitored so that the appropriate level of care is being delivered
at the right time and in the appropriate setting under the applicable clinical
program. Mariner believes that its standardized approaches to delivering care
and measuring outcomes are particularly attractive to managed care organizations
and large third-party payors because they facilitate such organizations' and
payors' increasing desire to be provided with outcomes data in order to manage
and contain costs. The Company currently plans to spend approximately
$10,100,000 in 1996 to upgrade its information systems in order to enhance its
ability to collect clinical and financial outcomes information on a timely
basis.
Regional Post-Acute Networks of Care. Mariner is organized into five
regions: Florida, North Central, Northeast, Southeast and Southwest, each of
which is headed by a regional President. Each regional President is responsible
for developing and integrating all of the Company's products and services within
its local markets. By providing directly a broad continuum of care within a
region, Mariner positions itself to coordinate the treatment of patients from
the onset of illness to recovery. Consistent with this strategy, since January
1, 1995 the Company has acquired or developed institutional pharmacy businesses
in Orlando, Florida and Houston and Dallas, Texas. Mariner has acquired two
Medicare certified home care agencies in central Florida and has applied for and
obtained five additional home care certificates of need ("CONs") in Florida. By
providing this continuum of care in selected markets, the Company believes that
it will be better able to maintain quality of care, control costs and attract
managed care organizations and third-party payors.
Partnering with Key Referral Sources. Utilizing its standardized clinical
programs, regional post-acute networks of care and outcomes management approach,
Mariner seeks to allow patients and payors to coordinate all of their post-acute
health care with Mariner. By entering into arrangements with physicians, payors
and managed care organizations, as well as skilled nursing facilities and other
traditional health care providers, the Company seeks to position itself to
obtain referrals of patients who would benefit from Mariner's clinical programs
and to contract with payors on a case rate or capitated
45
basis. For example, in March 1996, the Company acquired a primary care physician
organization comprised of a corporate office and four medical centers in the
Orlando, Florida area. In addition, the Company is building a medical office
building on the campus of one of its skilled nursing facilities from which a
physician group will act as the medical director of the facility.
Commitment to Employee Training. Through Mariner University, Mariner
employees participate in extensive Company-sponsored training programs that
focus on Mariner's business philosophy, reimbursement guidelines, teamwork and
execution. The Company's success depends on its ability to deliver standardized
services throughout its markets and to maintain a high quality level of care.
Thus, Mariner is committed to an intense and on-going training process designed
to ensure the integrity and consistency of its clinical programs.
Market Driven Development. The Company introduces its clinical programs in
strategically selected metropolitan areas throughout the United States. Mariner
targets areas with strong potential demand for its services and the potential
for the Company to establish relationships with leading local health care
providers and payors. The Company typically establishes a presence in a market
by acquiring, leasing or managing one or more inpatient facilities. Once Mariner
enters a target market, it seeks to establish other sites and expand the range
of health care services it provides in that market.
Consistent with this strategy, the Company expects its recently announced
arrangement with APS to provide it with opportunities to more quickly expand its
services in existing markets and to enter new target markets with lower capital
commitments. Pursuant to this arrangement, an APS affiliate was granted warrants
to purchase 210,000 shares of Mariner Common Stock at an exercise price of
$11.375 per share, as well as warrants to purchase up to an additional 1,890,000
shares of Mariner Common Stock over a five year period depending on the
performance of the arrangements between Mariner and APS-affiliated facilities.
The Company will receive management fees under the agreements it enters with
APS-affiliated facilities based on a percentage of such facility's revenues
specified in the agreement.
As part of its expansion strategy, Mariner may acquire additional health
care facilities and businesses. Potential acquisition candidates include
individual inpatient facilities, businesses that operate multiple inpatient
facilities and other health care services businesses. The Company continuously
identifies and evaluates potential acquisition candidates and in many cases
engages in discussions and negotiations regarding potential acquisitions. There
can be no assurance that any of the Company's discussions or negotiations will
result in an acquisition. Further, if Mariner makes any acquisitions, there can
be no assurance that it will be able to operate any acquired facilities or
businesses profitably or otherwise successfully implement its expansion
strategy.
MARINER CLINICAL PROGRAMS AND SERVICES
MARINERCARE PROGRAMS
Each MarinerCare program is designed to address the medical requirements of
a large group of patients with similar diagnoses in a high-quality,
cost-effective manner. MarinerCare programs are inpatient short-stay regimens
based on defined protocols and utilize various medical services provided by
Mariner. These programs are focused on the needs of patients who are
recuperating from a major injury, surgery or illness, and incorporate specific
patient admission, evaluation and discharge criteria, and standardized treatment
protocols and regimens, which have been developed over several years based on
the Company's clinical experience. Using these criteria, the Company evaluates
which patients would benefit most from its programs prior to their admission.
Upon admission, a care plan and projected discharge date are established for
each patient. Throughout a patient's inpatient stay, the Company carefully
monitors and evaluates the patient's progress and makes adjustments to the
patient's treatment. Educating patients regarding their ailments and treatments
also comprises a part of each program. MarinerCare programs typically involve
inpatient treatment periods of 20 to 45 days.
At its inpatient facilities, the Company offers a mix of MarinerCare
programs tailored to serve the demands of the local markets. In the facilities
it acquires, the Company intends to focus increasingly on treating subacute
patients and implementing appropriate MarinerCare programs or other clinical
programs. The emphasis on MarinerCare programs has been the primary reason for
the Company's decreasing length of stay, improved payor mix and increasing
patient turnover rate and revenue per bed.
46
The Company currently offers the following MarinerCare programs:
Orthopedic Recovery. Patients who are recovering from orthopedic surgery
(such as joint replacements or amputations) or serious fractures may be admitted
into this MarinerCare program as early as three days after surgery or injury.
These patients typically require comprehensive rehabilitation, including
physical or occupational therapies, following stabilization of their conditions
or after surgery, and may require traction or fixation devices.
Cardiac Recovery. Patients who are recuperating from heart attacks or heart
surgery, or associated complications, are provided with the nursing and
rehabilitation services necessary to enable them to enter an outpatient
rehabilitation program.
Pulmonary Management. Patients with acute or chronic lung disease, including
those with tracheotomies and those who are on ventilators, are provided with
short-term intensive programs of pulmonary, physical or occupational therapies.
Vascular and Wound Management. Patients who are recovering from surgery for
circulatory problems or from difficult-to-heal wounds or burns receive services
designed to further the healing process, such as state-of-the-art dressing
techniques, specialized bed therapies, nutritional support and physical or
occupational therapies.
Oncology Management. Patients who have undergone surgery, chemotherapy,
radiation, immunotherapy or hormone therapy as a result of cancer are provided
with a range of services, including pain management and nutritional and
psychological support.
Stroke Recovery. Patients who are recovering from strokes and require
treatment for related neurological and physical problems are provided with a
range of services, including physical, occupational and speech therapy.
Medically Complex. Under this program, Mariner treats patients with medical
complications that prolong their recuperative period from a major illness. These
secondary complications must be resolved or brought under control before their
primary diagnosis can be addressed. These patients typically require many
ancillary services and therapies. The goal of this program is to return patients
to their homes with or without support services or to have them re-enter an
acute care hospital for additional surgery or treatment.
MARINER REHABILITATION PROGRAMS
Mariner rehabilitation programs are designed to assist skilled nursing
facilities in providing comprehensive rehabilitation services and in attracting
patients who would benefit from these services. The Company provides a
contracting facility with the physical, occupational and speech therapists
necessary to provide comprehensive rehabilitation services to the facility's
patients. In selected facilities, the Company also provides MarinerCare
rehabilitation programs which include case management and quality assurance
services, as well as coordination of admissions functions with key referral
services. The Company also offers consulting services regarding managed care
reimbursement and cost containment strategies to these facilities, including
reimbursement analysis and assistance, preparation of atypical filings and
interim rate requests and subacute feasibility analysis. By utilizing Mariner's
rehabilitation programs, the Company believes that skilled nursing facilities
are able to offer a cost effective rehabilitation program which will make the
facilities service package more attractive to managed care organizations. The
Company currently provides rehabilitation programs for 413 skilled nursing
facilities.
In implementing a facility's rehabilitation programs, therapists screen each
patient in the facility to assess and identify those with functional problems. A
therapist, together with the patient's attending physician and staff of the
facility, designs a plan of care with specific long- and short-term goals.
Therapists with specializations appropriate for the patient's condition meet
with the patient on a regular basis and render the prescribed rehabilitation
services. The Company's admissions coordinators assist
47
the facility in working with local hospitals, payors and managed care
organizations to identify and admit patients who can benefit from the facility's
rehabilitation services. Services are typically rendered in a dedicated room
located in the facility which is equipped with rehabilitation equipment.
In addition to providing comprehensive rehabilitation services at its
inpatient facilities and other skilled nursing facilities, the Company also
operates 57 outpatient rehabilitation clinics located in metropolitan areas.
These clinics primarily provide routine physical and occupational therapy to
patients who suffer from injuries received in the workplace, accidents and
athletic endeavors and are capable of being treated on an outpatient basis.
OTHER INPATIENT SERVICES
In Mariner's inpatient facilities, all patients receive basic medical
services, including nursing care, special diets, nutritional supplements and
various medical equipment. Inpatient care is provided by registered nurses,
licensed practicing nurses and certified nurses aides under the supervision of
the Director of Nursing. Each facility also contracts with a local licensed
physician to serve as its medical director, and establishes relationships with a
number of independent local specialists, who are available to care for the
facility's patients. Each of Mariner's facilities provides a broad range of case
management services over the course of treatment, including admission into the
Company's MarinerCare programs, ongoing medical evaluation, social service
needs, specialty equipment requirements, outcomes measurement, discharge
planning and arrangement for home care.
MEDICAL PRODUCTS AND SERVICES
As part of its strategy of providing a continuum of care, the Company also
offers the following products and services in selected markets:
Pharmacy Services. Mariner provides pharmaceutical goods and services
customized to meet the needs of its patients, and pharmacy consulting services
designed to evaluate, guide and monitor the administration of medication. To
enhance its pharmacy services in Texas, in October 1995, Mariner acquired an
institutional pharmacy operation located in the Dallas/Ft. Worth area. Also, in
July 1995, the Company acquired an institutional pharmacy in the Orlando area.
The Company currently has pharmacy operations in five states.
Infusion Therapy. The Company provides infusion therapies, including
hydration, total parenteral nutrition, antibiotic, peritoneal dialysis and pain
management therapies. Infusion therapies are often required in treating patients
with chronic infections, digestive disorders, cancer and chronic and severe
pain.
Medical Equipment and Supplies. Mariner provides specialized medical
equipment and supplies, including ventilators, oxygen concentrators, diagnostic
equipment and various types of durable medical equipment. Equipment and supplies
are available to patients both in its inpatient facilities and at home.
Clinical Respiratory Services. The Company provides clinical programs for
managing the pulmonary disease process for patients with acute or chronic lung
diseases. These services include rehabilitation and provision of needed supplies
and equipment.
HOME CARE
The Company provides skilled nursing, rehabilitation, pharmacy, infusion
therapy and respiratory services and durable medical equipment and supplies to
individuals needing such services in their homes, allowing Mariner to continue
to meet the nursing care needs of patients discharged from its facilities.
PHYSICIAN SERVICES
Mariner provides management support services designed to allow physicians to
focus on the delivery of quality patient care, while the Company manages the
physicians' practice. In March 1996, the Company acquired a primary care
physician organization comprised of a corporate office and four medical centers
in the Orlando, Florida area. In addition, the Company is building a medical
office building on the campus of one of its skilled nursing facilities, from
which a physician group will act as the medical director of the facility.
48
SOURCES OF REVENUE
The following table sets forth certain information relating to the sources
of Mariner's revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------- --------------------------------
1993 1994 1995 1995 1996
-------------- --------------- -------------- ------------- ---------------
$ % $ % $ % $ % $ %
--------- --- --------- ---- -------- --- ------- ---- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Private payors (1) $115,339 55% $141,709 54% $177,479 50% $38,083 48% $ 53,198 39%
Medicare ........... 48,271 23 68,302 26 102,713 29 25,024 31 49,670 37
Medicaid ........... 47,196 22 54,133 20 74,614 21 17,052 21 32,311 24
------ -- ------ -- ------ -- ------ -- ------ --
Total .............. $210,806 100% $264,144 100% $354,806 100% $80,159 100% $135,179 100%
======== === ======== === ======== === ======= === ======== ===
</TABLE>
- ----------
(1) Includes indemnity insurers, health maintenance organizations, employers,
individuals and other non-governmental payors, payments from skilled nursing
facilities for services performed under rehabilitation management programs,
and revenue classified as "other revenue."
The sources and amounts of Mariner's patient revenues are determined by a
number of factors, including the capacities of its facilities, occupancy rate,
the mix of patients and the rates of reimbursement among payor categories
(private, Medicare and Medicaid). Patient length of stay is critical to the
level of reimbursement Mariner receives for each patient. Shorter-term patients
generally have a larger number of potential payors than do longer-term patients,
who generally depend to a greater extent on Medicaid. Reimbursement levels
generally are linked to the level of care provided, and short-stay recuperating
patients typically are more medically demanding, have higher acuity levels and
require greater ancillary services. In addition, Medicare and, in certain cases,
private payors typically cease reimbursement after defined lengths of stay or
levels of expenditure, following which Mariner is generally dependent on the
patient's own resources or Medicaid for reimbursement. Once admitted, a patient
can be discharged involuntarily only for limited reasons under Federal and state
laws, which generally do not include access to reimbursement or ability to pay.
See "Risk Factors -- Dependence on Reimbursement by Third-Party Payors."
The Company's rehabilitation program contracts typically have a term of one
year but frequently include automatic renewals and in general are terminable on
notice of 30 to 90 days by either party. See "Risk Factors -- Dependence on
Contract Renewals." Under certain contracts, Mariner bills Medicare or another
third-party payor directly. Under other contracts, the Company is compensated on
a fee for service basis and in general directly bills the skilled nursing
facility, which in turn receives reimbursement from Medicare, Medicaid, private
insurance or the patient. Mariner recognizes payments under these latter
contracts as payments from private payors. Under these latter contracts, Mariner
also generally indemnifies its customers against reimbursement denials by
third-party payors for services determined not to be medically necessary.
Mariner has established internal documentation standards and systems to minimize
denials and typically has the right to appeal denials at its expense.
Historically, reimbursement denials under these contracts have been
insignificant.
Private Payors. Private pay revenues include payments from individuals and
contract payors who pay directly for services without governmental assistance
and certain payments from skilled nursing facilities for services performed
under rehabilitation management programs. Contract payors include indemnity
insurers, health maintenance organizations, preferred provider organizations,
workers' compensation programs and other similar non-governmental third-party
payment sources. Payments from private payors are typically based on negotiated
contracts or on patient-specific terms. Typically, private payor contracts
permit such organizations to place patients in Mariner's facilities for a
negotiated per diem charge that varies with patient category, or for a per diem
base rate plus Mariner's charges for ancillary services. Certain of these
contracts require Mariner to provide specified health
49
care services for a set per diem payment rate. These contracts are generally
automatically renewed annually unless a party provides written notice. In most
of these contracts, either party may terminate such contract without cause on 90
days' written notice or with cause on 30 days' written notice. The amount
Mariner charges to private patients in its facilities is not subject to
regulatory control in any of the states in which Mariner operates facilities.
Medicare. Under Medicare, the Federal government provides payment for
skilled nursing care, room and board, therapies, drugs, supplies and other
subacute services provided by Mariner to eligible patients (generally, those
over age 65 and certain disabled persons). After the first 20 days of a
patient's stay, Medicare patients are subject to a 20% co-payment, all or some
of which may be paid by private payors, Medicaid, Medigap insurance or the
patient. Medicare generally does not provide reimbursement for inpatient stays
beyond the first 100 days, but may provide reimbursement for certain therapies
and supplies. Medicare provides Mariner with interim prospective payments during
the year, which are subject to later adjustment to reflect actual allowable
costs. These costs include the reasonable direct and indirect costs (including
depreciation, interest and overhead) of the services furnished at Mariner's
inpatient facilities, subject to prospectively determined ceilings on routine
operating costs except when the facility is granted an exception for the
delivery of atypical services. Medicare does not pay a rate of return on equity
capital. See "-- Government Regulation."
After the first three full years of a facility's operation, Medicare
reimbursement of routine operating costs is subject to a cap which is related to
regional health care costs. The Company has not recognized revenue in excess of
such caps except where it has received an "atypical services" exception or where
the three-year "new facility" exemption applies. Mariner has received an
atypical services exception for certain of its facilities, which allows payment
of the costs over the ceiling. This exception requires annual Federal approval.
Under arrangements in which the Company bills a skilled nursing facility for
its rehabilitation services on a fee for service basis, Medicare reimburses the
facility based on a reasonable cost standard. Specific guidelines exist for
evaluating the reasonable cost of physical, occupational and speech therapy
services. Medicare applies salary-equivalency guidelines in determining the
reasonable cost of physical therapy services, which is the cost that would be
incurred if the therapist were employed by a nursing facility, plus an amount
designed to compensate the provider for certain general and administrative
overhead costs. Medicare pays for occupational and speech therapy services on a
reasonable cost basis, subject to the so-called "prudent buyer" rule for
evaluating the reasonableness of the costs. The Company's gross margins for its
physical therapy services under the salary equivalency guidelines are
significantly less than for its speech and occupational therapy services under
the "prudent buyer" rule.
In April 1995, HCFA, the federal agency responsible for administering the
Medicare program, issued a memorandum to its Medicare fiscal intermediaries as a
guideline to assess costs incurred by inpatient providers relating to payment of
occupational and speech language pathology services furnished under arrangements
that include contracts between therapy providers and inpatient providers. While
not binding on the fiscal intermediaries, the memorandum suggested certain rates
to assist the fiscal intermediaries in making annual "prudent buyer" assessments
of speech and occupational therapy rates paid by inpatient providers. In
addition, HCFA through its intermediaries is subjecting physical therapy,
occupational therapy and speech therapy to a heightened level of scrutiny
resulting in increasing audit activity. A majority of Mariner's provider and
rehabilitation contracts provide for indemnification of the facilities for
potential liabilities in connection with reimbursement for rehabilitation
services. In light of the uncertainty regarding health care reform, Mariner
cannot now determine whether HCFA will continue to recommend the rates suggested
in the memorandum or whether such rates will be used by HCFA as a basis for
developing a salary equivalency based reimbursement system for speech and
occupational therapy services. There can be no assurance that actions ultimately
taken by HCFA with regard to reimbursement rates for such therapy services will
not materially adversely affect the Company's results of operations. See "Risk
Factors -- Dependence on Reimbursement by Third Party Payors."
Medicaid. The Medicaid program is designed to provide medical assistance to
individuals unable to afford medical care. Medicaid is a joint Federal and state
program in which states voluntarily participate. Reimbursement rates, and
reimbursement methods and standards, under the Medicaid
50
program are set by each participating state (with Federal approval as to certain
aspects of the reimbursement methods and standards), and rates and covered
services vary from state to state. In some of the states in which Mariner
operates, Mariner's inpatient facilities are paid a per diem rate for providing
services to Medicaid patients based on the applicable facility's reasonable
allowable costs incurred in providing services plus a return on equity, subject
to cost ceilings for both operating and fixed costs. In some states in which
Mariner operates, individual facilities are reimbursed, in whole or in part, on
a prospective rate system. Retroactive adjustments, if any, are based on a
recomputation of the rate based upon a field audit of the submitted cost report.
In other states, each facility is assigned a range of rates that vary depending
on patient acuity and historical costs. Certain states are studying methods for
reducing expenses under their Medicaid programs; these initiatives could have a
material adverse effect on Medicaid rates applicable to Mariner or cause delays
in payment. Certain states in which Mariner operates have undertaken a study of
acuity levels and are considering changes in their reimbursement systems to take
levels of acuity into account. Mariner cannot currently determine the potential
effect of any such changes. See "Risk Factors -- Health Care Reform."
Audits, Settlements and Reserves. Under current reimbursement regulations,
funds received under Medicaid and Medicare programs are subject to audit with
respect to proper application of the various payment formulas. These audits can
result in retroactive adjustment of payments received from the program,
resulting in either amounts due to the government agency from Mariner or amounts
due Mariner from the government agency. Past audits have not resulted in any
material repayments by Mariner, although there can be no assurance that there
will not be material adjustments in the future.
MARKETING AND PATIENT ADMISSION
INPATIENT FACILITIES
In marketing MarinerCare programs, the Company pursues a two-pronged
strategy. It markets its facilities, programs and services, first, to payors and
managed care organizations at the corporate level and, second, to professionals
responsible for discharging patients at local hospitals at the facility level.
At the corporate level, Mariner's sales personnel seek to establish
relationships with payors and managed care organizations, who are increasingly
important sources of referrals for subacute patients. The Company develops
contractual relationships with such payors and organizations on a local,
regional and national basis.
Each facility maintains admissions coordinators who develop admissions goals
based on the availability of resources for each of its MarinerCare programs and
who call on acute care hospitals to evaluate patients for admission to Mariner's
facilities. The admissions coordinators work closely with hospitals, payors and
managed care organizations to educate them about the Company's facilities,
programs and services and to determine which patients would benefit from the
Company's programs. Patients admitted to Mariner's facilities are generally
discharged to the facility from general acute care hospitals.
REHABILITATION PROGRAMS
Mariner markets its rehabilitation programs to skilled nursing facilities
primarily through regional administrators, who contact administrators and other
personnel of skilled nursing facilities. The Company seeks to demonstrate to the
administrator of a skilled nursing facility that Mariner offers a complete
solution to the facility's rehabilitation services needs in a cost-effective
manner. Mariner emphasizes that its therapists are based at the facility and do
not move from site to site, resulting in improved consistency and continuity of
patient care. Depending on the facility's needs, Mariner will also staff the
facility's rehabilitation management program with case managers and admissions,
management and marketing personnel, and will provide reimbursement and other
management support services. These individuals work with the facility's staff to
attract subacute patients whose recovery would be benefited by intensive
rehabilitation therapy, with the goal of improving the utilization of the
facility's rehabilitation management program as well as the facility's other
services.
51
QUALITY ASSURANCE
Mariner has developed a comprehensive quality assurance program at all of
its facilities and units. This program requires that each site meet Mariner's
standards, which include comprehensive training requirements and satisfactory
results on patient satisfaction surveys. Mariner's quality assurance program
includes a training program for all new Mariner employees and periodic training
programs for clinical personnel. Mariner believes that its utilization of
standardized protocols facilitates its clinical staffs' training and skill
retention.
Each facility is subject to audit by Mariner's corporate personnel at least
annually to review its compliance with Mariner's standards. Also, Mariner has
developed a patient satisfaction questionnaire which is included in each
patient's discharge package. Facility administrators' performance reviews and
bonuses are dependent in part upon the results of the facility's quality
assurance audit and its patient satisfaction questionnaires.
FACILITIES
The following table provides information by state about each of the
facilities owned, leased and managed by the Company as of May 2, 1996:
<TABLE>
<CAPTION>
OWNED FACILITIES LEASED FACILITIES MANAGED FACILITIES TOTAL
---------------- ----------------- ------------------ -----
FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS
---------- ---- ---------- ---- ---------- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Florida Region:
Florida ........... 16 1,829 8 1,008 2 367 26 3,204
Southwest Region:
Colorado .......... -- -- 2 237 -- -- 2 237
Kansas ............ -- -- 1 100 -- -- 1 100
Oklahoma .......... -- -- 1 161 -- -- 1 161
Texas ............. 4 650 7 995 1 146 12 1,791
New England Region:
Connecticut ....... 2 250 1 90 -- -- 3 340
Massachusetts ..... 6 748 -- -- -- -- 6 748
Mid Atlantic Region:
Georgia ........... 1 165 -- -- -- -- 1 165
North Carolina .... 1 150 -- -- -- -- 1 150
South Carolina .... 3 308 -- -- -- -- 3 308
Tennessee ......... 2 210 2 253 -- -- 4 463
West Virginia ..... 1 186 -- -- -- -- 1 186
Central Region:
Illinois .......... 1 120 -- -- -- -- 1 120
Indiana ........... 1 100 -- -- -- -- 1 100
Maryland .......... 1 177 -- -- -- -- 1 177
New Jersey ........ -- -- -- -- 1 40 1 40
Ohio .............. 1 93 -- -- -- -- 1 93
Pennsylvania ...... 2 175 -- -- 1 30 3 205
Wisconsin ......... 1 117 -- -- -- -- 1 117
- --- --- --- --- --- --- ---
TOTALS .......... 43 5,278 22 2,844 5 583 70 8,705
== ===== == ===== = === == =====
</TABLE>
The Company also owns its 80,000 square foot headquarters facility
located in New London, Connecticut. The Company's leases are generally
long-term. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
52
COMPETITION
Mariner's subacute care facilities compete primarily on a local and regional
basis with other skilled care providers, including general and chronic care
hospitals, skilled nursing facilities, rehabilitation centers and other subacute
care providers. Many of such providers currently have underutilized facilities
and are expanding into subacute care by converting some or all of such
facilities to subacute care. In particular, a number of nursing care facilities
and general acute care hospitals are adding subacute care units. In addition, a
number of services provided by the Company compete with services traditionally
provided by general acute care hospitals, rehabilitation facilities and other
providers. Some competing providers have greater financial resources than those
of the Company or may operate on a nonprofit basis or as charitable
organizations. The degree of success with which Mariner's facilities compete
varies from location to location and depends on a number of factors. The Company
believes that the programs and quality of care provided, the reputation of its
facilities and the level of its charges for services are significant competitive
factors. Mariner seeks to meet competition through its patient focus and the
relatively low cost of its programs. See "Risk Factors -- Competition."
Mariner's competition in the rehabilitation business in most markets
reflects the fragmented nature of the rehabilitation services industry. There
are numerous providers of contract rehabilitation services, some of which merely
provide a therapist to a nursing facility and others of which provide total
rehabilitation program management like the Company. Most of the Company's
clinics compete directly or indirectly with outpatient rehabilitation providers,
the rehabilitation therapy departments of acute care hospitals, physicians'
offices, private physical therapy practices and chiropractors.
GOVERNMENT REGULATION
The Company and the health care industry generally are subject to extensive
Federal, state and local regulation governing licensure, certification, conduct
of operations and participation in reimbursement programs. Political, economic
and regulatory influences are subjecting the health care industry in the United
States to fundamental change. Numerous proposals for comprehensive reform of the
nation's health care system have been introduced in Congress. Many potential
approaches are under consideration, including controls on health care spending
through limitations on the growth of private health insurance premiums and
Medicare and Medicaid spending, and other fundamental changes to the health care
delivery system. In addition, some of the states in which Mariner operates are
considering or have adopted various health care reform proposals. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative health care delivery systems and payment methodologies and
public debate of these issues will likely continue in the future. Due to
uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, the Company cannot predict which, if any, of such
reform proposals will be adopted, when they may be adopted or what impact they
may have on the Company. See "Risk Factors -- Health Care Reform."
In addition, both the Medicare and Medicaid programs are subject to
statutory and regulatory changes, administrative rulings, interpretations of
policy, intermediary determinations and governmental funding restrictions, all
of which may materially increase or decrease the rate of program payments to
health care facilities. Since 1983, Congress has consistently attempted to limit
the growth of Federal spending under the Medicare and Medicaid programs. The
Company can give no assurance that payments under such programs will in the
future remain at a level comparable to the present level or be sufficient to
cover the costs allocable to such patients. In addition, many states are
considering reductions in their Medicaid budgets.
Certificate of Need Requirements. Most states in which the Company operates
or is considering expansion possibilities have statutes which require that prior
to the addition or construction of new beds, the addition of new services, the
acquisition of certain medical equipment or certain capital expenditures in
excess of defined levels, a state agency must determine that a need exists.
These state determination of need or certificate of need ("CON") programs are
designed to avoid duplication in health care facilities. CONs usually are issued
for a specified maximum expenditure and require implementation of the proposed
improvement within a specified period of time. Some states also require
53
obtaining an exemption from CON review, or a reclassification of an existing
CON, for acquisitions of existing health care facilities. Several states have
instituted moratoria on new CONs, or otherwise stated their intent not to grant
approvals for new beds. Such moratoria may adversely affect the Company's
ability to expand in such states, but may also provide a barrier to entry to
potential competitors.
Where required, appropriate CONs are obtained for the Company's facilities
and managed units. Depending on the licensure of the facility in which it is
located, a managed or leased unit may operate under the host facility's CON,
although Mariner may seek a new CON to enable the unit to participate in certain
Federal and state health-related programs.
Licensing. The inpatient facilities operated or managed by the Company must
be licensed by state authorities. Both initial and continuing qualification of a
skilled nursing facility to maintain such licensure and participate in Medicare
and Medicaid programs depend upon many factors including, among other things,
accommodations, equipment, services, patient care, safety, personnel, physical
environment, and adequate policies, procedures and controls. In addition, the
Company's outpatient rehabilitation clinics, pharmacy services and other health
care services are generally subject to regulation and, in many instances,
licensure or certification requirements.
Medicare and Medicaid Certification. In order to receive Medicare and
Medicaid reimbursement, a skilled nursing facility must meet the applicable
requirements of participation set forth by the United States Department of
Health and Human Services ("HHS") relating to the type of facility, its
equipment, its personnel and its standards of medical care, as well as comply
with all state and local laws and regulations. In addition, Medicare regulations
generally require that entry into such facilities be through physician referral.
The Company must offer services to Medicare and Medicaid recipients on a
non-discriminatory basis and may not preferentially accept private pay or
commercially insured patients. In addition, the Company's outpatient
rehabilitation clinics, pharmacy services and other health care services are
generally subject to applicable Medicare and Medicaid certification
requirements.
Inspections. State and local agencies inspect all health care facilities on
a regular basis to determine whether such facilities are in compliance with
governmental operating and health standards and conditions for participation in
government medical assistance programs. Such surveys include reviews of patient
utilization of health care facilities and standards for patient care. In the
ordinary course of its business, the Company receives notices from time to time
of deficiencies for failure to comply with various regulatory requirements. The
Company reviews such notices and takes appropriate corrective action. In most
cases, the Company and the reviewing agency will agree upon the measures to be
taken to bring the facility into compliance with regulatory requirements. In
some cases or upon repeat violations, the reviewing agency may take, or may be
required to take, various adverse actions against a facility, including the
imposition of fines, temporary suspension of admission of new patients to the
facility, suspension or decertification from participation in the Medicare or
Medicaid programs and, in extreme circumstances, revocation of a facility's
license. These actions may adversely affect the facility's ability to continue
to operate, the ability of the Company to provide certain services, and the
facility's eligibility to participate in the Medicare or Medicaid programs. Two
of the Company's facilities have received notice that, if certain alleged
deficiencies are not remedied in a timely manner, the agency will decertify the
facility from participation in the Medicare and Medicaid programs. The Company
currently intends to take all reasonable actions necessary to remedy such
deficiencies in a timely manner. In this regard, with respect to one of such
facilities, the Company has retained independent third parties to assist in
evaluating and remedying the deficiencies and to assist in managing the
facility. There can be no assurances that the Company will be able to remedy the
deficiencies cited in a manner satisfactory to, and the time specified by, the
regulatory agencies.
Fraud and Abuse Laws. Various Federal and state laws regulate the
relationship between providers of health care services and physicians or others
able to refer medical services, including employment or service contracts,
leases and investment relationships. These laws include the fraud and abuse
provisions of the Medicare and Medicaid and similar state statutes (the "Fraud
and Abuse Laws"), which prohibit the payment, receipt, solicitation or offering
of any direct or indirect remuneration intended to induce the referral of
Medicare or Medicaid patients or for the ordering or providing of Medicare or
Medicaid covered services, items or equipment. Violations of these provisions
may result in civil and criminal penalties and/or exclusion from participation
in the Medicare and Medicaid programs and from state programs containing similar
54
provisions relating to referrals of privately insured patients. HHS has
interpreted these provisions broadly to include the payment of anything of value
to influence the referral of Medicare or Medicaid business. HHS has issued
regulations which set forth certain "safe harbors," representing business
relationships and payments that can safely be undertaken without violation of
the Fraud and Abuse Laws. In addition, certain Federal and state requirements
generally prohibit certain providers from referring patients to certain types of
entities in which such provider has an ownership or investment interest or with
which such provider has a compensation arrangement, unless an exception is
available. The Company considers all applicable laws in planning marketing
activities and exercises care in an effort to structure its arrangements with
health care providers to comply with these laws. However, because there is no
procedure for obtaining advisory opinions from government officials, Mariner is
unable to provide assurances that all of its existing or future arrangements
will withstand scrutiny under the anti-fraud and abuse statute, safe harbor
regulations or other state or federal legislation or regulations, nor can it
predict the effect of such rules and regulations on these arrangements in
particular or on Mariner's operations in general. While certain of Mariner's
contracts may not fall within the safe harbors, Mariner believes that its
business relationships comply with the Fraud and Abuse Laws. See "Risk Factors
- -- Uncertainty of Regulation."
INSURANCE
Mariner maintains professional liability insurance, comprehensive general
liability insurance and other insurance coverage on all of its facilities.
Mariner believes that its insurance is adequate in amount and coverage for its
current operations. See Note 18 of the Consolidated Financial Statements
appearing elsewhere in this Prospectus.
EMPLOYEES
As of March 31, 1996, Mariner employed approximately 13,500 full and
part-time employees. The employees at three of Mariner's skilled nursing
facilities, representing approximately 1.3% of Mariner's work force, are
represented by labor unions. One of these union contracts expired in February,
and the Company is currently in the process of negotiating a new contract. Two
other union contracts expire in June of 1996 and December of 1998. Mariner is
not aware of any current activities to organize any of its other employees.
Management of Mariner considers the relationship between Mariner and its
employees to be good.
Mariner competes with general acute care hospitals, nursing homes and other
care facilities for the services of physicians, registered nurses, therapists
and other professional personnel. From time to time, there have been shortages
in the supply of available physicians, registered nurses and various types of
therapists. Competition for licensed therapists is intense and turnover is very
high. Mariner places substantial emphasis on recruiting and retaining
therapists, employing a staff of recruiters dedicated to identifying,
interviewing and hiring therapists. In general, therapists prefer clinic
employment over contract services employment, primarily because a clinic
practice generally involves less acutely ill patients. The turnover in a clinic
practice is therefore lower than in a contract practice. Although Mariner
believes that it will be able to attract and retain sufficient physicians,
nursing personnel and therapists to meet its needs, there can be no assurance
that it will be able to do so. See "Risk Factors -- Dependence on Key Personnel;
Demand for Personnel."
LITIGATION
As is typical in the health care industry, Mariner is subject to claims and
legal actions in the ordinary course of business. The Company's Massachusetts
pharmacy operations are presently under review for certain matters with respect
to technical requirements. The Company currently believes that the outcome of
such review will not have a material adverse effect on Mariner. Mariner has also
assumed claims and legal actions brought against certain of the companies which
it has acquired, which material claims and legal actions are covered by
indemnification agreements by the companies' former owners. Mariner believes
that all such claims and actions currently pending against it either are
adequately covered by insurance or by indemnification or would not have a
material adverse effect on Mariner if decided in a manner unfavorable to
Mariner.
55
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES
---- --- --------------------
<S> <C> <C>
Arthur W. Stratton, Jr., M.D. .. 50 Chairman of the Board, President, Chief
Executive Officer and Director
Jeffrey W. Kinell .............. 40 Executive Vice President, Treasurer and
Chief Financial Officer
Lawrence R. Deering ............ 39 Executive Vice President and Chief
Operating Officer
David C. Fries, Ph. D. ......... 51 Director
Christopher Grant, Jr. ......... 41 Director
Stiles A. Kellett, Jr. ......... 51 Director
John F. Robenalt, Esq. ......... 43 Director
</TABLE>
Dr. Stratton has been Chairman of the Board of Directors and Chief Executive
Officer of Mariner since founding Mariner in 1988. He also served as President
of the Company since inception until May 1994 and from February 1995 to the
present. Prior to founding Mariner, Dr. Stratton was a practicing physician and
served in a number of administrative capacities in acute care hospitals.
Mr. Kinell has served as Executive Vice President of Mariner since September
1995, and has served as Treasurer and Chief Financial Officer of Mariner since
1991. From 1987 to 1991, Mr. Kinell served as the Senior Manager of the Health
Care Group of Ernst & Young, where he was responsible for the development of a
practice serving alternate site health care providers.
Mr. Deering has served as Executive Vice President and Chief Operating
Officer of Mariner since September 1995, and served as President of the
Inpatient Division of Mariner from September 1994 to September 1995. From 1990
to September 1994, he was President and Chief Executive Officer of Legend, a
corporation from which Mariner acquired certain assets in July 1994. From 1985
to 1990, he was the Chief Operating Officer of Meritcare, Inc.
Dr. Fries has served as a director of the Company since 1992. Since
December 1994, Dr. Fries has been the Chief Executive Officer and a
director of Productivity Solutions, Inc., a software company servicing the
retail industry. From 1987 through December 1994, Dr. Fries was a general
partner of Canaan Ventures, a venture capital firm. Prior to 1987, Dr.
Fries had been an operating executive with General Electric Co. in several
of its business units.
Mr. Grant has served as a director of the Company since 1991. Mr. Grant has
been the President of CGJR Capital Management, Inc. ("CGJR Capital"), a venture
capital firm, since May 1995. From May 1994 through May 1995, he was involved in
organizing CGJR Health Care Services Private Equities, L.P., a limited
partnership, for which CGJR Capital serves as the general partner. From January
1994 until May 1994, Mr. Grant served as the Senior Vice President and Chief
Operating Officer of Surgical Health Corporation, an operator of outpatient
surgical centers, and now a wholly-owned subsidiary of HealthSouth Corporation.
From March 1993 through January 1994, Mr. Grant was Executive Vice President,
Chief Operating Officer and a director of Heritage Surgical Corporation, an
operator of outpatient surgical centers and now a wholly-owned subsidiary of
Surgical Health Corporation. From 1990 through March 1993, Mr. Grant served as
Senior Vice President and, through 1992, Treasurer of Medical Care
International, Inc., an operator of outpatient surgical centers. From 1989
through 1990, Mr. Grant served as President of MediVision, Inc, an operator of
eye surgery and ophthalmic clinics and from 1986 through 1989, served as its
Chief Financial Officer.
56
Mr. Kellett has served as a director of the Company since July 1995. He
became a director of the Company in connection with the Company's transactions
with CSI and its affiliates. He has been Chairman of the Board of Directors of
CSI since 1980 and a Vice President since 1984. Mr. Kellett is Chairman of
Kellett Investment Corp., a private investment company. Mr. Kellett also served
as CSI's President and Treasurer from 1981 to 1984. Mr. Kellett has served as a
director of LDDS/IDB Worldcom Inc., a telecommunications company, since 1981.
Mr. Robenalt has served as a director of the Company since 1991. Mr.
Robenalt has been the President of Panama City Health Care Center, Inc. since
1985 and of Sarasota Health Care Center, Inc. since 1990, both of which are
nursing facilities located in Florida. Since 1992, Mr. Robenalt has been
President of Morgan Hill Health Care Investors, Inc. (an owner of two nursing
facilities in California), Oak Health Care Investors of Durham, Inc. (a lessee
of a nursing facility in North Carolina) and Century Health Care Investors, Inc.
(a company investing primarily in nursing facilities). Mr. Robenalt has also
been an attorney practicing with Robenalt & Robenalt since 1984, and has been
the managing partner of that firm since 1986. From 1988 to 1991, Mr. Robenalt
served as Vice President of Health Care REIT, Inc., with responsibility for
underwriting investments in health care facilities. Since May 1995, Mr. Robenalt
has been a director of Stacey's Buffet, Inc., a restaurant chain based in
Florida.
57
DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes will be issued under an Indenture, dated as of April 4,
1996 (the "Indenture"), between Mariner Health Group, Inc. (the "Company") and
State Street Bank and Trust Company, as trustee (the "Trustee"), which also
governs the Notes. The following summaries of certain provisions of the
Indenture do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, all the provisions of the Indenture, including
the definitions of certain terms therein. On the effective date of this Exchange
Offer Registration Statement, the Indenture will be subject to and governed by
the provisions of the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). Wherever particular Sections or defined terms of the Indenture
not otherwise defined herein are referred to, such Sections or defined terms
shall be incorporated herein by reference, and those terms made a part of the
Indenture by the Trust Indenture Act are also incorporated herein by reference.
For purposes of the following description, the Exchange Notes and Notes are at
times collectively referred to as the "Notes." A copy of the form of Indenture
will be made available to holders of Notes upon request, and is filed as an
exhibit to this Exchange Offer Registration Statement. See "Available
Information."
The Exchange Notes and any Notes that remain outstanding after consummation
of the Exchange Offer will be treated as a single class of securities under the
Indenture.
GENERAL
The Exchange Notes offered hereby will mature on April 1, 2006, will be
limited to $150,000,000 aggregate principal amount, and will be unsecured senior
subordinated obligations of the Company. Except as described below, each
Exchange Note will bear interest at the rate set forth on the cover page hereof,
subject to adjustment as described in the following paragraph, from April 4,
1996 or from the most recent interest payment date to which interest has been
paid, payable semiannually on April 1 and October 1 in each year, commencing
October 1, 1996, to the Person in whose name the Exchange Note (or any
predecessor Note) is registered at the close of business on the March 15 or
September 15 next preceding such interest payment date. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
(Sections 202, 301 and 309)
Principal of, and premium, if any, and interest on, the Notes will be
payable, and the Notes will be transferable, at the office or agency of the
Company in the City of New York maintained for such purposes (which initially
will be the corporate trust office of the Trustee); provided, however, that
payment of interest may be made at the option of the Company by check mailed to
the Person entitled thereto as shown on the security register. (Sections 301,
305 and 1002) The Notes will be issued only in fully registered form without
coupons, in denominations of $1,000 and any integral multiple thereof. (Section
302) No service charge will be made for any registration of transfer, exchange
or redemption of Notes, except in certain circumstances for any tax or other
governmental charges that may be imposed in connection therewith. (Section 305)
Initially, the Trustee will act as paying agent and registrar of the Notes.
The Company may change the paying agent and registrar without notice.
When issued, the Notes will be a new issue of securities with no
established trading market. No assurance can be given as to the liquidity
of the trading market for the Notes. See "Risk Factors --
Absence of Public Market for the Notes."
OPTIONAL REDEMPTION
(a) The Notes will be subject to redemption at any time on or after April 1,
2001, at the option of the Company, in whole or in part, on not less than 30 nor
more than 60 days' prior notice in amounts of $1,000 or an integral multiple
thereof at the following redemption prices (expressed as percentages of the
principal amount), if redeemed during the 12-month period beginning April 1 of
the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001 ..................... 104.750%
2002 ..................... 103.167%
2003 ..................... 101.583%
</TABLE>
58
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the redemption date (subject to the
rights of holders of record on relevant record dates to receive interest due on
an interest payment date).
(b) If less than all of the Notes are to be redeemed, the Trustee shall
select the Notes or portions thereof to be redeemed pro rata, by lot or by any
other method the Trustee shall deem fair and reasonable.
(Sections 203, 1101 and 1107)
SINKING FUND
The Notes will not be entitled to the benefit of any sinking fund.
RANKING
The payment of the principal of, and premium, if any, and interest on, the
Notes will be subordinated, as set forth in the Indenture, in right of payment
to the prior payment in full, in cash or Cash Equivalents or, as acceptable to
each and every holder of Senior Indebtedness, in any other manner, of all Senior
Indebtedness. The Notes will be senior subordinated indebtedness of the Company
ranking pari passu with all other existing and future senior subordinated
indebtedness of the Company and senior to all existing and future Subordinated
Indebtedness of the Company. (Sections 1301 and 1302)
Upon the occurrence of any default in the payment of any Designated Senior
Indebtedness beyond any applicable grace period and after the receipt by the
Trustee from representatives of holders of any Designated Senior Indebtedness
(collectively, a "Senior Representative") of written notice of such default, no
payment (other than payments previously made pursuant to the provisions
described under "-- Defeasance or Covenant Defeasance of Indenture") or
distribution of any assets of the Company or any Subsidiary of any kind or
character (excluding certain permitted equity interests or subordinated
securities) may be made on account of the principal of or premium, if any, or
interest on, the Notes, or on account of the purchase, redemption, defeasance or
other acquisition of or in respect of, the Notes unless and until such default
shall have been cured or waived or shall have ceased to exist or such Designated
Senior Indebtedness shall have been discharged or paid in full, in cash or Cash
Equivalents or, as acceptable to each and every holder of Senior Indebtedness,
in any other manner, after which the Company shall resume making any and all
required payments in respect of the Notes, including any missed payments.
Upon the occurrence and during the continuance of any non-payment default
with respect to any Designated Senior Indebtedness pursuant to which the
maturity thereof may then be accelerated (a "Non-payment Default") and after the
receipt by the Trustee and the Company from a Senior Representative of written
notice of such Non-payment Default, no payment (other than payments previously
made pursuant to the provisions described under "-- Defeasance or Covenant
Defeasance of Indenture") or distribution of any assets of the Company of any
kind or character (excluding certain permitted equity interests or subordinated
securities) may be made by the Company or any Subsidiary on account of the
principal of, or premium, if any, or interest on, the Notes or on account of the
purchase, redemption, defeasance or other acquisition of, or in respect of, the
Notes for the period specified below (the "Payment Blockage Period").
The Payment Blockage Period shall commence upon the receipt of notice of the
Non-payment Default by the Trustee and the Company from a Senior Representative
and shall end on the earliest of (i) the 179th day after such commencement, (ii)
the date on which such Non-payment Default (and all Non-payment Defaults as to
which notice is also given after such Payment Blockage Period is initiated) is
cured, waived or ceases to exist or on which such Designated Senior Indebtedness
is discharged or paid in full, in cash or Cash Equivalents or, as acceptable to
each and every holder of the Senior Indebtedness, in any other manner or (iii)
the date on which such Payment Blockage Period (and all Non-payment Defaults as
to which notice is given after such Payment Blockage Period is initiated) shall
have been terminated by written notice to the Company or the Trustee from the
Senior Representative initiating such Payment Blockage Period, after which, in
the case of each of clauses (i), (ii) and (iii), the Company will promptly
resume making any and all required payments in respect of the Notes, including
any missed payments. In no event will a Payment Blockage Period extend beyond
179 days from the date of the receipt by the Company and the Trustee of the
59
notice initiating such Payment Blockage Period (such 179-day period referred to
as the "Initial Period"), unless in the case of each of clauses (i), (ii) and
(iii), the maturity of any Designated Senior Indebtedness shall have been
accelerated or any payment default thereunder shall exist. Any number of notices
of Non-payment Defaults may be given during the Initial Period; provided that
during any period of 365 consecutive days only one Payment Blockage Period,
during which payment of principal of, or premium, if any, or interest on, the
Notes may not be made, may commence and the duration of such period may not
exceed 179 days, unless, in the case of each of clauses (i), (ii) and (iii), the
maturity of any Designated Senior Indebtedness shall have been accelerated or
any payment default thereunder shall exist. No Non-payment Default with respect
to any Designated Senior Indebtedness that existed or was continuing on the date
of the commencement of any Payment Blockage Period will be, or can be, made the
basis for the commencement of a second Payment Blockage Period, whether or not
within a period of 365 consecutive days, unless such default has been cured or
waived for a period of not less than 90 consecutive days. (Section 1303)
If the Company fails to make any payment on the Notes when due or within any
applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of Default
under the Indenture and would enable the holders of the Notes to accelerate the
maturity thereof. See "-- Events of Default."
The Indenture will provide that in the event of any insolvency or bankruptcy
case or proceeding, or any receivership, liquidation, reorganization or other
similar case or proceeding in connection therewith, relative to the Company or
its creditors, as such or to its assets, or any liquidation, dissolution or
other winding up of the Company, whether voluntary or involuntary, or whether or
not involving insolvency or bankruptcy, or any assignment for the benefit of
creditors or any other marshaling of assets or liabilities of the Company, all
Senior Indebtedness must be paid in full, in cash or Cash Equivalents or, as
acceptable to each and every holder of Senior Indebtedness, in any other manner,
before any payment or distribution (excluding distributions of certain permitted
equity interests or subordinated securities) is made on account of the principal
of, or premium, if any, or interest on the Notes or on account of the purchase,
redemption, defeasance or other acquisition of, or in respect of, the Notes
(other than payments previously made pursuant to the provisions described under
"-- Defeasance or Covenant Defeasance of Indenture").
By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Company who are holders of Senior Indebtedness may recover
more, ratably, than the holders of the Notes, and funds which would be otherwise
payable to the holders of the Notes will be paid to the holders of the Senior
Indebtedness to the extent necessary to pay the Senior Indebtedness in full, in
cash or Cash Equivalents or, as acceptable to each and every holder of Senior
Indebtedness, in any other manner, and the Company may be unable to meet its
obligations fully with respect to the Notes.
"Senior Indebtedness" under the Indenture means the principal of, and
premium, if any, and interest (including interest accruing after the filing of a
petition initiating any proceeding under any state, federal or foreign
bankruptcy law (at the rate provided for in the instrument governing the
Indebtedness and any related loan documents whether or not allowable as a claim
in such proceeding) and all other monetary obligations on, any Indebtedness of
the Company (other than as otherwise provided in this definition), whether
outstanding on the date of the Indenture or thereafter created, incurred or
assumed, and whether at any time owing, actually or contingently, unless, in the
case of any particular Indebtedness, the instrument creating or evidencing the
same or pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the Notes. Without
limiting the generality of the foregoing, "Senior Indebtedness" shall include
the principal of, and premium, if any, and interest (including interest accruing
after the filing of a petition initiating any proceedings under any state,
federal or foreign bankruptcy laws (at the rate provided for in the instrument
governing the Indebtedness and any other related loan documents) whether or not
allowable as a claim in such proceeding), and all other monetary obligations of
every kind and nature of the Company from time to time owed to the lenders under
the Credit Facility; provided, however, that any Indebtedness under any
refinancing, refunding or replacement of the Credit Facility shall not
constitute Senior Indebtedness to the extent the Indebtedness thereunder is by
its express terms subordinate to any other Indebtedness of the Company.
Notwithstanding the foregoing, "Senior Indebtedness" shall not include (i)
Indebtedness evidenced by the Notes, (ii) Indebtedness that is by its terms
subordinate or junior in right of
60
payment to any Indebtedness of the Company, (iii) Indebtedness which, when
incurred and without respect to any election under Section 1111(b) of Title 11
United States Code, is without recourse to the Company, (iv) Indebtedness which
is represented by Redeemable Capital Stock, (v) any liability for foreign,
federal, state, local or other taxes owed or owing by the Company to the extent
such liability constitutes Indebtedness, (vi) Indebtedness of the Company to a
Subsidiary or any other Affiliate of the Company or any of such Affiliate's
subsidiaries (other than any Indebtedness (or any commitment to incur
Indebtedness) outstanding on the date hereof and any refinancing, refunding,
renewal, substitution or replacement of such Indebtedness), (vii) that portion
of any Indebtedness which at the time of issuance is issued in violation of the
Indenture and (viii) Attributable Debt (other than under any Capital Lease
Obligations).
"Designated Senior Indebtedness" under the Indenture means (i) all Senior
Indebtedness under, or in respect of, the Credit Facility, including, without
limitation, any additional Indebtedness incurred under the Credit Facility after
the date of the Indenture pursuant to clause (i) of the definition of Permitted
Indebtedness as described in the Indenture, and (ii) any other Senior
Indebtedness which at the time of determination, has an aggregate principal
amount outstanding of at least $30 million and is specifically designated in the
instrument evidencing such Senior Indebtedness or the agreement under which such
Senior Indebtedness arises as "Designated Senior Indebtedness" by the Company.
As of December 31, 1995, on a pro forma basis after giving effect to the
Recent Acquisitions and the sale of the Notes and the application of the
estimated net proceeds therefrom, the Company would have had outstanding $152.3
million aggregate principal amount of Senior Indebtedness and indebtedness of
the Company's subsidiaries (excluding intercompany indebtedness), substantially
all of which would have been secured.
The Indenture will limit, but not prohibit, the incurrence by the Company
and its Subsidiaries of additional Indebtedness and the Indenture will prohibit
the incurrence by the Company of Indebtedness that is subordinated in right of
payment to any Senior Indebtedness of the Company and senior in right of payment
to the Notes.
The Notes will be effectively subordinated to all Indebtedness and other
liabilities and commitments (including trade payables and lease obligations) of
the Company's Subsidiaries. Any right of the Company to receive assets of any
such Subsidiary upon the liquidation or reorganization of any such Subsidiary
(and the consequent right of the holders of the Notes to participate in those
assets) will be effectively subordinated to the claims of that Subsidiary's
creditors, except to the extent that the Company is itself recognized as a
creditor of such Subsidiary, in which case the claims of the Company would still
be subordinate to any security in the assets of such Subsidiary and any
Indebtedness of such Subsidiary senior to that held by the Company.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness. The Company will not, and will not permit any of
its Subsidiaries to, create, issue, incur, assume, guarantee or otherwise in any
manner become directly or indirectly liable for the payment of or otherwise
incur (collectively, "incur"), any Indebtedness (including any Acquired
Indebtedness but excluding Permitted Indebtedness) unless, in each case, the
Company's Consolidated Fixed Charge Coverage Ratio for the four full fiscal
quarters immediately preceding the incurrence of such Indebtedness taken as one
period (and after giving pro forma effect to (i) the incurrence of such
Indebtedness and (if applicable) the application of the net proceeds therefrom,
including to refinance other Indebtedness, as if such Indebtedness was incurred,
and the application of such proceeds occurred, on the first day of such
four-quarter period; (ii) the incurrence, repayment or retirement of any other
Indebtedness by the Company and its Subsidiaries since the first day of such
four-quarter period as if such Indebtedness was incurred, repaid or retired at
the beginning of such four-quarter period (except that, in making such
computation, the amount of Indebtedness under any revolving credit facility
shall be computed based upon the average daily balance of such Indebtedness
during such four-quarter period); (iii) in the case of Acquired Indebtedness or
any acquisition occurring at the time of the incurrence of such Indebtedness,
the related acquisition, assuming such acquisition had been consummated on the
first day of such four-quarter period;
61
and (iv) any acquisition or disposition by the Company and its Subsidiaries of
any company or any business or any assets out of the ordinary course of business
(it being understood that for purposes of this provision the acquisition or
disposition of any health care facility or health care related facility is not
in the ordinary course of business), whether by merger, stock purchase or sale
or asset purchase or sale, or any related repayment of Indebtedness, in each
case since the first day of such four-quarter period, assuming such acquisition
or disposition had been consummated on the first day of such four-quarter
period) is at least equal to or greater than the ratios set forth below during
the periods indicated below:
<TABLE>
<CAPTION>
PERIOD RATIO
------ -----------
<S> <C>
Through March 31, 1997 2.00 : 1.00
from April 1, 1997 through March 31, 1998 2.15 : 1.00
April 1, 1998 and thereafter 2.25 : 1.00
</TABLE>
(Section 1008)
Limitation on Restricted Payments. (a) The Company will not, and will
not permit any Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to holders
of, any shares of the Company's Capital Stock (other than dividends or
distributions payable solely in its shares of Qualified Capital Stock or in
options, warrants or other rights to acquire shares of such Qualified
Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, the Company's Capital Stock or any Capital Stock of any
Affiliate of the Company (other than Capital Stock of any Wholly Owned
Subsidiary of the Company) or options, warrants or other rights to acquire
such Capital Stock of the Company or any Affiliate thereof;
(iii) make any principal payment on, or repurchase, redeem, defease,
retire or otherwise acquire for value, prior to any scheduled principal
payment, scheduled sinking fund payment or scheduled maturity, any
Subordinated Indebtedness (other than any such Indebtedness owed to the
Company or a Wholly Owned Subsidiary);
(iv) declare or pay any dividend or distribution on any Capital Stock of
any Subsidiary to any Person (other than (a) to the Company or any of its
Wholly Owned Subsidiaries or (b) to all holders of Capital Stock of such
Subsidiary on a pro rata basis);
(v) incur, create or assume any guarantee of Indebtedness of any
Affiliate of the Company (other than (a) guarantees of Indebtedness of a
Wholly Owned Subsidiary or Permitted Joint Venture given by the Company or
(b) guarantees of Indebtedness of the Company, any Wholly Owned Subsidiary
or Permitted Joint Venture given by any Subsidiary, in each case in
accordance with the terms of the Indenture); or
(vi) make any Investment in any Person (other than any Permitted
Investments)
(any of the foregoing actions described in clauses (i) through (vi), other
than any such action that is a Permitted Payment (as defined below),
collectively, "Restricted Payments") (the amount of any such Restricted
Payment, if other than cash, as determined by the board of directors of the
Company, whose determination shall be conclusive and evidenced by a board
resolution), unless (1) immediately before and immediately after giving
effect to such Restricted Payment on a pro forma basis, no Default or Event
of Default shall have occurred and be continuing and such Restricted Payment
shall not be an event which is, or after notice or lapse of time or both,
would be, an "event of default" under the terms of any Indebtedness of the
Company or its Subsidiaries; (2) immediately before and immediately after
giving effect to such Restricted Payment on a pro forma basis, the Company
could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the provisions described under "-- Limitation on
Indebtedness;" and (3) after giving effect to the proposed Restricted
Payment, the aggregate amount of all such Restricted Payments declared or
made after the date of the Indenture, does not exceed the sum of:
62
(A) 50% of the aggregate Consolidated Net Income of the Company
accrued on a cumulative basis during the period beginning on the first
day of the fiscal quarter beginning prior to the date of the Indenture
and ending on the last day of the Company's last fiscal quarter ending
prior to the date of the Restricted Payment (or, if such aggregate
cumulative Consolidated Net Income shall be a loss, minus 100% of such
loss);
(B) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the issuance or sale (other than to any of
its Subsidiaries) of Qualified Capital Stock of the Company or any
options, warrants or rights to purchase such Qualified Capital Stock of
the Company (except, in each case, to the extent such proceeds are used
to purchase, redeem or otherwise retire Capital Stock or Subordinated
Indebtedness as set forth below in clause (ii) or (iii) of paragraph (b)
below);
(C) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company (other than from any of its Subsidiaries) upon
the exercise of any options, warrants or rights to purchase Qualified
Capital Stock of the Company;
(D) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the conversion or exchange, if any, of debt
securities or Redeemable Capital Stock of the Company or its Subsidiaries
into or for Qualified Capital Stock of the Company plus, to the extent
such debt securities or Redeemable Capital Stock were issued after the
date of the Indenture, the aggregate of Net Cash Proceeds from their
original issuance; and
(E) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company as capital contributions to the Company.
(b) Notwithstanding the foregoing, and in the case of clauses (ii) through
(v) and (vii) through (x) below, so long as there is no Default or Event of
Default continuing, the foregoing provisions shall not prohibit the following
actions (each of clauses (i) through (viii) and (x) being referred to as a
"Permitted Payment"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would be
permitted by the provisions of paragraph (a) of this Section and such
payment shall be deemed to have been paid on such date of declaration and
shall not have been deemed a "Permitted Payment" for purposes of the
calculation required by paragraph (a) of this Section;
(ii) the repurchase, redemption, or other acquisition or retirement for
value of any shares of any class of Capital Stock of the Company in exchange
for (including any such exchange pursuant to the exercise of a conversion
right or privilege in connection with which cash is paid in lieu of the
issuance of fractional shares or scrip), or out of the Net Cash Proceeds of
a substantially concurrent issue and sale for cash (other than to a
Subsidiary) of, other shares of Qualified Capital Stock of the Company;
provided that the Net Cash Proceeds from the issuance of such shares of
Qualified Capital Stock are excluded from clause (3)(B) of paragraph (a) of
this Section;
(iii) the repurchase, redemption, defeasance, retirement or acquisition
for value or payment of principal of any Subordinated Indebtedness in
exchange for, or in an amount not in excess of the net proceeds of, a
substantially concurrent issuance and sale for cash (other than to any
Subsidiary) of any Qualified Capital Stock of the Company, provided that the
Net Cash Proceeds from the issuance of such shares of Qualified Capital
Stock are excluded from clause (3)(B) of paragraph (a) of this Section;
(iv) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Subordinated
Indebtedness (other than Redeemable Capital Stock) (a "refinancing") through
the issuance of new Subordinated Indebtedness of the Company, provided that
any such new Subordinated Indebtedness (1) shall be in a principal amount
that does not exceed the principal amount so refinanced (or, if such
Subordinated Indebtedness provides for an amount less than the principal
amount thereof to be due and payable upon a declaration of
63
acceleration thereof, then such lesser amount as of the date of
determination), plus the lesser of (I) the stated amount of any premium or
other payment required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being refinanced or (II) the amount
of premium or other payment actually paid at such time to refinance the
Indebtedness, plus, in either case, the amount of expenses of the Company
incurred in connection with such refinancing; (2) has an Average Life to
Stated Maturity greater than the remaining Average Life to Stated Maturity of
the Notes; (3) has a Stated Maturity for its final scheduled principal
payment later than the Stated Maturity for the final scheduled principal
payment of the Notes; and (4) is expressly subordinated in right of payment
to the Notes, at least to the same extent as the Indebtedness to be
refinanced;
(v) the repayment upon the consummation of an Asset Sale of any
Subordinated Indebtedness of the Company which is secured by a Lien which
was permitted in accordance with the Indenture to the extent that such
Indebtedness is required to be repaid in connection with such Asset Sale
pursuant to the terms of the instrument governing such Indebtedness and such
Lien; provided that the pro rata concurrent or prior repayment of the Notes
is provided for with the proceeds of such Asset Sale if the Notes are
secured by a Lien pari passu with or senior to the Lien of such
Indebtedness;
(vi) any purchase, redemption or other acquisition of Capital Stock of a
Permitted Joint Venture from a physician or other health care provider which
is required to be purchased, redeemed or otherwise acquired by applicable
law;
(vii) in addition to the transactions covered by clause (vi) of this
paragraph, any purchase, redemption or other acquisition of Capital Stock of
a Permitted Joint Venture;
(viii) the incurrence, creation of assumption of a guarantee by the
Company or any Subsidiary of the Indebtedness of any Healthcare Related
Business in which the Company has made a Permitted Investment pursuant to
clause (vi) of the definition of Permitted Investment;
(ix) the making of any payment pursuant to any guarantee of Indebtedness
of (a) a Healthcare Related Business which guarantee was permitted to be
incurred pursuant to clause (viii) above or (b) a Permitted Joint Venture;
and
(x) the repurchase of Common Stock pursuant to the Buy Back Agreement
dated September 3, 1992 among MedRehab, Inc., Gerald W. Duley and Frederick
A. Mathwig in an amount not to exceed $1.5 million. (Section 1009)
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly, enter into any
transaction or series of related transactions (including, without limitation,
the sale, purchase, exchange or lease of assets, property or services) with any
Affiliate of the Company (other than the Company or a Wholly Owned Subsidiary)
unless (a) such transaction or series of related transactions is in writing and
on terms that are no less favorable to the Company or such Subsidiary than those
that would be available in a comparable transaction in arm's-length dealings
with an unrelated third party or (b) with respect to any transaction or series
of related transactions involving aggregate payments in excess of $5 million,
such transaction or series of related transactions has been approved by the
Disinterested Directors of the Company (or in the event there is only one
Disinterested Director, by such Disinterested Director); provided, however, that
this provision shall not apply to (i) any transaction or series of related
transactions entered into prior to the date of the Indenture; (ii) the Company's
employee compensation and other benefit arrangements, including any stock option
or stock incentive plan, deferred compensation plan, or any employment
agreement; (iii) the payment of reasonable and customary regular fees to
directors of the Company or any of its Subsidiaries who are not employees of the
Company or any Affiliate; (iv) Restricted Payments that are permitted by the
provisions of the Indenture described above under the covenant entitled "--
Limitation on Restricted Payments;" (v) the continued performance of existing
arrangements with Affiliates on the terms described in the most recent proxy
statement filed by the Company prior to the date of the Indenture; (vi) the
exercise of options set forth in the Amended and Restated Option Agreement dated
as of May 24, 1995 among the Company, CSI, Stiles A. Kellett, Jr., Samuel B.
Kellett, and certain limited partnerships controlled by Stiles A. Kellett, Jr.
and Samuel B. Kellett on the terms in effect on the date of the Indenture; (vii)
the leases entered into by CSI, and the lease payment guarantees by the Company
entered
64
into, in connection with the acquisition by the Company of CSI on the terms in
effect on the date of the Indenture; and (viii) any indemnification of officers
and directors of the Company or any Subsidiary to the maximum extent permitted
by Delaware law (or such other law as may be applicable). (Section 1010).
Limitation on Liens. The Company will not, and will not permit any
Subsidiary to, directly or indirectly, create, incur or affirm any Lien of any
kind securing any Pari Passu Indebtedness or Subordinated Indebtedness
(including any assumption, guarantee or other liability with respect thereto by
any Subsidiary) upon any property or assets (including any intercompany notes)
of the Company or any Subsidiary owned on the date of the Indenture or acquired
after the date of the Indenture, or any income or profits therefrom, unless the
Notes are directly secured equally and ratably with (or, in the case of
Subordinated Indebtedness, prior or senior thereto, with the same relative
priority as the Notes shall have with respect to such Subordinated Indebtedness)
the obligation or liability secured by such Lien (but only until such time as
the Lien securing such Pari Passu Indebtedness or Subordinated Indebtedness
remains outstanding) except for Liens (A) securing any Indebtedness which became
Indebtedness pursuant to a transaction permitted under "-- Consolidation,
Merger, Sale of Assets" or securing Acquired Indebtedness which, in each case,
were created prior to (and not created in connection with, or in contemplation
of) the incurrence of such Pari Passu Indebtedness or Subordinated Indebtedness
by the Company or any Subsidiary and which Indebtedness is permitted under the
provisions of "-- Limitation on Indebtedness;" (B) securing any Indebtedness
incurred in connection with any refinancing, renewal, substitutions or
replacements of any such Indebtedness described in clause (A), or (C) created in
favor of the Company, provided, however, that in the case of clauses (A) and
(B), any such Lien only extends to the assets that were subject to such Lien
securing such Indebtedness prior to the related acquisition by the Company or
its Subsidiaries. (Section 1012)
Limitation on Sale of Assets. (a) The Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, consummate an Asset Sale
unless (i) at least 75% of the consideration from such Asset Sale is received in
cash or Cash Equivalents and (ii) the Company or such Subsidiary receives
consideration at the time of such Asset Sale at least equal to the Fair Market
Value of the shares or assets subject to such Asset Sale (as determined by the
board of directors of the Company and evidenced in a board resolution, which
determination shall be conclusive); provided, however, that (x) the amount of
any Senior Indebtedness of the Company that is assumed by the transferee of any
asset in connection with any Asset Sale pursuant to a customary novation
agreement that releases the Company or such Subsidiary from further liability
and (y) any notes or other obligations received by the Company or any such
Subsidiary from such transferee that are immediately converted by the Company or
such Subsidiary into cash (to the extent of the cash received), will, in the
case of clauses (x) and (y), be deemed to be cash for purposes of this
provision; and provided, further that any Asset Sale which constitutes a
Permitted Investment under clause (v) or (vi) of the definition of Permitted
Investment shall not be subject to the condition set forth in clause (i) of this
sentence.
(b) If all or a portion of the Net Cash Proceeds of any Asset Sale are not
required to be applied to repay permanently any Senior Indebtedness then
outstanding as required by the terms thereof (and in the case of revolving
indebtedness, to permanently reduce the commitment), or the Company determines
not to apply such Net Cash Proceeds to the permanent prepayment of such Senior
Indebtedness, or if no such Senior Indebtedness is then outstanding, then the
Company or a Subsidiary may, within one year of the Asset Sale, use (or enter
into a legally binding commitment to use) the Net Cash Proceeds of such Asset
Sale to acquire properties and other assets (including pursuant to capital
expenditures) that (as determined by the board of directors of the Company)
replace the properties and assets that were the subject of the Asset Sale or
that will be used or useful in any Healthcare Related Business. If any such
legally binding agreement to invest any Net Cash Proceeds is terminated, then
the Company may invest such Net Cash Proceeds prior to the end of such one-year
period or six months from such termination, whichever is later, in any
Healthcare Related Business as provided above. Pending the final application of
any such Net Cash Proceeds, the Company may temporarily reduce revolving
Indebtedness under the Credit Facility or otherwise invest such Net Cash
Proceeds in any manner that is not prohibited by the Indenture. The amount of
such Net Cash Proceeds neither used to permanently repay or prepay Senior
Indebtedness nor used or invested as set forth in this paragraph constitutes
"Excess Proceeds."
65
(c) When the aggregate amount of Excess Proceeds exceeds $10 million, the
Company will apply the Excess Proceeds to the repayment of the Notes and any
other Pari Passu Indebtedness outstanding with similar provisions requiring the
Company to make an offer to purchase such Indebtedness with the proceeds from
any Asset Sale as follows: (A) the Company will make an offer to purchase (an
"Offer") from all holders of the Notes in accordance with the procedures set
forth in the Indenture in the maximum principal amount (expressed as a multiple
of $1,000) of Notes that may be purchased out of an amount (the "Note Amount")
equal to the product of such Excess Proceeds multiplied by a fraction, the
numerator of which is the outstanding principal amount of the Notes, and the
denominator of which is the sum of the outstanding principal amount of the Notes
and such Pari Passu Indebtedness (subject to proration in the event such amount
is less than the aggregate Offered Price (as defined herein) of all Notes
tendered), and (B) to the extent required by such Pari Passu Indebtedness to
permanently reduce the principal amount of such Pari Passu Indebtedness, the
Company will make an offer to purchase or otherwise repurchase or redeem Pari
Passu Indebtedness (a "Pari Passu Offer") in amount (the "Pari Passu Debt
Amount") equal to the excess of the Excess Proceeds over the Note Amount;
provided that in no event will the Company be required to make a Pari Passu
Offer in a Pari Passu Debt Amount exceeding the principal amount of such Pari
Passu Indebtedness plus the amount of any premium required to be paid to
repurchase such Pari Passu Indebtedness. The offer price for the Notes will be
payable in cash in an amount equal to 100% of the principal amount of the Notes
plus accrued and unpaid interest, if any, to the date (the "Offer Date") such
Offer is consummated (the "Offered Price"), in accordance with the procedures
set forth in the Indenture. To the extent that the aggregate Offered Price of
the Notes tendered pursuant to the Offer is less than the Note Amount relating
thereto or the aggregate amount of Pari Passu Indebtedness that is purchased in
a Pari Passu Offer is less than the Pari Passu Debt Amount, the Company may use
any remaining Excess Proceeds for general corporate purposes. If the aggregate
principal amount of Notes and Pari Passu Indebtedness surrendered by holders
thereof exceeds the amount of Excess Proceeds, the Trustee shall select the
Notes to be purchased on a pro rata basis. Upon the completion of the purchase
of all the Notes tendered pursuant to an Offer and the completion of a Pari
Passu Offer, the amount of Excess Proceeds, if any, shall be reset at zero.
(d) The Indenture will provide that, whenever the aggregate amount of Excess
Proceeds received by the Company exceed $10 million such Excess Proceeds will,
prior to any purchase of Notes and Pari Passu Indebtedness described in
paragraph (c) above, be set aside by the Company in a separate account pending
(i) deposit with the depository or a paying agent of the amount required to
purchase the Notes tendered in an Offer or Pari Passu Indebtedness tendered in a
Pari Passu Offer, (ii) delivery by the Company of the Offered Price to the
holders of the Notes tendered in an Offer or Pari Passu Indebtedness tendered in
a Pari Passu Offer and (iii) application, permitted by paragraph (c) above, of
any remaining Excess Proceeds for general corporate purposes. Such Excess
Proceeds may be invested in Temporary Cash Investments, provided that the
maturity date of any such investment made after the amount of Excess Proceeds
exceeds $10 million shall not be later than the Offer Date. The Company shall be
entitled to any interest or dividends accrued, earned or paid on such Temporary
Cash Investments.
(e) The Indenture will provide that, if the Company becomes obligated to
make an Offer pursuant to clause (c) above, the Notes shall be purchased by the
Company, at the option of the holder thereof, in whole or in part in integral
multiples of $1,000, on a date that is not earlier than 30 days and not later
than 60 days from the date the notice of the Offer is given to holders, or such
later date as may be necessary for the Company to comply with the requirements
under the Exchange Act.
(f) The Indenture will provide that the Company will comply with the
applicable tender offer rules, including Rule 14e-1 under the Exchange Act, and
any other applicable securities laws or regulations in connection with an Offer.
(Section 1013)
Limitation on Senior Subordinated Indebtedness. The Company will not, and
will not permit any Guarantor to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise in any manner become directly or indirectly
liable for or with respect to or otherwise permit to exist any Indebtedness that
is subordinate in right of payment to any Indebtedness of the Company or such
Guarantor, as the
66
case may be, unless such Indebtedness is also pari passu with the Notes or the
Guarantee of such Guarantor or subordinate in right of payment to the Notes or
such Guarantee at least to the same extent as the Notes or such Guarantee are
subordinate in right of payment to Senior Indebtedness or Senior Indebtedness of
such Guarantor, as the case may be. (Section 1011)
Limitation on Issuances of Guarantees of Indebtedness. (a) The Company will
not permit any Subsidiary, directly or indirectly, to guarantee, assume or in
any other manner become liable with respect to any Pari Passu Indebtedness or
Subordinated Indebtedness of the Company unless such Subsidiary simultaneously
executes and delivers a supplemental indenture to the Indenture in a form
satisfactory to the trustee providing for a Guarantee of the Notes on the same
terms (including any subordination provisions included in any such guarantee of
Pari Passu or Subordinated Indebtedness) as the guarantee of such Indebtedness
except that (A) such Guarantee need not be secured unless required pursuant to
"-- Limitation on Liens" and (B) if such Indebtedness is by its terms expressly
subordinated to the Notes, any such assumption, guarantee or other liability of
such Subsidiary with respect to such Indebtedness shall be subordinated to such
Subsidiary's Guarantee of the Notes at least to the same extent as such
Indebtedness is subordinated to the Notes.
(b) Notwithstanding the foregoing, any Guarantee by a Subsidiary of the
Notes shall provide by its terms that it (together with any Liens arising from
such Guarantee) shall be automatically and unconditionally released and
discharged upon (i) any sale, exchange or transfer, to any Person not an
Affiliate of the Company, of all of the Company's Capital Stock in, or all or
substantially all the assets of, such Subsidiary, which is in compliance with
the terms of the Indenture or (ii) the release or discharge of the assumption,
guarantee or other liability which resulted in the creation of such Guarantee.
(Section 1014)
Purchase of Notes Upon a Change of Control. If a Change of Control shall
occur at any time, then each holder of Notes shall have the right to require
that the Company purchase such holder's Notes in whole or in part in integral
multiples of $1,000, at a purchase price (the "Change of Control Purchase
Price") in cash in an amount equal to 101% of the principal amount of such
Notes, plus accrued and unpaid interest, if any, to the date of purchase (the
"Change of Control Purchase Date"), pursuant to the offer described below (the
"Change of Control Offer") and in accordance with the other procedures set forth
in the Indenture.
Within 30 days following any Change of Control, the Company shall notify the
Trustee thereof and give written notice of such Change of Control to each holder
of Notes, by first-class mail, postage prepaid, at his address appearing in the
security register, stating, among other things, that a Change of Control has
occurred, the date of such event, the circumstances and relevant facts regarding
such Change of Control (including, but not limited to information with respect
to pro forma historical income, cash flow and capitalization after giving effect
to such Change of Control) the purchase price and that the purchase date shall
be a business day no earlier than 30 days nor later than 60 days from the date
such notice is mailed, or such later date as is necessary to comply with
requirements under the Exchange Act; that any Note not tendered will continue to
accrue interest; that, unless the Company defaults in the payment of the Change
of Control Purchase Price, any Notes accepted for payment pursuant to the Change
of Control Offer shall cease to accrue interest after the Change of Control
Purchase Date; and certain other procedures that a holder of Notes must follow
to accept a Change of Control Offer or to withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by holders of the
Notes seeking to accept the Change of Control Offer. The failure of the Company
to make or consummate the Change of Control Offer or pay the Change of Control
Purchase Price when due will give the Trustee and the holders of the Notes the
rights described under "-- Events of Default."
The term "all or substantially all" as used in the definition of "Change of
Control" has not been interpreted under New York law (which is the governing law
of the Indenture) to represent a specific quantitative test. As a consequence,
in the event the holders of the Notes elected to exercise their rights under the
Indenture and the Company elected to contest such election, there could be no
assurance as to how a court interpreting New York law would interpret the
phrase.
67
The existence of a holder's right to require the Company to repurchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction which constitutes a Change of Control.
In addition to the obligations of the Company under the Indenture with
respect to the Notes in the event of a "Change of Control," the Credit Facility
also contains an event of default upon a "change of control" as defined therein
which obligates the Company to repay amounts outstanding under the Credit
Facility upon an acceleration of the indebtedness issued thereunder.
Indebtedness pursuant to the Credit Facility is senior in right of payment to
the Notes under the Indenture. Future Indebtedness of the Company may contain
prohibitions of certain events which would constitute a Change of Control or
require the Company to offer to redeem such Indebtedness upon a Change of
Control. Moreover, the exercise by the holders of the Notes of their right to
require the Company to purchase the Notes upon a Change of Control could cause a
default under such Indebtedness, even if the Change of Control itself does not,
due to the financial effect of such purchase on the Company. Finally, the
Company's ability to pay cash to the holders of the Notes to purchase Notes may
be limited by the Company's then existing financial resources. There can be no
assurance that sufficient funds will be available when necessary to make any
required purchases. Under its current financial condition, the Company believes
that sufficient funds would not be available to make such required purchases. If
the Company is not able to prepay indebtedness outstanding under any
Indebtedness containing similar restrictions or obtain requisite consents, the
Company may be unable to fulfill its repurchase obligations if holders of the
Notes exercise their purchase rights following a Change of Control, thereby
resulting in a default under the Indenture. Furthermore, the Change of Control
provisions may in certain circumstances make more difficult or discourage a
takeover of the Company and the removal of incumbent management.
The provisions of the Indenture will not afford holders of Notes the right
to require the Company to repurchase the Notes in the event of a highly
leveraged transaction or certain transactions with the Company's management or
its Affiliates, including a reorganization, restructuring, merger or similar
transaction (including, in certain circumstances, an acquisition of the Company
by management or its affiliates) involving the Company that may adversely affect
holders of the Notes, if such transaction is not a transaction defined as a
Change of Control. A transaction involving the Company's management or its
Affiliates, or a transaction involving a recapitalization of the Company, will
only result in a Change of Control if it is the type of transaction specified by
such definition.
The Company will comply, to the extent applicable, with the applicable
tender offer rules, including Rule 14e-1 under the Exchange Act, and any other
applicable securities laws or regulations in connection with a Change of Control
Offer. (Section 1015)
Limitation on Preferred Stock of Subsidiaries. The Company will not permit
(a) any Subsidiary of the Company to issue any Preferred Stock of such
Subsidiary (other than Preferred Stock issued (i) prior to the date of the
Indenture or (ii) to the Company or any Wholly Owned Subsidiary), unless such
Subsidiary would be entitled to create, incur or assume Indebtedness pursuant to
the covenant described under "-- Limitation on Indebtedness" in an aggregate
principal amount equal to the aggregate liquidation value of the Preferred Stock
to be issued or (b) any Person (other than the Company or any Wholly Owned
Subsidiary) to own or hold any interest in Preferred Stock of any Subsidiary,
except (i) upon the acquisition of all the outstanding Capital Stock of such
Subsidiary in accordance with the terms of the Indenture, (ii) Preferred Stock
issued by a Person prior to the time (A) such Person becomes a Subsidiary, (B)
such Person merges with or into a Subsidiary or (C) a Subsidiary merges with or
into such Person, provided, that in the case of this subclause (ii), such
Preferred Stock was not issued, sold or transferred by any such Person in
connection with, or in contemplation of, such person becoming a Subsidiary,
(iii) Preferred Stock issued to any Person other than the Company or a Wholly
Owned Subsidiary prior to the date of the Indenture or (iv) if at the time of
the initial issuance or transfer of any such Preferred Stock to a Person (other
than the Company or any Affiliate), the Subsidiary that issued such Preferred
Stock would have been entitled to create, incur or assume Indebtedness pursuant
to the covenant described under "-- Limitation on Indebtedness" in an aggregate
principal amount equal to the aggregate liquidation value of such Preferred
Stock. (Section 1016)
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Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any of its Subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any consensual encumbrance or restriction on the ability of any
Subsidiary to (i) pay dividends or make any other distribution on its Capital
Stock, (ii) pay any Indebtedness owed to the Company or any other Subsidiary,
(iii) make any Investment in the Company or any other Subsidiary or (iv)
transfer any of its properties or assets to the Company or any other Subsidiary,
except for (a) any encumbrance or restriction pursuant to an agreement in effect
on the date of the Indenture, including, without limitation, the Credit Facility
as in effect on the date of the Indenture, and listed on a schedule to the
Indenture; (b) any encumbrance or restriction, with respect to a Subsidiary that
is not a Subsidiary of the Company on the date of the Indenture, in existence at
the time such Person becomes a Subsidiary of the Company and not incurred in
connection with, or in contemplation of, such Person becoming a Subsidiary; (c)
any encumbrance or restriction existing or arising under applicable law; (d)
customary provisions restricting subletting or assignment of any lease or
contract of the Company or any Subsidiary; (e) provisions of any instrument
governing secured Indebtedness otherwise permitted to be incurred under the
Indenture and incurred in connection with the acquisition of the assets securing
such Indebtedness, which provisions limit the right of the debtor thereunder to
dispose of the assets securing such Indebtedness; and (f) any encumbrance or
restriction existing under any agreement that extends, renews, refinances or
replaces the agreements containing the encumbrances or restrictions in the
foregoing clauses (a) or (b) or in this clause (f), provided that the terms and
conditions of any such encumbrances or restrictions are no more restrictive in
any material respect than those under or pursuant to the agreement evidencing
the Indebtedness so extended, renewed, refinanced or replaced. (Section 1017)
Provision of Financial Statements. The Indenture will provide that, whether
or not the Company is subject to Section 13(a) or 15(d) of the Exchange Act, the
Company will, to the extent permitted under the Exchange Act, file with the
Commission the annual reports, quarterly reports and other documents which the
Company would have been required to file with the Commission pursuant to such
Sections 13(a) or 15(d) if the Company were so subject, such documents to be
filed with the Commission on or prior to the date (the "Required Filing Date")
by which the Company would have been required so to file such documents if the
Company were so subject. The Company will also in any event (x) within 15 days
of each Required Filing Date (i) transmit by mail to all holders, as their names
and addresses appear in the security register, without cost to such holders and
(ii) file with the Trustee copies of the annual reports, quarterly reports and
other documents which the Company would have been required to file with the
Commission pursuant to Section 13(a) or 15(d) of the Exchange Act if the Company
were subject to such Sections and (y) if filing such documents by the Company
with the Commission is not permitted under the Exchange Act, promptly upon
written request and payment of the reasonable cost of duplication and delivery,
supply copies of such documents to any prospective holder at the Company's cost.
If any Guarantor's financial statements would be required to be included in the
financial statements filed or delivered pursuant to the Indenture if the Company
were subject to Section 13(a) or 15(d) of the Exchange Act, the Company shall
include such Guarantor's financial statements in any filing or delivery pursuant
hereto. (Section 1018)
Additional Covenants. The Indenture will also contain covenants with respect
to the following matters: (i) payment of principal, premium and interest; (ii)
maintenance of an office or agency in the City of New York; (iii) arrangements
regarding the handling of money held in trust; (iv) maintenance of corporate
existence; (v) payment of taxes and other claims; (vi) maintenance of
properties; and (vii) maintenance of insurance.
CONSOLIDATION, MERGER, SALE OF ASSETS
The Company will not, in a single transaction or through a series of related
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially all
of its properties and assets on a Consolidated basis to any Person or group of
affiliated Persons, or permit any of its Subsidiaries to enter into any such
transaction or series of related transactions if such transaction or series of
related transactions, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or disposition of all or substantially all of the
properties and assets of the Company and its Subsidiaries on a Consolidated
basis to any other Person or
69
group of affiliated Persons, unless at the time and after giving effect thereto
(i) either (a) the Company will be the continuing corporation or (b) the Person
(if other than the Company) formed by such consolidation or into which the
Company is merged or the Person which acquires by sale, assignment, conveyance,
transfer, lease or disposition all or substantially all of the properties and
assets of the Company and its Subsidiaries on a Consolidated basis (the
"Surviving Entity") will be a corporation duly organized and validly existing
under the laws of the United States of America, any state thereof or the
District of Columbia and such Person expressly assumes, by a supplemental
indenture, in a form satisfactory to the Trustee, all the obligations of the
Company under the Indenture and the Notes, and the Notes and the Indenture will
remain in full force and effect as so supplemented; (ii) immediately before and
immediately after giving effect to such transaction on a pro forma basis (and
treating any Indebtedness not previously an obligation of the Company or a
Subsidiary which becomes the obligation of the Company or any of its
Subsidiaries in connection with or as a result of such transaction as having
been incurred at the time of such transaction), no Default or Event of Default
will have occurred and be continuing; (iii) immediately after giving effect to
such transaction on a pro forma basis (and treating any Indebtedness not
previously an obligation of the Company or a Subsidiary which becomes the
obligation of the Company or any of its Subsidiaries in connection with or as a
result of such transaction as having been incurred at the time of such
transaction), the Consolidated Net Worth of the Company (or the Surviving Entity
if the Company is not the continuing obligor under the Indenture) is equal to or
greater than the Consolidated Net Worth of the Company immediately prior to such
transaction; (iv) immediately after giving effect to such transaction on a pro
forma basis (on the assumption that the transaction occurred on the first day of
the four-quarter period ending immediately prior to the consummation of such
transaction with the appropriate adjustments with respect to the transaction
being included in such pro forma calculation), the Company (or the Surviving
Entity if the Company is not the continuing obligor under the Indenture) could
incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) under
the provisions of "-- Certain Covenants -- Limitation on Indebtedness;" (v) at
the time of the transaction, each Guarantor, if any, unless it is the other
party to the transactions described above, will have by supplemental indenture
confirmed that its Guarantees shall apply to such Person's obligations under the
Indenture and the Notes; and (vi) at the time of the transaction the Company or
the Surviving Entity will have delivered, or caused to be delivered, to the
Trustee, in form and substance reasonably satisfactory to the Trustee, an
officers' certificate and an opinion of counsel, each to the effect that such
consolidation, merger, transfer, sale, assignment, conveyance, lease or other
transaction and the supplemental indenture in respect thereof comply with the
Indenture and that all conditions precedent therein provided for relating to
such transaction have been complied with. In delivering any such opinion of
counsel, counsel may rely as to factual matters on certificates of officers of
the Company. (Section 801)
Each Guarantor shall not, and the Company will not permit a Guarantor to, in
a single transaction or through a series of related transactions, consolidate
with or merge with or into any other Person (other than the Company or any
Subsidiary) or sell, assign, convey, transfer, lease or otherwise dispose of all
or substantially all of its properties and assets on a Consolidated basis to any
Person or group of affiliated Persons (other than the Company or any
Subsidiary), or permit any of its Subsidiaries to enter into any such
transaction or series of related transactions if such transaction or series of
related transactions, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or disposition of all or substantially all of the
properties and assets of the Guarantor and its Subsidiaries on a Consolidated
basis to any other Person or group of affiliated Persons (other than the Company
or any Subsidiary), unless at the time and after giving effect thereto (i)
either (a) the Guarantor will be the continuing corporation or (b) the Person
(if other than the Guarantor ) formed by such consolidation or into which such
Guarantor is merged or the Person which acquires by sale, assignment,
conveyance, transfer, lease or disposition all or substantially all of the
properties and assets of the Guarantor and its Subsidiaries on a Consolidated
basis (the "Surviving Guarantor Entity") will be a corporation duly organized
and validly existing under the laws of the United States of America, any state
thereof or the District of Columbia and such Person expressly assumes, by a
supplemental indenture, in a form satisfactory to the Trustee, all the
obligations of such Guarantor under its guarantee of the Notes and the
Indenture, and such Guarantee will remain in full force and effect; (ii)
immediately before and immediately after giving effect to such transaction, on a
pro forma basis (treating any Indebtedness not previously an obligation of the
Guarantor, the Company or any of its Subsidiaries which becomes an obligation of
the Guarantor, the Company or any of its Subsidiaries in connection with or as a
result of
70
such transaction as having been incurred at the time of such transaction), no
Default or Event of Default will have occurred and be continuing; and (iii) at
the time of the transaction such Guarantor or the Surviving Guarantor Entity
will have delivered, or caused to be delivered, to the Trustee, in form and
substance reasonably satisfactory to the Trustee, an officers' certificate and
an opinion of counsel, each to the effect that such consolidation, merger,
transfer, sale, assignment, conveyance, lease or other transaction and the
supplemental indenture in respect thereof comply with the Indenture and that all
conditions precedent therein provided for relating to such transaction have been
complied with, and thereafter all obligations of the predecessor shall
terminate. (Section 801)
Notwithstanding the foregoing, any Wholly Owned Subsidiary may merge with or
into, or sell, assign, convey, transfer, lease or dispose all or substantially
all of its assets to, the Company or another Wholly Owned Subsidiary.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which the Company is not the continuing corporation, the successor Person formed
or remaining shall succeed to, and be substituted for, and may exercise every
right and power of, the Company, and the Company would be discharged from all
obligations and covenants under the Indenture and the Notes. (Section 802)
EVENTS OF DEFAULT
An Event of Default will occur under the Indenture, if:
(i) there shall be a default in the payment of any interest on any Note when
it becomes due and payable, and such default shall continue for a period of 30
days;
(ii) there shall be a default in the payment of the principal of (or
premium, if any, on) any Note, at its Maturity (upon acceleration, optional or
mandatory redemption, required repurchase or otherwise);
(iii) (a) there shall be a default in the performance, or breach, of any
covenant or agreement of the Company or any Guarantor under the Indenture (other
than a default in the performance, or breach, of a covenant or agreement which
is specifically dealt with in clause (i) or (ii) or in clause (b), (c) or (d) of
this clause (iii)) and such default or breach shall continue for a period of 30
days after written notice has been given, by certified mail, (x) to the Company
by the Trustee or (y) to the Company and the Trustee by the holders of at least
25% in aggregate principal amount of the outstanding Notes, which notice shall
specify that it is a "notice of default" and shall demand that such a default be
remedied; (b) there shall be a default in the performance or breach of the
provisions described in "-- Consolidation, Merger, Sale of Assets;" (c) the
Company shall have failed to make or consummate an Offer in accordance with the
provisions of "-- Certain Covenants -- Limitation on Sale of Assets;" or (d) the
Company shall have failed to make or consummate a Change of Control Offer in
accordance with the provisions of "-- Certain Covenants -- Purchase of Notes
Upon a Change of Control;"
(iv) one or more defaults shall have occurred under any of the agreements,
indentures or instruments under which the Company, any Guarantor or any
Subsidiary then has outstanding Indebtedness in excess of $5 million in the
aggregate and, as a result of such default or defaults, if not already matured
at its final maturity in accordance with its terms, such Indebtedness shall have
been accelerated;
(v) one or more judgments, orders or decrees for the payment of money in
excess of $5 million, either individually or in the aggregate, shall be rendered
against the Company, any Guarantor or any Subsidiary or any of their respective
properties and shall not be discharged and either (a) any creditor shall have
commenced an enforcement proceeding upon such judgment, order or decree or (b)
there shall have been a period of 60 consecutive days during which a stay of
enforcement of such judgment, order or decree, by reason of an appeal or
otherwise, shall not be in effect;
(vi) there shall have been the entry by a court of competent jurisdiction of
(a) a decree or order for relief in respect of the Company, any Guarantor or any
Significant Subsidiary in an involuntary case or proceeding under any applicable
Bankruptcy Law or (b) a decree or order adjudging the Company, any Guarantor or
any Significant Subsidiary bankrupt or insolvent, or ordering reorganization,
71
arrangement, adjustment or composition of or in respect of the Company, any
Guarantor or any Significant Subsidiary under any applicable federal or state
law, or appointing a custodian, receiver, liquidator, assignee, trustee or
sequestrator (or other similar official) of the Company, any Guarantor or any
Significant Subsidiary or of any substantial part of their respective
properties, or ordering the winding up or liquidation of their respective
affairs, and any such decree or order for relief shall continue to be in effect,
or any such other decree or order shall be unstayed and in effect, for a period
of 75 consecutive days; or
(vii) (a) the Company, any Guarantor or any Significant Subsidiary commences
a voluntary case or proceeding under any applicable Bankruptcy Law or any other
case or proceeding to be adjudicated bankrupt or insolvent, (b) the Company, any
Guarantor or any Significant Subsidiary consents in writing to the entry of a
decree or order for relief against the Company, such Guarantor or such
Significant Subsidiary in an involuntary case or proceeding under any applicable
Bankruptcy Law or to the commencement of any bankruptcy or insolvency case or
proceeding against it, (c) the Company, any Guarantor or any Significant
Subsidiary files a petition or answer or consent seeking reorganization or
relief under any Bankruptcy Law, (d) the Company, any Guarantor or any
Significant Subsidiary (x) consents to the filing of such petition or the
appointment of, or taking possession by, a custodian, receiver, liquidator,
assignee, trustee, sequestrator or similar official of the Company, any
Guarantor or such Significant Subsidiary or of any substantial part of their
respective properties, (y) makes an assignment for the benefit of creditors or
(z) admits in writing its inability to pay its debts generally as they become
due or (e) the Company, any Guarantor or any Significant Subsidiary takes any
corporate action in furtherance of any such actions in this paragraph (vii).
(Section 501)
If an Event of Default (other than as specified in clauses (vi) and (vii) of
the prior paragraph) shall occur and be continuing with respect to the
Indenture, the Trustee or the holders of not less than 25% in aggregate
principal amount of the Notes then outstanding may, and the Trustee at the
request of such holders shall, declare all unpaid principal of, and premium, if
any, and accrued interest on, all Notes then outstanding, to be due and payable
immediately, by a notice in writing to the Company (and to the Trustee if given
by the holders of the Notes) specifying the relevant Event of Default and that
it is a "notice of acceleration" and upon any such declaration, such principal,
premium, if any, and interest shall become immediately due and payable. If an
Event of Default specified in clause (vi) or (vii) of the prior paragraph occurs
and is continuing, then all the Notes shall ipso facto become and be due and
payable immediately in an amount equal to the principal amount of the Notes
together with accrued and unpaid interest, if any, to the date the Notes become
due and payable, without any declaration or other act on the part of the Trustee
or any holder. Thereupon, the Trustee may, at his or her discretion, proceed to
protect and enforce the rights of the holders of Notes by appropriate judicial
proceedings.
After a declaration of acceleration with respect to the Notes, but before a
judgment or decree for payment of the money due has been obtained by the
Trustee, the holders of a majority in aggregate principal amount of Notes
outstanding by written notice to the Company and the Trustee, may rescind and
annul such declaration and its consequences if (a) the Company has paid or
deposited with the Trustee a sum sufficient to pay (i) all sums paid or advanced
by the Trustee under the Indenture and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, (ii) all
overdue interest on all Notes then outstanding, (iii) the principal of, and
premium, if any, on any Notes then outstanding, which have become due otherwise
than by such declaration of acceleration and interest thereon at a rate borne by
the Notes and (iv) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate borne by the Notes; and (b) all
Events of Default, other than the non-payment of principal of the Notes which
have become due solely by such declaration of acceleration, have been cured or
waived as provided in the Indenture. (Section 502)
The holders of not less than a majority in aggregate principal amount of the
Notes outstanding may on behalf of the holders of all outstanding Notes waive
any past default under the Indenture and its consequences, except a default in
the payment of the principal of, or premium, if any, or interest on, any Note,
or in respect of a covenant or provision which under the Indenture cannot be
modified or amended without the consent of the holder of each outstanding Note,
affected by such modification or amendment. (Section 513)
72
No holder of any Note will have any right to institute any proceeding,
judicial or otherwise, with respect to the Indenture or the Notes, or for the
appointment of a receiver or trustee or for any other remedy under the
Indenture, unless (a) such holder has previously given notice to the Trustee of
a continuing Event of Default, (b) the holders of not less than 25% in principal
amount of the then outstanding Notes have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name as
Trustee under the Indenture, (c) such holder or holders have offered to the
Trustee reasonable indemnity against the costs, expenses and liabilities to be
incurred in compliance with such request, (d) the Trustee for 15 days after its
receipt of such notice, request and offer (and if requested, provision) of
indemnity has failed to institute any such proceeding, and (e) no direction
inconsistent with such written request has been given to the Trustee during such
15-day period by the holders of a majority in principal amount of the
outstanding Notes.
The Company is also required to notify the Trustee within five business days
of becoming aware of the occurrence of any Default. The Company is required to
deliver to the Trustee, on or before a date not more than 120 days after the end
of each fiscal year, a written statement as to compliance with the Indenture,
including whether or not any Default has occurred. (Section 1019) The Trustee is
under no obligation to exercise any of the rights or powers vested in them by
the Indenture at the request or direction of any of the holders of the Notes
unless such holders offer to the Trustee security or indemnity satisfactory to
the Trustee against the costs, expenses and liabilities which might be incurred
thereby. (Section 603)
The Trust Indenture Act contains limitations on the rights of the Trustee,
should it become a creditor of the Company or any Guarantor, if any, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions, provided that if it acquires any
conflicting interest it must eliminate such conflict upon the occurrence of an
Event of Default or else resign.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the Federal securities laws and it is the view of the
Commission that such waiver is against public policy. (Section 118)
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company, any Guarantor and any other obligor upon the Notes
discharged with respect to the outstanding Notes ("defeasance"). Such defeasance
means that the Company, any such Guarantor and any other obligor under the
Indenture shall be deemed to have paid and discharged the entire Indebtedness
represented by the outstanding Notes, except for (i) the rights of holders of
such outstanding Notes to receive, solely from the trust fund described below,
payments in respect of the principal of, and premium, if any, and interest on,
such Notes, when such payments are due from the trust referred to below, (ii)
the Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes, and
the maintenance of an office or agency for payment and money for security
payments held in trust, (iii) the rights, powers, trusts, duties and immunities
of the Trustee and (iv) the defeasance provisions of the Indenture. In addition,
the Company may, at its option and at any time, elect to have the obligations of
the Company and any Guarantor released with respect to certain covenants that
are described in the Indenture ("covenant defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or an
Event of Default with respect to the Notes. In the event covenant defeasance
occurs, certain events (not including non-payment, bankruptcy and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes. (Sections 401, 402 and 403)
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In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit or cause to be deposited with the Trustee, as
trust funds in trust, for the benefit of the holders of the Notes, cash in
United States dollars, U.S. Government Obligations (as defined in the
Indenture), or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants or
a nationally recognized investment banking firm, to pay and discharge the
principal of, and premium, if any, and interest on, the outstanding Notes, on
the Stated Maturity of such principal or interest (or on any date after April 1,
2001 (such date being referred to as the "Defeasance Redemption Date"), if at or
prior to electing either defeasance or covenant defeasance, the Company has
delivered to the Trustee an irrevocable notice to redeem all of the outstanding
Notes, on the Defeasance Redemption Date); (ii) in the case of defeasance, the
Company shall have delivered to the Trustee an opinion of independent counsel to
the Company in the United States stating that (A) the Company has received from,
or there has been published by, the Internal Revenue Service a ruling or (B)
since the date of the Indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of independent counsel in the United States shall confirm that, the
holders of the outstanding Notes, will not recognize income, gain or loss for
federal income tax purposes as a result of such defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such defeasance had not occurred; (iii) in
the case of covenant defeasance, the Company shall have delivered to the Trustee
an opinion of independent counsel in the United States to the effect that the
holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such covenant defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such covenant defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as clauses (vi) or (vii) under
the first paragraph under "Events of Default" are concerned, at any time during
the period ending on the 91st day after the date of deposit (other than a
Default or Event of Default resulting from the borrowing of funds to be applied
to such deposit); (v) such defeasance or covenant defeasance shall not result in
a breach or violation of, or constitute a Default under, any material agreement
or instrument (other than the Indenture) to which the Company, any Guarantor or
any Subsidiary is a party or by which it is bound; (vi) the Company will have
delivered to the Trustee an opinion of independent counsel in the United States
to the effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii) the
Company shall have delivered to the Trustee an officers' certificate stating
that the deposit was not made by the Company with the intent of preferring the
holders of the Notes or any Guarantee over the other creditors of the Company or
any Guarantor with the intent of defeating, hindering, delaying or defrauding
creditors of the Company, any Guarantor or others; (viii) no event or condition
shall exist that would prevent the Company from making payments of the principal
of, and premium, if any, and interest on the Notes on the date of such deposit
or at any time ending on the 91st day after the date of such deposit; and (ix)
the Company will have delivered to the Trustee an officers' certificate and an
opinion of independent counsel, each stating that all conditions precedent
required for either defeasance or the covenant defeasance, have been complied
with. (Section 404)
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes,
under the Indenture when (a) either (i) all such Notes, theretofore
authenticated and delivered (except lost, stolen or destroyed Notes which have
been replaced or paid or Notes whose payment has been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust as provided for in the Indenture) have been
delivered to the Trustee for cancellation or (ii) all Notes, not theretofore
delivered to the Trustee canceled or for cancellation (x) have become due and
payable, (y) will become due and payable at their Stated Maturity within one
year, or (z) are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company; and the Company or any
Guarantor has irrevocably
74
deposited or caused to be deposited with the Trustee as trust funds in trust an
amount in United States dollars sufficient to pay and discharge the entire
indebtedness on the Notes, not theretofore delivered to the Trustee for
cancellation, including principal of, and premium, if any, and accrued interest
on, such Note at such Maturity, Stated Maturity or redemption date; (b) the
Company or any Guarantor has paid or caused to be paid all other sums payable
under the Indenture by the Company and any Guarantor; and (c) the Company has
delivered to the Trustee an officers' certificate and an opinion of independent
counsel, each stating that (i) all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with and (ii) such satisfaction and discharge will not result in a breach or
violation of, or constitute a default under, the Indenture or any other material
agreement or instrument to which the Company, any Guarantor or any Subsidiary is
a party or by which the Company, any Guarantor or any Subsidiary is bound.
(Section 1201)
MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Indenture, may be made by the Company,
each Guarantor and the Trustee with the consent of the holders of at least a
majority in aggregate principal amount of the Notes then outstanding; provided,
however, that no such modification or amendment may, without the consent of the
holder of each outstanding Note affected thereby: (i) change the Stated Maturity
of the principal of, or any installment of interest on, any such Note or reduce
the principal amount thereof or the rate of interest thereon or any premium
payable upon the redemption thereof, or change the coin or currency in which the
principal of any such Note or any premium or the interest thereon is payable, or
impair the right to institute suit for the enforcement of any such payment on or
after the Stated Maturity thereof (or, in the case of redemption, on or after
the redemption date); (ii) amend, change or modify the obligation of the Company
to make and consummate a Change of Control Offer in the event of a Change of
Control in accordance with "-- Certain Covenants -- Purchase of Notes Upon a
Change of Control," including, in each case, amending, changing or modifying any
definitions relating thereto; (iii) reduce the percentage in principal amount of
such outstanding Notes, the consent of whose holders is required for any such
supplemental indenture, or the consent of whose holders is required for any
waiver or compliance with certain provisions of the Indenture; (iv) modify any
of the provisions relating to a supplemental indenture requiring the consent of
holders or relating to the waiver of past defaults or relating to the waiver of
certain covenants, except to increase the percentage of such outstanding Notes
required for such actions or to provide that certain other provisions of the
Indenture cannot be modified or waived without the consent of the holder of each
such Note affected thereby; (v) except as otherwise permitted under "--
Consolidation, Merger, Sale of Assets," consent to the assignment or transfer by
the Company or any Guarantor of any of its rights and obligations under the
Indenture; or (vi) amend or modify any of the provisions of the Indenture
relating to the subordination of the Notes or any Guarantee thereof in any
manner adverse to the holders of the Notes or any such Guarantee. (Section 902)
Notwithstanding the foregoing, without the consent of any holders of the
Notes, the Company, any Guarantor and the Trustee may modify or amend the
Indenture (a) to evidence the succession of another Person to the Company or a
Guarantor, and the assumption by any such successor of the covenants of the
Company or such Guarantor in the Indenture and in the Notes, and in any
Guarantee in accordance with "-- Consolidation, Merger, Sale of Assets," (b) to
add to the covenants of the Company, any Guarantor or any other obligor upon the
Notes for the benefit of the holders of the Notes or to surrender any right or
power conferred upon the Company or any Guarantor or any other obligor upon the
Notes, as applicable, in the Indenture, in the Notes or in any Guarantee; (c) to
cure any ambiguity, or to correct or supplement any provision in the Indenture
or in any supplemental indenture, the Notes or any Guarantee which may be
defective or inconsistent with any other provision in the Indenture or in any
supplemental indenture, the Notes or any Guarantee or make any other provisions
with respect to matters or questions arising under the Indenture or in any
supplemental indenture, the Notes or any Guarantee; provided that, in each case,
such provisions shall not adversely affect the interest of the holders of the
Notes; (d) to comply with the requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture Act;
(e) to add a Guarantor under the Indenture; (f) to evidence and provide the
acceptance of the appointment of a successor Trustee under the Indenture; or (g)
to mortgage, pledge, hypothecate or grant a security interest in favor of the
75
Trustee for the benefit of the holders of the Notes, as additional security for
the payment and performance of the Company's and any Guarantor's obligations
under the Indenture, in any property, or assets, including any of which are
required to be mortgaged, pledged or hypothecated, or in which a security
interest is required to be granted to the Trustee pursuant to the Indenture or
otherwise. (Section 901).
The holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture. (Section 1020)
GOVERNING LAW
The Indenture, the Notes and any Guarantee will be governed by, and
construed in accordance with, the laws of the State of New York, without giving
effect to the conflicts of law principles thereof.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
as Trustee with such conflict or resign as Trustee. (Sections 608 and 613)
The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. (Section 512) The Indenture provides that in case an Event
of Default occurs (which has not been cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any holder of Notes unless such holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense. (Sections 601 and 603)
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Subsidiary or (ii) assumed in connection with the
acquisition of assets from such Person, in each case, other than Indebtedness
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary or such acquisition. Acquired Indebtedness shall be deemed to be
incurred on the date of the related acquisition of assets from any Person or the
date the acquired Person becomes a Subsidiary.
"Affiliate" means, with respect to any specified Person, (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person; (ii) any other Person that
owns, directly or indirectly, 5% or more of such specified Person's Capital
Stock or any officer or director of any such specified Person or other Person
or, with respect to any natural Person, any person having a relationship with
such Person by blood, marriage or adoption not more remote than first cousin; or
(iii) any other Person 5% or more of the Voting Stock of which is beneficially
owned or held directly or indirectly by such specified Person. For the purposes
of this definition, "control" when used with respect to any specified Person
means the power to direct the management and policies of such Person, directly
or indirectly, whether through ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of (i) any Capital Stock
of any Subsidiary; (ii) all or substantially all of the properties and assets of
any division or line of business of the Company or its Subsidiaries; or (iii)
any other properties or assets of the Company or any Subsidiary other than in
the ordinary course of business (it being understood that the transfer of a
health
76
care facility or health care related facility is not in the ordinary course of
business). For the purposes of this definition, the term "Asset Sale" shall not
include (A) any transfer of properties and assets that is governed by the
provisions described under "-- Certain Covenants -- Consolidation, Merger, Sale
of Assets," (B) any transfer of properties or assets that is by the Company to
any Guarantor or Wholly Owned Subsidiary, or by any Subsidiary to the Company or
any Wholly Owned Subsidiary in accordance with the terms of the Indenture, (C)
transfers of properties or assets in any 12-month period, (I) the Fair Market
Value of which do not, in the aggregate, exceed 2.5% of the Company's
Consolidated Total Assets and (II) the Consolidated EBITDA related to such
properties or assets of which does not, in the aggregate, exceed 2.5% of the
Company's Consolidated EBITDA and (D) issuances of Capital Stock by a Wholly
Owned Subsidiary to the Company or another Wholly Owned Subsidiary.
"Attributable Debt" in respect of a sale-leaseback transaction or an
operating lease in respect of a health care facility means, at the time of
determination, the present value (discounted at the interest rate implicit in
the lease, compounded semiannually) of the obligation of the lessee of the
property subject to such sale-leaseback transaction or operating lease in
respect of a health care facility for rental payments during the remaining term
of the lease included in such transaction including any period for which such
lease has been extended or may, at the option of the lessor, be extended or
until the earliest date on which the lessee may terminate such lease without
penalty or upon payment of penalty (in which case the rental payments shall
include such penalty), after excluding all amounts required to be paid on
account of maintenance and repairs, insurance, taxes, assessments, water,
utilities and similar charges.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from the date of determination to the
date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment by (ii)
the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding up, liquidation, reorganization or
relief of debtors or any amendment to, succession to or change in any such law.
"Banks" means the lenders from time to time under the Credit Facility.
"Capital Lease Obligation" of any Person means any obligation of such Person
and its Subsidiaries on a Consolidated basis under any capital lease of real or
personal property which, in accordance with GAAP, has been recorded as a
capitalized lease obligation.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of such Person's
capital stock or other equity interests whether now outstanding or issued after
the date of the Indenture.
"Cash Equivalent" means (A) any security, maturing not more than six months
after the date of acquisition, issued by the United States of America, or an
instrumentality or agency thereof and guaranteed fully as to principal, premium,
if any, and interest by the United States of America, (B) any certificate of
deposit, time deposit, money market account or bankers' acceptance, maturing not
more than six months after the date of acquisition, issued by any commercial
banking institution that is a member of the Federal Reserve System and that has
combined capital and surplus and undivided profits of not less than
$500,000,000, whose debt has a rating, at the time as of which any investment
therein is made, of "P-1" (or higher) according to Moody's Investors Service,
Inc. or any successor rating agency ("Moody's"), or "A-1" (or higher) according
to Standard & Poor's Corporation or any successor rating agency ("S&P"), (C)
commercial paper, maturing not more than three months after the date of
acquisition, issued by any corporation (other than an Affiliate or Subsidiary of
the Company) organized and existing under the laws of the United States of
America with a rating, at the time as of which any investment therein is made,
of "P-1" (or higher) according to Moody's, or "A-1" (or higher) according to
S&P.
"Change of Control" means the occurrence of any of the following events: (i)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), except that a Person shall be
77
deemed to have beneficial ownership of all shares that such Person has the right
to acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 50% of the total
outstanding Voting Stock of the Company; (ii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the board of directors of the Company (together with any new directors whose
election to such board or whose nomination for election by the stockholders of
the Company, was approved by a vote of 66 2/3 % of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of such board of directors then in office; (iii)
the Company consolidates with or merges with or into any Person or conveys,
transfers or leases all or substantially all of its assets to any Person, or any
corporation consolidates with or merges into or with the Company, in any such
event pursuant to a transaction in which the outstanding Voting Stock of the
Company is changed into or exchanged for cash, securities or other property
(other than any such transaction (I) where the outstanding Voting Stock of the
Company is only changed or exchanged to the extent necessary to reflect a change
in the jurisdiction of incorporation of the Company or (II) where (A) the
outstanding Voting Stock of the Company is changed into or exchanged for (x)
Voting Stock of the surviving corporation which is not Redeemable Capital Stock
or (y) cash, securities and other property (other than Capital Stock of the
surviving corporation) in an amount which could be paid by the Company as a
Restricted Payment as described under "-- Certain Covenants -- Limitation on
Restricted Payments" (and such amount shall be treated as a Restricted Payment
subject to the provisions in the Indenture described under "-- Certain Covenants
- -- Limitation on Restricted Payments") and (B) no "person" or "group" owns
immediately after such transaction, directly or indirectly, more than 50% of the
total outstanding Voting Stock of the surviving corporation); or (iv) the
Company is liquidated or dissolved or adopts a plan of liquidation or
dissolution other than in a transaction which complies with the provisions
described under "Consolidation, Merger, Sale of Assets."
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
execution of the Indenture such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act then the body performing
such duties at such time.
"Common Stock" means the common stock, par value $.01 per share, of the
Company.
"Company" means Mariner Health Group, Inc., a corporation incorporated under
the laws of Delaware, until a successor Person shall have become such pursuant
to the applicable provisions of the Indenture, and thereafter "Company" shall
mean such successor Person.
"Consolidated EBITDA" of any Person means, for any period, Consolidated Net
Income (Loss), plus (i) Consolidated Income Tax Expense, plus (ii) Consolidated
Non-Cash Charges, plus (iii) Consolidated Interest Expense of such Person and
its Subsidiaries determined in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" of any Person means, for any
period, the ratio of (a) the sum of Consolidated Net Income (Loss), Consolidated
Interest Expense, Consolidated Income Tax Expense, Consolidated Non-cash Charges
deducted in computing Consolidated Net Income (Loss), Consolidated Pooling
Expenses, and one-third of Consolidated Rental Payments in each case, for such
period, of such Person and its Subsidiaries on a Consolidated basis, all
determined in accordance with GAAP to (b) the sum of (x) Consolidated Interest
Expense for such period and (y) and one-third of Consolidated Rental Payments
for such period; provided that (i) in making such computation, the Consolidated
Interest Expense attributable to interest on any Indebtedness computed on a pro
forma basis and (A) bearing a floating interest rate shall be computed as if the
rate in effect on the date of computation had been the applicable rate for the
entire period and (B) which was not outstanding during the period for which the
computation is being made but which bears, at the option of such Person, a fixed
or floating rate of interest, shall be computed by applying at the option of
such Person either the fixed or floating rate and (ii) in making such
computation, the Consolidated Interest Expense of such Person attributable to
interest
78
on any Indebtedness under a revolving credit facility computed on a pro forma
basis shall be computed based upon the average daily balance of such
Indebtedness during the applicable period.
"Consolidated Income Tax Expense" of any Person means, for any period, the
provision for Federal, state, local and foreign income taxes of such Person and
its Consolidated Subsidiaries for such period as determined in accordance with
GAAP.
"Consolidated Interest Expense" of any Person means, without duplication,
for any period, the sum of (a) the interest expense of such Person and its
Subsidiaries for such period on a Consolidated basis, including, without
limitation, (i) amortization of debt discount, (ii) the net costs associated
with Interest Rate Agreements (including amortization of discounts), (iii) the
interest portion of any deferred payment obligation and (iv) accrued interest,
plus (b) (i) the interest component of the Capital Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by such Person and its
Subsidiaries during such period and (ii) all capitalized interest of such Person
and its Subsidiaries, plus (c) cash and non-cash dividends (other than in the
form of Common Stock) paid or accrued on any Preferred Stock of such Person and
its Subsidiaries during such period paid to Persons other than the Company or
any Wholly Owned Subsidiary, plus (d) the interest expense on any Guaranteed
Debt of such Person (whether or not paid by such Person) during such period, in
each case as determined in accordance with GAAP. For purposes of clause (c) of
the preceding sentence, dividends shall be deemed to be an amount equal to the
actual dividends paid divided by one minus the applicable actual combined
Federal, state, local and foreign income tax rate of the Company and its
Subsidiaries on a Consolidated basis (expressed as a decimal).
"Consolidated Net Income (Loss)" of any Person means, for any period, the
net income (or loss) of such Person and its Subsidiaries for such period on a
Consolidated basis as determined in accordance with GAAP, adjusted, to the
extent included in calculating such net income (or loss), by excluding, without
duplication, (i) all extraordinary gains or losses (less all fees and expenses
relating thereto), (ii) the portion of net income (or loss) of such Person and
its Subsidiaries on a Consolidated basis allocable to minority interests in
unconsolidated Persons to the extent that cash dividends or distributions have
not actually been received by such Person or one of its Consolidated
Subsidiaries, (iii) net income (or loss) of any Person combined with such Person
or any of its Subsidiaries on a "pooling of interests" basis attributable to any
period prior to the date of combination, (iv) any gain or loss, net of taxes,
realized upon the termination of any employee pension benefit plan, (v) net
gains or losses (less all fees and expenses relating thereto) in respect of
dispositions of assets other than in the ordinary course of business (it being
understood that the disposition of a health care facility or health care related
facility is not in the ordinary course of business), (vi) the net income of any
Subsidiary to the extent that the declaration of dividends or similar
distributions by that Subsidiary of that income is not at the time permitted,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary or its stockholders, (vii) any gain
(but not loss) arising from the acquisition of any securities, or the
extinguishment, under GAAP, of any Indebtedness of such Person, (viii) any gain
or loss arising from the cumulative effect of changes in accounting principles
or (ix) for the second quarter of 1995, $8,073,000 of costs accrued by the
Company related to the CSI Merger and the consolidation of various regional and
satellite offices to the Company's New London, Connecticut office, which are
described in this Prospectus and reflected in the Company's 1995 financial
statements.
"Consolidated Net Worth" of any Person, as of a date, means the Consolidated
stockholders' equity (excluding Redeemable Capital Stock) of such Person and its
Subsidiaries, as set forth on the most recent consolidated balance sheet of such
Person and its Consolidated Subsidiaries, as determined in accordance with GAAP.
"Consolidated Non-cash Charges" of any Person means, for any period, the
aggregate depreciation, amortization (including, without limitation,
amortization of capitalized debt issuance costs) and other non-cash charges of
such Person and its Subsidiaries on a Consolidated basis for such period, as
determined in accordance with GAAP (excluding any non-cash charge which requires
an accrual or reserve for cash charges for any future period).
79
"Consolidated Pooling Expenses" of any Person means for any period, with
respect to such Person and its Subsidiaries on a Consolidated basis, the
transaction or transactions-related expenses for such period in connection with
a pooling of interests transaction, determined in accordance with GAAP, but only
to the extent such expenses would have been capitalized, in accordance with
GAAP, if such transaction had been a purchase transaction.
"Consolidated Rental Payments" of any Person means, for any period, the
aggregate rental obligation of such Person and its Subsidiaries (not including
taxes, insurance, maintenance and similar expenses that the lessee is obligated
to pay under the terms of the relevant leases), determined on a Consolidated
basis in conformity with GAAP, payable in respect of such period under
Attributable Debt or leases of real or personal property not constituting
Attributable Debt (net of income from subleases thereof, not including taxes,
insurance, maintenance and similar expenses that the sublessee is obligated to
pay under the terms of such sublease), whether or not such obligations are
reflected as liabilities or commitments on a Consolidated balance sheet of such
Person and its Subsidiaries or in the notes thereto, excluding, however, in any
event, (i) that portion of Consolidated Interest Expense of such Person
representing payments by such Person or any of its Consolidated Subsidiaries in
respect of Capital Lease Obligations (net of payments to such Person or any of
its Consolidated Subsidiaries under subleases qualifying as capitalized lease
subleases to the extent that such payments would be deducted in determining
Consolidated Interest Expense) and (ii) the aggregate amount of amortization of
obligations of such Person and its Consolidated Subsidiaries in respect of such
Capital Lease Obligations for such period (net of payments to such Person or any
of its Consolidated Subsidiaries and subleases qualifying as capitalized lease
subleases to the extent that such payments would be deducted in determining such
amortization amount).
"Consolidated Total Assets" of any Person means all amounts that would be
shown as assets on a Consolidated balance sheet of such Person and its
Subsidiaries prepared in accordance with GAAP.
"Consolidation" means, with respect to any Person, the consolidation of the
accounts of such Person and each of its subsidiaries if and to the extent the
accounts of such Person and each of its subsidiaries would normally be
consolidated with those of such Person, all in accordance with GAAP. The term
"Consolidated" shall have a similar meaning.
"Credit Facility" means the Credit Agreement, dated as of May 18, 1994, as
amended to the date of the Indenture, among the Company, PNC Bank National
Association, as Agent and the other banks party thereto, as such agreement, in
whole or in part, may be amended, renewed, extended, substituted, refinanced,
restructured, replaced, supplemented or otherwise modified from time to time and
whether by the same or another agent, lender or group of lenders (including,
without limitation, any successive renewals, extensions, substitutions,
refinancings, restructurings, replacements, supplementations or other
modifications of the foregoing).
"CSI" means Convalescent Services, Inc., a Georgia corporation.
"Default" means any event which is, or after notice or passage of any time
or both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series of
related transactions, a member of the board of directors of the Company who does
not have any material direct or indirect financial interest in or with respect
to such transaction or series of related transactions.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute.
"Fair Market Value" means, with respect to any asset or property, the sale value
that would be obtained in an arm's-length transaction between an informed and
willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, which
are in effect on the date of the Indenture.
"Guarantee" means the guarantee by any Guarantor of the Company's Indenture
Obligations.
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"Guaranteed Debt" of any Person means, without duplication, all Indebtedness
of any other Person guaranteed directly or indirectly in any manner by such
Person, or in effect guaranteed directly or indirectly by such Person through an
agreement (i) to pay or purchase such Indebtedness or to advance or supply funds
for the payment or purchase of such Indebtedness, (ii) to purchase, sell or
lease (as lessee or lessor) property, or to purchase or sell services, primarily
for the purpose of enabling the debtor to make payment of such Indebtedness or
to assure the holder of such Indebtedness against loss, (iii) to supply funds
to, or in any other manner invest in, the debtor (including any agreement to pay
for property or services without requiring that such property be received or
such services be rendered), (iv) to maintain working capital or equity capital
of the debtor, or otherwise to maintain the net worth, solvency or other
financial condition of the debtor or (v) otherwise to assure a creditor against
loss; provided that the term "guarantee" shall not include endorsements for
collection or deposit, in either case in the ordinary course of business.
"Guarantor" means any guarantors of the Notes including any Person that is
required after the date of the Indenture to execute a guarantee of the Notes
pursuant to the "Limitations on Liens" covenants of the Indenture or the "--
Limitation on Issuance of Guarantees of Indebtedness" covenant of the Indenture,
until a successor replaces such party pursuant to the applicable provisions of
the Indenture and, thereafter, shall mean such successor.
"Healthcare Related Business" means a business, the majority of whose
revenues result from health care, long-term care, or managed care related
businesses or facilities, including businesses which provide insurance relating
to the costs of health care, long-term care or managed care services.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities arising in the ordinary course of business, but including,
without limitation, all obligations, contingent or otherwise, of such Person in
connection with any letters of credit issued under letter of credit facilities,
acceptance facilities or other similar facilities and in connection with any
agreement to purchase, redeem, exchange, convert or otherwise acquire for value
any Capital Stock of such Person, or any warrants, rights or options to acquire
such Capital Stock, now or hereafter outstanding, (ii) all obligations of such
Person evidenced by bonds, notes, debentures or other similar instruments, (iii)
every obligation of such Person issued or contracted for as payment in
consideration of the purchase by such Person or an Affiliate of such Person of
the Capital Stock or substantially all of the assets of another Person or in
consideration for the merger or consolidation with respect to which such Person
or an Affiliate of such Person was a party (other than any obligation of such
Person to pay an amount to another Person based on income in respect of Capital
Stock or assets which were purchased or in respect of such merger to which such
Person or an Affiliate was a party except for such obligations which are
required in accordance with GAAP to be classified as a liability on the balance
sheet of such Person), (iv) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even if the rights and remedies of the seller or lender
under such agreement in the event of default are limited to repossession or sale
of such property), but excluding trade payables and other accrued current
liabilities arising in the ordinary course of business, (v) all monetary
obligations under Interest Rate Agreements of such Person, (vi) all Capital
Lease Obligations of such Person, (vii) all Indebtedness referred to in clauses
(i) through (vi) above of other Persons and all dividends of other Persons, the
payment of which is secured by (or for which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by) any Lien, upon or
with respect to property (including, without limitation, account and contract
rights) owned by such Person, even though such Person has not assumed or become
liable for the payment of such Indebtedness, (viii) all Guaranteed Debt of such
Person, (ix) all Redeemable Capital Stock issued by such Person valued at the
greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued and unpaid dividends, (x) all Attributable Debt of such Person and (xi)
any amendment, supplement, modification, deferral, renewal, extension, refunding
or refinancing of any liability of the types referred to in clauses (i) through
(x) above. For purposes hereof, the "maximum fixed repurchase price" of any
Redeemable Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Redeemable Capital Stock as if
such Redeemable Capital Stock were purchased
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on any date on which Indebtedness shall be required to be determined pursuant to
the Indenture, and if such price is based upon, or measured by, the Fair Market
Value of such Redeemable Capital Stock, such Fair Market Value to be determined
in good faith by the board of directors of the issuer of such Redeemable Capital
Stock.
"Indenture Obligations" means the obligations of the Company and any other
obligor under the Indenture, or under the Notes, including any Guarantor, to pay
principal of, and premium, if any, and interest on, the Notes when due and
payable, and all other amounts due or to become due under or in connection with
the Indenture, the Notes, and the performance of all other obligations to the
Trustee and the holders under the Indenture and the Notes, according to the
terms thereof.
"Interest Rate Agreements" means one or more of the following agreements:
interest rate protection agreements (including, without limitation, interest
rate swaps, caps, floors, collars and similar agreements) and/or other types of
interest rate hedging agreements.
"Investment" means, with respect to any Person, directly or indirectly, any
advance, loan (including guarantees), or other extension of credit or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase, acquisition or ownership by such Person of any Capital Stock, bonds,
notes, debentures or other securities issued or owned by any other Person and
all other items that would be classified as investments on a balance sheet
prepared in accordance with GAAP. Investments shall exclude extensions of trade
credit and advances to customers and suppliers to the extent made in the
ordinary course of business and in accordance with customary industry practice.
The amount of any Investment shall be the original cost of such Investment plus
the cost of all additions thereto, without any adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with respect to such
Investment.
"Lien" means any mortgage or deed of trust, charge, pledge, lien (statutory
or otherwise), security interest, easement, hypothecation or other encumbrance
upon or with respect to any property of any kind (including any conditional
sale, capital lease or other title retention agreement, any leases in the nature
thereof, and any agreement to give any security interest), real or personal,
movable or immovable, now owned or hereafter acquired.
"Maturity" means, when used with respect to the Notes, the date on which the
principal of the Notes becomes due and payable as therein provided or as
provided in the Indenture, whether at Stated Maturity, the Offer Date or the
redemption date and whether by declaration of acceleration, Offer in respect of
Excess Proceeds, Change of Control Offer in respect of a Change of Control, call
for redemption or otherwise.
"Net Cash Proceeds" means (a) with respect to any Asset Sale by any Person,
the proceeds thereof (without duplication in respect of all Asset Sales) in the
form of cash, Cash Equivalents or Temporary Cash Investments including payments
in respect of deferred payment obligations when received in the form of, or
stock or other assets when disposed of for, cash, Cash Equivalents or Temporary
Cash Investments (except to the extent that such obligations are financed or
sold with recourse to the Company or any Subsidiary) net of (i) brokerage
commissions and other reasonable fees and expenses (including fees and expenses
of counsel and investment bankers) related to such Asset Sale, (ii) provisions
for all taxes payable as a result of such Asset Sale, (iii) payments made to
retire Indebtedness where payment of such Indebtedness is secured by the assets
or properties the subject of such Asset Sale, (iv) amounts required to be paid
to any Person (other than the Company or any Subsidiary) owning a beneficial
interest in the assets subject to the Asset Sale and (v) appropriate amounts to
be provided by the Company or any Subsidiary, as the case may be, as a reserve,
in accordance with GAAP, against any liabilities associated with such Asset Sale
and retained by the Company or any Subsidiary, as the case may be, after such
Asset Sale, including, without limitation, pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Sale, all as reflected in an officers' certificate delivered to the Trustee and
(b) with respect to any issuance or sale of Capital Stock or options, warrants
or rights to purchase Capital Stock, or debt securities or Capital Stock that
have been converted into or exchanged for Capital Stock, as referred to under
"-- Certain Covenants -- Limitation on Restricted Payments,"
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the proceeds of such issuance or sale in the form of cash, Cash Equivalents or
Temporary Cash Investments, net of attorney's fees, accountant's fees and
brokerage, consultation, underwriting and other fees and expenses actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Pari Passu Indebtedness" means any Indebtedness of the Company that is pari
passu in right of payment to the Notes.
"Permitted Indebtedness" means:
(i) Indebtedness of the Company and the Subsidiaries under the Credit
Facility (or guarantees thereunder) in an aggregate principal amount at any one
time outstanding not to exceed $175 million, plus any increase over $175 million
(including the most recent increase to $200 million) in the principal amount
that the lenders under the Credit Facility have committed to loan the Company
thereunder pursuant to an amendment or other agreement entered into on or prior
to six months after the date of the Indenture; provided that in no event shall
the Indebtedness incurred pursuant to this clause (i) exceed $250 million in
principal amount;
(ii) Indebtedness of the Company pursuant to the Notes and Indebtedness of
any Guarantor pursuant to a Guarantee of the Notes;
(iii) Indebtedness of the Company or any Subsidiary outstanding on the date
of the Indenture and listed on a schedule thereto;
(iv) Indebtedness of the Company owing to a Subsidiary; provided that any
Indebtedness of the Company owing to a Subsidiary is made pursuant to an
intercompany note in the form attached to the Indenture and is subordinated in
right of payment from and after such time as the Notes shall become due and
payable (whether at Stated Maturity, acceleration or otherwise) to the payment
and performance of the Company's obligations under the Notes; provided, further,
that any disposition, pledge or transfer of any such Indebtedness to a Person
(other than a disposition, pledge or transfer to a Subsidiary) shall be deemed
to be an incurrence of such Indebtedness by the obligor not permitted by this
clause (iv);
(v) Indebtedness of a Wholly Owned Subsidiary owing to the Company or
another Wholly Owned Subsidiary; provided that any such Indebtedness is made
pursuant to an intercompany note in the form attached to the Indenture;
provided, further, that (a) any disposition, pledge or transfer of any such
Indebtedness to a Person (other than a disposition, pledge or transfer to the
Company or a Wholly Owned Subsidiary) shall be deemed to be an incurrence of
such Indebtedness by the obligor not permitted by this clause (v), and (b) any
transaction pursuant to which any Wholly Owned Subsidiary which has Indebtedness
owing to the Company or any other Wholly Owned Subsidiary ceases to be a Wholly
Owned Subsidiary shall be deemed to be the incurrence of Indebtedness by such
Wholly Owned Subsidiary that is not permitted by this clause (v);
(vi) guarantees of any Subsidiary made in accordance with the provisions of
"-- Certain Covenants -- Limitation on Issuances of Guarantees of Indebtedness;"
(vii) obligations of the Company pursuant to Interest Rate Agreements
designed to protect the Company or any Subsidiary against fluctuations in
interest rates in respect of Indebtedness of the Company or any Subsidiary as
long as such obligations do not exceed the aggregate principal amount of such
Indebtedness then outstanding;
(viii) Indebtedness evidenced by letters of credit issued in the ordinary
course of business consistent with past practice to support the Company's or any
Subsidiary's insurance or self-insurance obligations for workers compensation
and other similar insurance coverages;
(ix) Indebtedness to be assumed by the Company or any Subsidiary pursuant to
the Agreement and Plan of Merger dated as of February 27, 1996 among the
Company, Mariner Health of Florida, Inc., Regency Health Care Centers Inc.,
MedTx Corporation, and certain stockholders of Regency Health Care Centers,
Inc.;
83
(x) Indebtedness incurred by the Company or any Subsidiary consisting of
Purchase Money Obligations or Capital Lease Obligations in an aggregate
principal amount not to exceed $10 million at any time outstanding;
(xi) any renewals, extensions, substitutions, refundings, refinancings or
replacements (collectively, a "refinancing") of any Indebtedness described in
clauses (ii), (iii) and (ix) of this definition of "Permitted Indebtedness,"
including any successive refinancings so long as the borrower under such
refinancing is the Company or, if not the Company, the same as the borrower of
the Indebtedness being refinanced and the aggregate principal amount of
Indebtedness represented thereby is not increased by such refinancing plus the
lesser of (I) the stated amount of any premium or other payment required to be
paid in connection with such a refinancing pursuant to the terms of the
Indebtedness being refinanced or (II) the amount of premium or other payment
actually paid at such time to refinance the Indebtedness, plus, in either case,
the amount of expenses of the Company incurred in connection with such
refinancing and (A) in the case of any refinancing of Indebtedness that is
Subordinated Indebtedness, such new Indebtedness is made subordinated to the
Notes at least to the same extent as the Indebtedness being refinanced and (B)
in the case of Subordinated Indebtedness, such refinancing does not reduce the
Average Life to Stated Maturity or the Stated Maturity of such Indebtedness; and
(xii) Indebtedness of the Company in addition to that described in the
foregoing clauses (i) through (xi) above, and any renewals, extensions,
substitutions, refinancings or replacements of such Indebtedness, so long as the
aggregate principal amount of all such Indebtedness shall not exceed $25 million
outstanding at any one time in the aggregate.
"Permitted Investment" means (i) Investments in any Wholly Owned Subsidiary
or any Person which, as a result of such Investment, (a) becomes a Wholly Owned
Subsidiary or (b) is merged or consolidated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into, the Company
or any Wholly Owned Subsidiary; (ii) Indebtedness of the Company or a Subsidiary
described under clauses (iv) and (v) of the definition of "Permitted
Indebtedness;" (iii) Temporary Cash Investments; (iv) Investments acquired by
the Company or any Subsidiary in connection with an Asset Sale permitted under
"-- Certain Covenants -- Limitation on Sale of Assets" to the extent such
Investments are non-cash proceeds as permitted under such covenant; (v)
Investments in any Permitted Joint Venture; (vi) Investments in any Healthcare
Related Business; provided that the Company is able, at the time of such
investment and immediately after giving pro forma effect thereto, to incur at
least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with "-- Certain Covenants -- Limitation on Indebtedness;" (vii)
accounts receivable created or acquired in the ordinary course of business;
(viii) loans and advances to employees and officers of the Company and its
Subsidiaries in an amount not to exceed $1 million at any one time outstanding;
(ix) Investments in securities of trade creditors or customers received pursuant
to any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of such trade creditors or customers; (x) Investments in any Person,
the consideration for which consists of Qualified Capital Stock of the Company;
(xi) Investments in existence on the date of the Indenture; (xii) Investments in
the Notes or any Guarantee; and (xiii) in addition to the Investments described
in clauses (i) through (xii) above, Investments in an aggregate amount not to
exceed $25 million at any one time outstanding. In connection with any assets or
property contributed or transferred to any Person as an Investment, such
property and assets shall be equal to the Fair Market Value (as determined by
the Company's Board of Directors) at the time of the Investment.
"Permitted Joint Venture" means any Subsidiary which owns, operates or
services Healthcare Related Businesses.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class in such Person.
84
"Purchase Money Obligations" means any Indebtedness of the Company or any
Subsidiary incurred to finance the acquisition or construction of any property
or business (including Indebtedness incurred within 90 days following such
acquisition or construction); provided, however that any Lien on such
Indebtedness shall not extend to any property other than the property so
acquired or constructed and any Lien securing such Indebtedness shall be created
within 90 days of such acquisition or construction.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any Capital Stock that, either by its terms
or by the terms of any security into which it is convertible or exchangeable or
otherwise, is or upon the happening of an event or passage of time would be,
required to be redeemed prior to any Stated Maturity of the principal of the
Notes, or is redeemable at the option of the holder thereof at any time prior to
any such Stated Maturity, or is convertible into or exchangeable for debt
securities at any time prior to any such Stated Maturity at the option of the
holder thereof.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.
"Significant Subsidiary" means, at any particular time, any Subsidiary that,
together with the Subsidiaries of such Subsidiary, (i) for the most recent
fiscal year of the Company accounted for more than 10% of the Consolidated
revenues of the Company and its Subsidiaries or (ii) at the end of such fiscal
year, was the owner (beneficial or otherwise) of more than 10% of the
consolidated assets of the Company and its Subsidiaries, all as calculated in
accordance with GAAP and as shown on the Consolidated financial statements of
the Company and its Subsidiaries.
"Stated Maturity," when used with respect to any Indebtedness or any
installment of interest thereon, means the date specified in such Indebtedness
as the fixed date on which the principal of such Indebtedness or such
installment of interest, is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company or a Guarantor
subordinated in right of payment to the Notes.
"Subsidiary" means any Person, a majority of the equity ownership or the
Voting Stock of which is at the time owned, directly or indirectly, by the
Company or by one or more other Subsidiaries, or by the Company and one or more
other Subsidiaries.
"Temporary Cash Investments" means (i) any evidence of Indebtedness,
maturing not more than one year after the date of acquisition, issued by the
United States of America, or an instrumentality or agency thereof and guaranteed
fully as to principal, premium, if any, and interest by the United States of
America, (ii) any certificate of deposit, maturing not more than one year after
the date of acquisition, issued by, or time deposit of, a commercial banking
institution that is a member of the Federal Reserve System and that has combined
capital and surplus and undivided profits of not less than $500 million, whose
debt has a rating, at the time as of which any investment therein is made, of
"P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P,
(iii) commercial paper, maturing not more than one year after the date of
acquisition, issued by a corporation (other than an Affiliate or Subsidiary of
the Company) organized and existing under the laws of the United States of
America with a rating, at the time as of which any investment therein is made,
of "P-1" according to Moody's or "A-1" according to S&P and (iv) any money
market deposit accounts issued or offered by a domestic commercial bank having
capital and surplus in excess of $500 million; provided that the short term debt
of such commercial bank has a rating, at the time of Investment, of "P-1" (or
higher) according to Moody's or "A-1" (or higher) according to S&P.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended, or
any successor statute.
85
"Voting Stock" means Capital Stock of the class or classes pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees of
a corporation (irrespective of whether or not at the time Capital Stock of any
other class or classes shall have or might have voting power by reason of the
happening of any contingency).
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of which
is owned by the Company or another Wholly Owned Subsidiary of the Company.
86
DESCRIPTION OF OTHER INDEBTEDNESS
CREDIT FACILITY
In May 1994, the Company entered into the Credit Facility with PNC Bank,
National Association, ("PNC") as agent, and certain lenders. The Credit Facility
has subsequently been amended several times, most recently in April 1996, to
increase the size of the facility and to reduce the restrictions which the
Credit Facility imposes on the operations of the Company's business. The Credit
Facility provides the Company with a revolving loan facility of $200 million. Up
to $10 million of the Credit Facility may be used to issue standby letters of
credit. Each of the Company's subsidiaries has provided an unconditional
guaranty of all amounts owing under the Credit Facility. The stock of all of the
Company's subsidiaries has been pledged as security for all amounts owing under
the Credit Facility. In addition, the Credit Facility is secured by mortgages on
certain of the Company's inpatient facilities, leasehold mortgages on certain
inpatient facilities leased by the Company, and security interests in certain
other properties and assets of the Company and its subsidiaries.
The Credit Facility matures on April 30, 1999. The Company is permitted, at
its election and at any time, to reduce permanently the amount available under
the Credit Facility in whole or in part. Revolving loans under the Credit
Facility may be borrowed, repaid and reborrowed by the Company in accordance
with the terms of the Credit Facility.
The Company is currently negotiating an amendment to the Credit Facility to
increase the size of the Credit Facility to $250 million and reduce the
restrictions which the Credit Facility imposes on the operations of the
Company's business. No assurance can be given that any amendment will be entered
into.
At the Company's option, interest on amounts borrowed under the Credit
Facility are payable either at (i) the greater of (x) the rate announced as the
prime rate of PNC Bank, National Association and (y) the applicable federal
funds rate plus 1/2 of 1%, or (ii) the applicable Eurodollar rate plus an
applicable Eurodollar rate margin (which applicable Eurodollar rate margin shall
not be lower than 0.500% or exceed 1.500%). The applicable margins referred to
above vary (within the ranges referred to above) in accordance with the
Company's operating performance.
At March 31, 1996, the Company had borrowings of approximately $130,500,000
million under the Credit Facility and had letters of credit outstanding under
this facility of $2,612,000. At March 31, 1996, the Company was borrowing at a
blended interest rate of 6.97% under the Credit Facility. The Credit Facility
obligates the Company to pay a quarterly commitment fee at the applicable
commitment fee rate (which applicable commitment fee rate shall not exceed
0.375% per annum) on the average daily unused portion of the Credit Facility, as
well as certain other customary fees and commissions.
The Credit Facility contains certain covenants, including, without
limitation, reporting and other affirmative covenants of and restrictions
(subject to certain exceptions) on the Company (and in most cases the Company's
subsidiaries) with respect to: (i) indebtedness and additional indebtedness,
(ii) liens and encumbrances, (iii) guarantees, (iv) loans and investments
(including investments in subsidiaries), (v) dividends and distributions, (vi)
liquidations, mergers, consolidations and acquisitions, (vii) certain
dispositions of assets or subsidiaries, (viii) transactions with affiliates,
(ix) subsidiaries, partnerships and joint ventures, (x) the conduct of business,
(xi) compliance with pension, environmental and other laws, (xii) the issuance
of stock and (xiii) capital expenditures and leases.
GUARANTEES OF SUBSIDIARY DEBT
The Company has guaranteed the payment of certain obligations of certain of
its subsidiaries pursuant to mortgages, lease agreements and other instruments.
Included among such obligations at March 31, 1996 are those obligations
identified below:
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(i) The reimbursement obligations of Seventeenth Street Associates Limited
Partnership to NationsBank of Georgia, N.A., NationsBank of Tennessee, N.A. and
the County Commission of Cabell County, West Virginia in the original principal
amount of $6.8 million pursuant to secured financing agreements entered into on
or about October 1, 1993.
(ii) The obligations of Mariner Health Care of Lake Worth to JBG Management
in the original principal amount of $2.8 million pursuant to an agreement dated
October 3, 1994.
(iii) The obligations of Pinnacle Rehabilitation, Inc. to Bay State
Rehabilitation, Inc., Connecticut Therapies, Inc. and Valley Rehabilitation,
Inc. in the original principal amount of $1.8 million pursuant to the terms of
an Asset Purchase and Sale Agreement dated as of July 14, 1993.
CAPITAL LEASES AND MORTGAGE LOANS
As of March 31, 1996, subsidiaries of the Company also had $75 million and
$25 million of capital leases and mortgages outstanding, respectively.
Generally, the interest rate underlying the capital leases is 6.75%. The
interest rates on the mortgages generally range from 8% to 11%. The instruments
governing the indebtedness of such subsidiaries contain various restrictive loan
covenants, including covenants which restrict in certain circumstances the
payment of dividends and the transfer of assets to the Company.
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PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with resales of Exchange Notes
received in exchange for Notes where such Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that it will furnish to each Participating Broker-Dealer as many copies of this
Prospectus, as amended or supplemented, as such Participating Broker-Dealer may
reasonably request. In addition, each Participating Broker-Dealer shall be
authorized to deliver this Prospectus in connection with the sale or transfer of
the Exchange Notes. In addition, until , all dealers effecting transactions in
the Exchange Notes may be required to deliver a Prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker-Dealers. Exchange Notes received by Participating
Broker-Dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating Broker-Dealer and/or the purchasers of
any such Exchange Notes. Any Participating Broker-Dealer that resells the
Exchange Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such Exchange Notes may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit on any such resale of Exchange Notes and any
comissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
The Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any Participating Broker-Dealer
that requests such documents in the Letter of Transmittal. See "Exchange Offer
- -- Purpose and Effect of the Exchange Offer."
89
LEGAL MATTERS
Certain legal matters with respect to the issuance of the Exchange Notes
will be passed upon for the Company by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts.
EXPERTS
The consolidated financial statements and the financial statement schedule
of the Company included in this Prospectus and this Registration Statement have
been included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The consolidated statements of income, stockholders' equity and cash flows
of Pinnacle Care Corporation for the year ended December 31, 1993 included in
Mariner's consolidated financial statements referred to above have been audited
by Ernst & Young LLP, independent auditors, to the extent indicated in their
report thereon incorporated by reference herein. Such consolidated financial
statements referred to above are incorporated herein in reliance upon such
report, given on the authority of that firm as experts in accounting and
auditing.
The combined balance sheet as of December 31, 1995 relating to certain
assets and liabilities of Convalescent Services, Inc. and Affiliates acquired by
Mariner Health Group, Inc. on January 2, 1996 and the related statement of
operations, cash flows and changes in stockholders' deficit for the year then
ended included in this Prospectus have been included herein in reliance on the
report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The combined balance sheets as of December 31, 1993 and 1994 and the related
combined statements of operations, cash flows and changes in stockholders'
deficit for each of the three years in the period ended December 31, 1994 of
Convalescent Services, Inc. and Affiliates included in this Prospectus have been
included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The balance sheets of Regency Health Care Centers, Inc. and subsidiaries as
of December 31, 1995 and 1994 and the related statements of operations,
shareholders' equity and cash flows for the years then ended incorporated by
reference in this Prospectus have been incorporated herein in reliance on the
report of Bennett Thrasher & Co. P.C., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The balance sheet of Heritage Health Care Centers of Central Florida, Inc.
as of December 31, 1994 and the related statement of income, changes in
stockholders' deficit and cash flows for the period from inception (March 15,
1993) to December 31, 1994 incorporated by reference in this Prospectus have
been incorporated herein in reliance on the report of Ryun, Givens, Wenthe &
Co., P.L.C., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
The balance sheets of Heritage Health Care Center of Baker County, Inc. (an
S corporation) as of December 31, 1994 and 1993 and the related statements of
income, changes in stockholders' equity (deficit) and cash flows for the years
then ended incorporated by reference in this Prospectus have been incorporated
herein in reliance on the report of Ryun, Givens, Wenthe & Co., P.L.C.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The balance sheets of Inverness Health Care, A Limited Partnership d/b/a
Heritage Health Care Center as of December 31, 1994 and 1993, and the related
statements of income, changes in partners' capital and cash flows for the years
then ended incorporated by reference in this Prospectus have been incorporated
herein in reliance on the report of Ryun, Givens, Wenthe & Co., P.L.C.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
90
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the following Regional Offices of the Commission: 7 World
Trade Center, Suite 1300, New York, New York 10048; and the Northwestern Atrium
Center 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies
of such reports and other information may be obtained from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Reports, proxy statements and other
information concerning the Company may also be inspected at the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C.
20006.
The Indenture provides that the Company will furnish copies of the periodic
reports required to be filed with the Commission under the Exchange Act to the
Trustee. If the Company is not subject to the periodic reporting and information
requirements of the Exchange Act, the Company will, to the extent permitted
under the Exchange Act, file with the Commission, and the Company will provide
to the Trustee, annual reports containing the information required to be
contained in a Form 10-K under the Exchange Act, quarterly reports containing
the information required to be contained in a Form 10-Q under the Exchange Act
and from time to time such other information as is required to be contained in a
Form 8-K under the Exchange Act. The Company shall also furnish all such reports
to Holders of the Exchange Notes or to the Trustee for forwarding to each Holder
of Exchange Notes. If filing such reports by the Company with the Commission is
not permitted under the Exchange Act, the Company will promptly upon written
request and payment of the reasonable cost of duplication and delivery, supply
copies of such reports to any person the Company reasonably believes is a
prospective holder of Exchange Notes.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act are incorporated in this Prospectus by reference as of their
respective dates (File No. 0-21512): (1) Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 (as amended on April 9, 1996 and May 14,
1996); (2) Quarterly Report on Form 10-Q for the quarter ended March 31, 1996;
(3) Current Reports on Form 8-K dated January 2, 1996, April 1, 1996, April 4,
1996, April 30, 1996 and June 13, 1996; (4) Current Reports on Form 8-K/A filed
on November 28, 1995 and December 15, 1995; and (5) Forms 10-C filed with the
Commission on January 5, 1996 and March 6, 1996. All documents filed by Mariner
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to
the date of this Prospectus and prior to the termination of the offering of the
Exchange Notes shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the date of filing of such documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document that is incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE WITHOUT CHARGE FROM
JEFFREY W. KINELL, CHIEF FINANCIAL OFFICER, MARINER HEALTH GROUP, INC., 125
EUGENE O'NEILL DRIVE, NEW LONDON, CONNECTICUT 06320, TELEPHONE (860) 701-2000.
IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE
FIVE BUSINESS DAYS PRIOR TO THE EXPIRATION DATE.
91
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
PAGE
----
<S> <C>
Audited Financial Statements
Report of Coopers & Lybrand L.L.P ................................................ F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 ..................... F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994
and 1995 ........................................................................ F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995 ........................................................................ F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995 ............................................................. F-6
Notes to Consolidated Financial Statements ....................................... F-7
Unaudited Financial Statements
Consolidated Balance Sheet as of March 31, 1996 .................................. F-24
Consolidated Statements of Operations for the three months ended March 31, 1995
and 1996 ........................................................................ F-25
Consolidated Statements of Cash Flows for the three months ended March 31, 1995
and 1996 ........................................................................ F-26
Notes to Consolidated Financial Statements ....................................... F-27
CERTAIN ASSETS AND LIABILITIES OF CONVALESCENT SERVICES, INC. AND AFFILIATES
ACQUIRED BY MARINER HEALTH GROUP, INC. ON JANUARY 2, 1996
Audited Financial Statements
Report of Coopers & Lybrand L.L.P ................................................ F-29
Combined Balance Sheet as of December 31, 1995 ................................... F-30
Combined Statement of Operations for the year ended December 31, 1995 ........... F-31
Combined Statement of Cash Flows for the year ended December 31, 1995 ........... F-32
Combined Statement of Changes in Stockholders' Deficit for the year
ended December 31, 1995 .......................................................... F-33
Notes to Financial Statements .................................................... F-34
CONVALESCENT SERVICES, INC. AND AFFILIATES
Audited Financial Statements
Report of Coopers & Lybrand L.L.P. ............................................... F-40
Combined Balance Sheets as of December 31, 1993 and 1994.......................... F-41
Combined Statements of Operations for the fiscal years ended December 31, 1992,
1993 and 1994 ................................................................... F-42
Combined Statements of Cash Flows for the fiscal years ended December 31, 1992,
1993 and 1994 ................................................................... F-43
Combined Statements of Changes in Stockholders' Deficit for the fiscal years ended
December 31, 1992, 1993 and 1994 ................................................ F-44
Notes to Combined Financial Statements ........................................... F-45
</TABLE>
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
MARINER HEALTH GROUP, INC.
We have audited the accompanying consolidated balance sheets of Mariner
Health Group, Inc. and subsidiaries (the "Company") as of December 31, 1994 and
1995 and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements give
effect to two poolings of interests as described in Notes 2 and 3 to the
consolidated financial statements. We did not audit the financial statements of
Pinnacle Care Corporation, whose financial statements represent 39% of
consolidated revenues for the year ended December 31, 1993. These statements
were examined by another auditor whose report thereon has been furnished to us,
and our opinion expressed herein, insofar as it relates to the amounts included
for Pinnacle Care Corporation, is based solely on the report of another auditor.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors the
financial statements referred to above, present fairly, in all material
respects, the consolidated financial position of Mariner Health Group, Inc. and
subsidiaries as of December 31, 1994 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
May 30, 1996
F-2
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 18) ........................................................... $ 37,209 $ 4,086
Accounts receivable, less allowance for doubtful accounts of $6,379 and $10,078
respectively (Notes 2 and 5) ................................................................ 55,465 92,537
Estimated settlements due from third-party payors (Note 5) .................................... 5,770 12,915
Prepaid expenses and other current assets ..................................................... 3,307 6,757
Deferred income tax benefit (Note 11) ......................................................... 5,168 9,918
----- -----
Total current assets ...................................................................... 106,919 126,213
Property, plant, and equipment, net (Note 7) ..................................................... 118,944 174,486
Goodwill, net of accumulated amortization of $17,272 and $19,084, respectively (Notes
2 and 3) ....................................................................................... 53,935 78,212
Intangible and other assets, net of accumulated amortization of $6,968 and $6,550,
respectively (Notes 2 and 3) ................................................................... 12,880 30,144
Restricted cash and cash equivalents (Note 8) .................................................... 1,954 1,198
Deferred income tax benefit (Note 11) ............................................................ 2,301 1,273
----- -----
Total assets .............................................................................. $ 296,933 $ 411,526
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease obligations (Note 9) ................... $ 2,194 $ 5,156
Accounts payable .............................................................................. 6,075 10,904
Accrued payroll ............................................................................... 4,903 6,072
Accrued vacation .............................................................................. 3,916 5,053
Other accrued expenses ........................................................................ 17,122 22,808
Deferred income taxes (Note 11) ............................................................... -- 987
Other liabilities ............................................................................. 1,492 1,085
----- -----
Total current liabilities ................................................................. 35,702 52,065
Long-term debt and capital lease obligations (Notes 9 and 18) .................................... 24,506 107,910
Deferred income taxes (Note 11) .................................................................. 4,096 6,007
Deferred gain (Note 6) ........................................................................... 3,590 2,122
Redeemable Stock ................................................................................. 891 1,030
--- -----
Total liabilities ......................................................................... 68,785 169,134
Commitments and contingencies (Note 17)
Stockholders' equity (Notes 12, 13, 14 and 15):
Common stock, $.01 par value; 50,000,000 shares authorized; 22,365,818and 22,540,008
issued and outstanding at December 31, 1994 and 1995, respectively .......................... 224 225
Additional paid-in capital .................................................................... 244,985 246,660
Unearned compensation ......................................................................... (101) (15)
Accumulated deficit ........................................................................... (16,960) (4,478)
------- ------
Total stockholders' equity ................................................................ 228,148 242,392
Total liabilities and stockholders' equity ............................................. $ 296,933 $ 411,526
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Net patient service revenue ........................................................ $ 209,238 $ 260,357 $ 337,635
Other income (Note 2) .............................................................. 1,568 3,787 17,171
Total operating revenue ............................................................ 210,806 264,144 354,806
------- ------- -------
Operating expenses:
Facility operating costs ........................................................ 167,785 208,691 276,633
Corporate general and administrative ............................................ 34,902 30,935 39,830
------ ------ ------
202,687 239,626 316,463
Interest expense, net ........................................................... 7,379 1,819 3,598
Facility rent expense, net ...................................................... 1,079 1,739 1,830
Depreciation and amortization ................................................... 6,843 8,091 11,397
----- ----- ------
Total operating expenses ........................................................... 217,988 251,275 333,288
Operating income (loss) ............................................................ (7,182) 12,869 21,518
Net gain (loss) on sale of facilities .............................................. 364 932 (6)
--- --- --
Income (loss) before income taxes and extraordinary items .......................... (6,818) 13,801 21,512
Net provision for income taxes (Notes 2 and 11) .................................... (3,220) (5,848) (7,892)
------ ------ ------
Income (loss) before extraordinary items ........................................... (10,038) 7,953 13,620
Extraordinary items (Note 9) ....................................................... (5,882) (86) (1,138)
------ --- ------
Net income (loss) .................................................................. $ (15,920) $ 7,867 $ 12,482
========= ========= =========
Net income (loss) per common and common equivalent share:
Income (loss) from continuing operations before extraordinary items ............. $ (0.92) $ 0.41 $ 0.60
Extraordinary items ............................................................. (0.51) (--) (0.05)
----- - -----
Net income (loss) ............................................................... $ (1.43) $ 0.41 $ 0.55
========= ========= =========
Weighted average number of common and common equivalent shares outstanding ......... 11,608 19,251 22,755
====== ====== ======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................................. $ (15,920) $ 7,867 $ 12,482
Adjustments to reconcile net income to cash provided by (used in) operating
activities:
Depreciation and amortization .................................................. 6,843 8,091 11,399
Amortization of deferred gain .................................................. (304) (905) (1,468)
Loss on facility closure ....................................................... -- -- 1,801
Extraordinary item-loss due to early retirement of debt ........................ 5,695 143 1,138
Non-recurring charges .......................................................... 11,760 1,375 --
Amortization of stock plan expense ............................................. -- 34 19
Gain on sales of facilities .................................................... (364) (508) 20
Earnings from partnerships ..................................................... (158) (123) (14)
Provisions for losses on accounts receivable ................................... 1,595 1,338 3,698
Changes in operating assets and liabilities:
Increase in accounts receivable ............................................. (7,440) (17,063) (40,787)
Increase in estimated settlements from third party payors ................... (1,006) (2,578) (7,156)
Increase in prepaid expenses and other current assets ....................... (300) (830) (3,397)
(Increase) decrease in income taxes receivable .............................. (731) 731 --
Increase (decrease) in accounts payable ..................................... 201 (970) 3,778
Increase in accrued liabilities ............................................. 2,281 11,383 6,884
Increase (decrease) in other current liabilities ............................ 1,144 (2,494) (165)
Increase in other assets .................................................... (132) -- --
Increase in deferred income tax benefit ..................................... (558) (4,571) (3,722)
Increase in deferred income tax liability ................................... 738 250 2,898
Decrease in other long-term liabilities ..................................... -- (21) (1)
----- ---- ----
Net cash provided by (used in) operating activities ...................... 3,344 1,149 (12,593)
----- ----- -------
Cash flows used in investing activities:
Purchase of property, plant and equipment ......................................... (10,228) (8,875) (11,943)
Proceeds from sale of discontinued operations ..................................... 40 -- --
Proceeds from sale of plant, property and equipment ............................... 393 -- --
Loss on facility closure .......................................................... -- (811) --
Increase in other assets .......................................................... (273) (766) (3,210)
Payments on amounts of prior acquisitions ......................................... (157) -- 1,055
Proceeds from the collection of long-term receivables ............................. 21 -- --
Proceeds on loan to nonprofit corporation ......................................... 26 -- --
Decrease in restricted cash ....................................................... 189 -- 756
Cash paid for acquisitions, net of cash acquired .................................. (10,896) (59,323) (52,389)
Purchase deposits ................................................................. -- -- (19,500)
Increase in preopening costs ...................................................... (2,724) -- --
------ ------ ------
Net cash used in investing activities .................................... (23,609) (69,775) (85,231)
------- ------- -------
Cash flows from financing activities:
Principal payments under capital lease obligations ................................ (2,910) (693) (1,950)
Drawings on line of credit ........................................................ 64,700 47,250 80,775
Borrowings from investor .......................................................... -- -- 400
Increase in deferred financing costs .............................................. (2,385) (315) --
Repayments of debt ................................................................ (106,137) (63,917) (15,971)
Proceeds from issuance of stock, net of offering costs ............................ 94,756 83,634 --
Decrease in other liabilities ..................................................... (43) -- --
Exercise of stock options ......................................................... -- 995 1,008
Shares issued under employee stock purchase plan .................................. -- -- 400
Exercise of warrants .............................................................. -- 95 --
Release of restricted cash ........................................................ 4,167 -- --
Prepayment penalties .............................................................. (3,719) -- --
Partnership distributions ......................................................... 183 784 39
Redemption of preferred D stock ................................................... (5,546) -- --
------ ------ ------
Net cash provided by financing activities ................................ 43,066 67,833 64,701
------ ------ ------
Increase (decrease) in cash and cash equivalents ...................................... 22,801 (793) (33,123)
Cash and cash equivalents at beginning of year ........................................ 15,201 38,002 37,209
------ ------ ------
Cash and cash equivalents at end of year .............................................. $ 38,002 $ 37,209 $ 4,086
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years
ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------ ---------------
RETAINED
ADDITIONAL EARNINGS
PAID-IN UNEARNED ACCUMULATED
SHARES PAR VALUE SHARES PAR VALUE CAPITAL COMPENSATION DEFICIT) TOTAL
------ --------- ------ --------- ------- ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 .. 3,105,398 $ 31 7,936,332 $ 8,329 $ 21,752 -- $ (8,907) $ 21,205
Net loss ...................... (15,920) (15,920)
Accrued dividends on redeemable
Preferred Stock ............. (1,616) (1,616)
Conversion of Preferred Stock . 3,977,321 40 (5,800,000) (8,420) 33,402 25,022
Conversion of debt ............ 338,701 3 3,712 3,715
Issuance of Common Stock ...... 7,704,313 77 94,255 94,332
Exercise of warrants .......... 274,452 3 401 404
Exercise of options ........... 10,278 23 23
Stock option grants ........... 276 (276) --
Accretion of preferred stock .. 112 (103) 9
Amortization of stock plan
expense ..................... 55 55
-------- ------ ------ ------ ------ ------ ------ ------
Balance at December 31, 1993 .. 15,410,463 154 2,136,332 21 152,102 (221) (24,827) 127,229
Net income .................... 7,867 7,867
Conversion of Preferred Stock . 2,136,332 21 (2,136,332) (21) --
Conversion of subordinated debt 556,070 6 6,474 6,480
Exercise of options ........... 180,418 2 993 995
Exercise of warrants .......... 49,286 1 202 203
Accelerated vesting of stock
options ..................... 1,375 1,375
Shares purchased under
Employee Stock Purchase
Plan ........................ 5,711 95 95
Tax benefit arising from
exercise of employee stock
options ..................... 294 294
Issuance of Common Stock ...... 4,027,538 40 83,536 83,576
Cancellation of options ....... (86) 86 --
Amortization of stock plan
expense ..................... 34 34
-------- ------ ------ ------ ------ ------ ------ ------
Balance at December 31, 1994 .. 22,365,818 224 -- -- 244,985 (101) (16,960) 228,148
Net income .................... 12,482 12,482
Exercise of options ........... 140,201 1 1,013 1,014
Shares purchase under
Employee Stock Purchase Plan 32,365 400 400
Issuance of Common Stock ...... 1,624 3 3
Tax benefit arising from
exercise of employee stock
options ..................... 326 326
Cancellation of options ....... (67) 67 --
Amortization of stock plan
expense ..................... 19 19
-------- ------ ------ ------ ------ ------ ------ ------
Balance at December 31, 1995 .. 22,540,008 $ 225 -- -- $ 246,660 $ (15) $ (4,478) $ 242,392
========== ======== ====== ====== ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Mariner Health Group, Inc. and subsidiaries ("Mariner" or the "Company")
provides post-acute health care services in selected markets with a particular
clinical expertise in the treatment of short-stay subacute patients in
cost-effective alternate sites. Subacute patients are medically stable and
generally require between three to six hours of skilled nursing care per day.
These patients typically can benefit from standardized clinical programs,
require extensive ancillary medical services and are discharged directly to
their homes.
Mariner owns, operates and manages freestanding inpatient facilities,
provides rehabilitation program management services to other skilled nursing
facilities and operates outpatient rehabilitation clinics, pharmacies and home
health agencies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of Mariner have been prepared to give
retroactive effect to the mergers with Pinnacle Care Corporation on May 10, 1994
and MedRehab, Inc. ("MedRehab" or "MRI") on March 1, 1996, each of which was
accounted for as a pooling of interests. Accordingly, the accompanying
consolidated financial statements have been restated to include the accounts and
operations of MedRehab for all periods presented.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Estimates Used in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are used when accounting for the collectibility of receivables and third party
settlements, depreciation and amortization, employee benefit plans, taxes and
contingencies.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments with
original maturities of three months or less.
Net Patient Service Revenue
Net patient service revenues include patient revenues payable by patients,
amounts reimbursable by third party payors under contracts, rehabilitation
therapy service revenues from management contracts to provide services to
non-affiliated skilled nursing facilities and other entities and revenues from
the Company's medical products and home health care services. Patient revenues
payable by patients at the Company's facilities are recorded at established
billing rates. Patient revenues to be reimbursed by contracts with third-party
payors are recorded at the amount estimated to be realized under these
contractual arrangements. Revenues from Medicare and Medicaid are generally
based on reimbursement of the reasonable direct and indirect costs of providing
services to program participants or a prospective payment system. The Company
separately estimates revenues due from each third party with which it has a
contractual arrangement and records anticipated settlements with these parties
in the contractual period during which services were rendered. The amounts
actually reimbursable under Medicare and Medicaid are determined by filing cost
reports which are then subject to audit and retroactive adjustment by the payor.
Legislative changes to state or federal reimbursement systems may also
retroactively affect recorded revenues. Changes in estimated revenues due in
connection with Medicare and Medicaid may be recorded by the Company subsequent
to the year of origination and prior to final settlement based on improved
estimates. Such adjustments and final settlements with third party payors are
reflected in operations at the time of the adjustment or settlement.
F-7
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
In addition, indirect costs reimbursed under the Medicare program are
subject to regional limits. The Company's costs generally exceed these limits
and accordingly, the Company is required to submit exception requests to recover
such excess costs. The Company believes it will be successful in collecting
these receivables, however, the failure to recover these costs in the future
could materially and adversely affect the Company.
The Company's rehabilitation management contracts typically have a term of
one year but frequently include automatic renewals and in general are terminable
on notice of 30 to 90 days by either party. Under certain contracts, Mariner
bills Medicare or another third-party payor directly. Under other contracts, the
Company is compensated on a fee for service basis and in general directly bills
the skilled nursing facility, which in turn receives reimbursement from
Medicare, Medicaid, private insurance or the patient. Mariner recognizes
payments under these latter contracts as payments from private payors. Under
these latter contracts, Mariner also generally indemnifies its customers against
reimbursement denials by third-party payors for services determined not to be
medically necessary. Mariner has established internal documentation standards
and systems to minimize denials and typically has the right to appeal denials at
its expense. Historically, reimbursement denials under these contracts have been
insignificant.
Other Income
Other income consists primarily of fees earned from contracts to manage
inpatient sub-acute care units of non-affiliated health care facilities and, in
1995, includes fees of $11,227,000 relating to the management of the
Convalescent Services, Inc. ("CSI") facilities. A director, officer and
stockholder of CSI during 1995 was also a director of the Company during the
period in which these fees were earned (see Note 3).
Facility Operating Costs
Facility operating costs include nursing expenses for the years ended
December 31, 1993, 1994 and 1995 of $34,758,000, $35,039,000 and $50,738,000,
respectively. All other expenses included in facility operating costs, such as
rehabilitation and ancillary services, administration, dietary and plant
operations, for the years ended December 31, 1993, 1994 and 1995 were
$133,027,000, $173,652,000 and $225,895,000, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Betterments and major
renewals are capitalized and included in property and equipment, while repairs
and maintenance are charged to expense as incurred. Upon retirement or sale of
assets, the cost of the assets disposed of and the related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
reflected in the statement of operations.
The provision for depreciation is computed using the straight-line method.
Depreciation provisions are based on estimated useful lives as follows:
Building and improvements -- 15-40 years
Furniture and equipment -- 3-8 years
Leasehold rights and improvements -- Over the shorter of the remaining
term of the lease or life of the
asset
Goodwill, Intangibles and Other Assets
Goodwill, intangibles and other assets primarily consist of amounts
identified in connection with certain facility acquisitions accounted for under
the purchase method, and certain deferred costs which were incurred in
connection with various financings.
F-8
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
In connection with each of its acquisitions, the Company reviews the assets
acquired and assesses their relative fair value in comparison to the purchase
price. Goodwill results from the acquisition of certain facilities for which the
negotiated purchase prices exceed the allocations of the fair market value of
identifiable assets. The Company's policy is to evaluate each acquisition
separately and identify an appropriate amortization period for goodwill based on
the acquired property's characteristics. Goodwill is being amortized using the
straight-line method generally over a 40 year period.
Costs incurred in obtaining financing are amortized using the straight-line
method, over the term of the related financial obligation. Amortization expense
related to intangible assets for the years ended December 31, 1993, 1994 and
1995 was $1,645,000, $2,396,000 and $3,112,000, respectively.
The Company periodically reviews the carrying value of its long-lived assets
(primarily property, plant and equipment and intangible assets) to assess the
recoverability of these assets; any impairments would be recognized in operating
results if a permanent diminution in value were to occur. As part of this
assessment, the Company reviews the expected future net operating cash flows
from its facilities, as well as the values included in any of its facilities,
which have periodically been obtained in connection with various refinancings.
Income Taxes
The Company follows the provisions of Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes," which requires
the use of the liability method of accounting for deferred income taxes. The
Company's policies regarding depreciation for financial reporting purposes
differ from those used for tax purposes, thereby giving rise to deferred income
taxes. For federal income tax purposes, Mariner Health Group, Inc. and its
subsidiaries file a consolidated income tax return.
Provision for Doubtful Accounts
Provisions for uncollectible accounts receivable of $1,595,000, $1,338,000,
and $3,698,000 are included in facility operating expenses for the years ended
December 31, 1993, 1994 and 1995, respectively.
Stock-based Compensation
In 1996, the Company will adopt Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation." This standard will require
the Company to report the fair value for stock-based compensation plans either
through recognition or disclosure. The Company intends to adopt this standard by
disclosing the pro forma net income and pro forma net income per common and
common equivalent share amounts assuming the fair value method was adopted on
January 1, 1996. The adoption of this standard will not impact the Company's
results of operations, financial position or cash flows.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year financial statement presentation.
3. MERGER AND ACQUISITIONS
On January 14, 1993, the Company acquired the assets of a contract
rehabilitation therapy business for $3,000,000 payable in a $1,750,000 five-year
promissory note payable with interest in arrears at the rate of 7% per annum and
$1,250,000 in cash. The purchase agreement also contains a provision for
additional payments if certain minimum revenues and earnings requirements are
met. These provisions
F-9
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. MERGER AND ACQUISITIONS -- (CONTINUED)
expire in 1997. Because certain minimum revenue and earnings requirements have
been met, Mariner is also obligated to pay the sellers of this business, who are
now employees of the Company (one of whom was an executive officer), an
additional $1,600,000 in cash and options to purchase 20,000 shares of Common
Stock granted in connection with this transaction have become vested. The
payments totaling $1,600,000 are payable in four equal annual installments of
$400,000. Such payments began in April 1995. The contract rehabilitation therapy
business was comprised of three rehabilitation service companies providing
various types of therapies to clients in Massachusetts and Connecticut. The
assets purchased by the Company consisted primarily of customer lists,
inventories, equipment and other assets. Any additional payments under the
agreement are being accounted for as goodwill.
During January 1994, the Company entered into a definitive agreement to
merge with Pinnacle Care Corporation. On May 10, 1994, Pinnacle Care Corporation
and its subsidiaries was merged with and into the Company. Under terms of the
merger agreement, 4,857,143 shares of the Company's Common Stock were exchanged
for all the outstanding stock and options to purchase stock of Pinnacle Care
Corporation. The merger was consummated during the second quarter of 1994 in a
tax-free, stock-for-stock transaction which has been accounted for as a pooling
of interests.
Operating results of the separate companies for the periods preceding the
acquisition are as follows:
<TABLE>
<CAPTION>
MARINER PINNACLE ADJUSTMENT COMBINED
------- -------- ---------- --------
<S> <C> <C> <C> <C>
Three months ended March 31, 1994:
Total revenue ..................................... $ 23,026 $ 23,951 -- $ 46,977
Extraordinary items ............................... -- -- -- --
Net income ........................................ 1,230 1,366 -- 2,596
Twelve months ended December 31, 1993:
Total revenue ..................................... 71,728 82,994 154,722
Extraordinary items ............................... (5,546) (336) (5,882)
Net income (loss) ................................. (2,079) 3,620 (174) 1,367
Changes in stockholders' equity as a result of SFAS
No. 109 adoption ................................ -- 174 (174) --
</TABLE>
The combined financial results presented above include adjustments made to
conform accounting policies of the two companies. The only adjustment impacting
net income was the restatement of Pinnacle's provision for income taxes under
the accounting methods prescribed by SFAS No. 109, to reflect the retroactive
adoption in 1991 in order to be consistent with the Mariner presentation. There
were no intercompany transactions between the two companies for the periods
presented.
During 1994, the Company recorded a general and administrative charge of
$9,327,000 of which $7,952,000 related to the merger with Pinnacle and
$1,375,000 related to the accelerated vesting of certain stock options. Of the
merger costs, approximately $4,627,000 was expensed for employee severance,
payroll and relocation, $2,878,000 was expensed for transaction costs including
investment bankers', legal and accounting fees, $172,000 was expensed for
customer relations, $150,000 was expensed for operations relocation, $66,000 was
expensed for investor relations and $59,000 was expensed for employee relations.
During 1994, the Company acquired property, plant and equipment of eight
facilities with an aggregate of 892 beds. The Company paid a total of
approximately $58,250,000, using approximately $14,750,000 cash and $43,750,000
of borrowings under the revolving credit facility. The acquisitions are being
accounted for under the purchase method of accounting. Accordingly, the purchase
prices have been allocated to the assets acquired based on their fair value and
the excess purchase price totaling $28,237,000 has been accounted for as
goodwill.
F-10
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. MERGER AND ACQUISITIONS -- (CONTINUED)
Also during 1994, the Company acquired a pharmacy and home health care
business in Connecticut. The consideration paid by the Company for this business
consisted of $3,655,000 in cash (of which approximately $3,500,000 was borrowed
under the revolving credit facility) and a $500,000 note payable in quarterly
installments over three years which bears interest at 6% per annum. The
acquisition was accounted for under the purchase method of accounting.
Accordingly, the purchase price was allocated to assets acquired based on their
fair value. The excess of $3,087,000 has been accounted for as goodwill.
In March 1995, Mariner acquired a 60-bed skilled nursing facility located in
St. Petersburg, Florida for $2,500,000 in cash.
A definitive agreement to merge with Convalescent Services, Inc. ("CSI") had
originally been announced on January 9, 1995. At the time, CSI operated 25
skilled nursing facilities, one rehabilitation hospital and one continuing care
retirement community, with an aggregate of 3,801 beds (the "CSI Facilities").
The CSI Facilities are concentrated primarily in Florida and Texas. Under the
terms of the definitive agreement, the Common Stock consideration was fixed at
5,853,658 newly issued shares of Mariner Common Stock. On April 11, 1995,
Mariner shareholders voted to approve the proposed combinations with CSI. In the
interim, a number of conditions relating to the closing of this business
combination had not be satisfied.
Therefore on May 24, 1995 (the "May 1995 Closing"), Mariner and CSI entered
into a Management Agreement (the "Management Agreement"), pursuant to which
Mariner managed all of CSI's facilities and operations until the closing which
occured on January 2, 1996 (the "Closing"), for a monthly management fee equal
to 6% of the gross operating revenue of CSI's facilities. In addition, upon
termination of the Management Agreement, Mariner received a bonus management fee
equal to the net income of the facilities managed by Mariner during the term of
the agreement subject to certain adjustments (see Note 12). Mariner received
$11,227,000 of management fees from facilities controlled by the Kelletts. Of
this amount, $10,288,000 was from facilities which were acquired by Mariner on
January 2, 1996. In addition, Mariner acquired substantially all the assets of
Convalescent Supply Services, Inc., a Georgia corporation ("CSSI") owned by
Stiles A Kellett, Jr. and Samuel B. Kellett ("the Kelletts"), which provides
enteral, urological, wound care and ostomy products to CSI's facilities. The
purchase price of CSSI's assets was $6,500,000 in cash and the assumption of
CSSI's trade payables. At the May 1995 Closing, Mariner acquired options to
purchase 12 of the facilities leased by CSI from affiliates of the Kelletts at
fair market value (the "Options"). At the May 1995 Closing, the Company also
deposited an aggregate of $15,000,000 to be credited against the purchase prices
for two of the skilled nursing facilities to be acquired at the Closing and for
the facilities which may be acquired upon exercise of the Options. Mariner also
paid a $4,500,000 deposit to the CSI stockholders, which was credited by Mariner
to the purchase price paid in cash at the Closing. On January 2, 1996 the CSI
Merger was consummated. As a result of the CSI Merger, CSI became a wholly owned
subsidiary of the Company. The total purchase price of CSI was approximately
$218,000,000, which consists of the assumption of debt and capital leases of
$110,000,000, $59,000,000 of common stock, $30,000,000 of cash and assumption of
various other liabilities of $19,000,000. Goodwill of approximately $82,000,000
was recorded in this transaction.
In June 1995, Mariner purchased a 150-bed skilled nursing facility in
Nashville, Tennessee, for a total purchase price of approximately $8,500,000.
The purchase price was financed under the Company's revolving credit facility.
Approximately $2,400,000 of goodwill was recorded in this transaction.
Also in June 1995, the Company purchased an 80,000 square foot building in
New London, Connecticut to serve as its corporate headquarters. The purchase
price of the new building was $3,050,000 and was financed under the Company's
revolving credit facility. The Company completed its relocation in October,
1995.
In October 1995, Mariner completed an acquisition of six skilled nursing
facilities with an aggregate of 686 beds in central and northern Florida. The
purchase price for the transaction was $42,800,000,
F-11
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. MERGER AND ACQUISITIONS -- (CONTINUED)
comprised of $33,000,000 in cash and debt in the amount of $9,800,000. The cash
portion of the transaction was financed through borrowings under the Company's
revolving credit facility. The six facilities include two in Orlando, and one
each in Daytona, Inverness, Baker County and Melbourne. Approximately
$14,300,000 of goodwill was recorded in this transaction.
Also in October 1995, the Company acquired an institutional pharmacy
operation based in Dallas, Texas, for the total purchase price of approximately
$1,623,000. The purchase price was financed through the Company's revolving
credit facility and issuance of a note to the seller.
All of the 1995 acquisitions were accounted for under the purchase method.
During 1995, the Company accrued general and administrative costs totaling
$8,073,000 related to the merger with CSI and the consolidation of various
regional and satellite offices to the New London, Connecticut office. Of this
total charge, approximately $3,691,000 relates to severance and related payroll
costs and approximately $4,382,000 relates to expenses incurred to close the
regional offices.
As of December 31, 1995, other accrued expenses includes $2,526,000 which
has been accrued primarily to pay remaining scheduled severance amounts to
certain employees.
On March 1, 1996, the Company consummated a merger with MedRehab, a company
whose primary business is contract rehabilitation therapy. Mariner issued an
aggregate of approximately 2,312,500 shares of its Common Stock for all of
MedRehab's outstanding capital stock and options to purchase MedRehab capital
stock in a merger that was accounted for as a pooling of interests.
Operating results for the separate companies for the period preceding the
acquisition are as follows:
<TABLE>
<CAPTION>
MARINER MEDREHAB COMBINED
------- -------- --------
<S> <C> <C> <C>
Twelve months ended December 31, 1995:
Total revenue ......................... $ 298,049 $ 56,757 $ 354,806
Extraordinary items ................... (1,138) -- (1,138)
Net income ............................ 11,535 947 12,482
</TABLE>
4. DISPOSITIONS OF FACILITIES
1993 Transactions
As of June 30, 1993, the former MedRehab adopted a plan to restructure
certain operations. In connection therewith, all operations then in Florida and
certain clinics in Texas, Illinois, and Wisconsin were closed and the workforce
reduced and relocated its headquarters. A restructuring charge of $15,457,000
was established at June 30, 1993, and was comprised of the following components:
<TABLE>
<S> <C>
Write-down of goodwill ..................................... $11,185,000
Write-down of property and equipment ....................... 575,000
Accrual for lease obligations .............................. 1,659,000
Accrual for severance ...................................... 1,141,000
Losses of facilities to date of closing .................... 491,000
Other items ................................................ 406,000
-------
Total ............................................... $15,457,000
===========
</TABLE>
During 1995 and 1994, approximately $288,000 and $2,056,000 of costs were
charged against the restructuring reserve. Also, as a result of restructuring
actions taken and changes in the Company's estimates, restructuring reserves of
approximately $690,000 in excess of those estimated to be necessary were
reversed and reflected as income in 1994.
F-12
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. DISPOSITIONS OF FACILITIES -- (CONTINUED)
The Company operated a nursing facility under an operating lease set to
expire in November 1993. The owner of the building notified the Company that it
would allow the lease to expire without renewal and would begin operating the
facility itself. The transition occurred without any continuing liability on the
part of the Company. For the year ended December 31, 1993, the facility had
$3,532,000 of net patient service revenue and $181,000 of income from continuing
operations before income taxes, extraordinary items and cumulative effect of
changes in accounting principle.
1994 Transaction
Effective January 31, 1994, the Company executed an agreement to sell one of
its nursing centers. The sale price was $2,715,000 in the form of $2,465,000
cash and a $250,000 note to be secured by a first lien on a leasehold right the
purchaser has in connection with a sale-leaseback financing of the acquisition.
The sale resulted in a pretax loss of approximately $115,000. For the years
ended December 31, 1993 and 1994, the facility generated $2,428,000 and $403,000
of net patient service revenue, respectively, and $31,000 and $202,000 of income
from continuing operations before income taxes, extraordinary items and
cumulative effect of change in accounting principle, respectively.
There were no assets held for sale at December 31, 1995.
5. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of temporary cash investments in money market
funds and repurchase agreements with a financial institution and trade
receivables. Approximately 17% and 10% of the Company's accounts receivable and
estimated settlements due from third party payors are from Medicaid programs and
31% and 21% are from Medicare programs at December 31, 1994 and 1995,
respectively. There have been, and the Company expects that there will continue
to be, a number of proposals to limit reimbursement allowable to skilled nursing
facilities. Should the related government agencies suspend or significantly
reduce contributions to these programs, the Company's ability to collect on its
receivables would be adversely affected. Management believes that the remaining
receivable balances from various payors, including individuals involved in
diverse activities, subject to differing economic conditions, do not represent a
concentration of credit risk to the Company. Management continually monitors and
adjusts its allowance for doubtful accounts and contractual allowances
associated with these receivables. Federal law limits the degree to which states
are permitted to alter Medicaid programs.
6. SALES LEASEBACK TRANSACTIONS
The Company constructed two facilities which were purchased in 1993, at the
completion of the construction phase, by the real estate investment trust
providing the financing. The Company entered into operating lease arrangements
for these facilities which provided for minimum lease terms through July 1999
and January 2004, respectively, with extension rights available through 2019.
In April 1993, one of the facilities was sold and leased back. A gain on the
sale totaling $1,815,000 was deferred and was being amortized over 7 years, the
term of the lease. The Company initiated a significant change in business focus
at this facility during 1995. The facility was purchased on November 1, 1995.
Effective January 1, 1996 a portion of the building was leased to a long-term
care company unrelated to the Company. The remaining portion of the building is
leased as office space. Upon effecting these transactions, the Company
recognized the remaining deferred gain of $1,135,000 which was offset by the
write-off of certain capitalized costs of $2,887,000 for a net loss of
$1,752,000 which is included in facility operating expenses.
In November 1993, the second facility was sold and leased back. A gain on
the sale totaling $1,783,000 has been deferred and is being amortized over 10
years, the term of the lease. The unamortized amount of this deferred gain
totalled $1,411,000 at December 31, 1995. Additional deferred gains of $711,000
relate to prior Pinnacle transactions.
F-13
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1995
---- ----
<S> <C> <C>
Land ......................................... $ 12,103 $ 15,342
Building and improvements .................... 100,086 141,453
Furniture and equipment ...................... 31,262 48,588
Leasehold rights and improvements ............ 769 429
Construction in progress ..................... 305 1,954
--- -----
144,525 207,766
Less: accumulated depreciation ............... (25,581) (33,280)
------- -------
$ 118,944 $ 174,486
========= =========
</TABLE>
Depreciation expense related to property and equipment for the years ended
December 31, 1993, 1994 and 1995 was $5,198,000, $5,695,000 and $8,285,000,
respectively.
Interest costs associated with construction or renovations are capitalized
in the period in which they are incurred. Interest costs capitalized in 1993
totaled approximately $550,000. No interest was capitalized during 1994 or 1995.
Included in property, plant and equipment is equipment, furniture and
buildings under capital leases totaling $3,049,000 and $3,973,000 at December
31, 1994 and 1995, respectively. Accumulated amortization on equipment under
capital leases is $83,000 and $188,000 at December 31, 1994 and 1995,
respectively. These non-cash transactions have been excluded from the
consolidated statements of cash flows.
8. RESTRICTED CASH AND CASH EQUIVALENTS
Approximately $1,954,000 and $1,198,000 of the Company's cash is restricted
for capital improvements and collateral under the terms of various financing
arrangements at December 31, 1994 and 1995, respectively.
9. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans .......................................... $ 964 $ 16,615
Revolving credit and term loan agreement ................ -- 64,500
Tax exempt low floater with annual maturities of
$395,000 through October 2010 ...................... ... 6,270 5,875
Term loans .............................................. 14,765 17,092
Other ................................................... 1,746 1,683
Capital lease obligations ............................... 2,955 7,301
----- -----
26,700 113,066
Current maturities of long-term debt .................... (1,701) (4,115)
Current portion of capital lease obligations ............ (493) (1,041)
---- ------
$ 24,506 $ 107,910
========= =========
</TABLE>
F-14
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS -- (CONTINUED)
During 1993, the Company completed a $20 million bridge credit facility with
a bank. The proceeds of the $20 million facility along with the proceeds of the
Company's initial public offering were used to repay certain debt described
below. Also in 1993, the Company completed a $60 million senior secured
revolving credit facility with a syndicate of banks, the proceeds from which
were used to repay the $20 million bridge facility. During 1994, the Company
negotiated an increase in the borrowing capacity to a $120 million reducing
revolving credit facility. During 1995, the Company renegotiated a further
increase to the borrowing capacity to $175 million and eliminated the reduction
feature of the facility. In conjunction with this refinancing, the Company
incurred an extraordinary charge of $1,138,000, net of tax benefit of $698,000.
The facility matures on July 18, 1998 and provides for prime or LIBOR rate
interest options based upon certain financial covenants. Mariner's obligations
under this credit are collateralized by a pledge of the stock of its
subsidiaries. In addition, the Credit Facility is collateralized by mortgages on
certain of the Company's inpatient facilities, leasehold mortgages on certain
inpatient facilities leased by the Company, and security interests in certain
other properties and assets of the Company and its subsidiaries. The agreement
includes a commitment fee of 3/8 of 1% of the unused line. The borrowing
availability and rate of interest will vary depending upon specified financial
ratios and the passage of time. The revolving credit facility contains covenants
which, among other things, require the Company to maintain certain financial
ratios and impose certain limitations or prohibitions on the Company with
respect to the incurrence of indebtedness, liens and capital leases; the payment
of dividends on, and the redemption or repurchase of, its capital stock;
investments and acquisitions, including acquisitions of new facilities; the
merger or consolidation of the Company with any person or entity and the
disposition of any of the Company's properties or assets. There were no amounts
outstanding on the line at December 31, 1994 and $64,500,000 was outstanding at
December 31, 1995. Additionally, as of December 31, 1995, the Company had a
letter of credit outstanding under the facility of $2,612,000.
During 1995, the Company violated its capital expenditures and leases
covenant. The Company obtained a waiver of this violation.
MedRehab had a $30,000,000 credit agreement with a bank with a balance
outstanding as of December 31, 1995, of $12,670,000. However, any additional
borrowings under this credit agreement required bank approval. Under this
agreement, the Company was required to maintain certain financial and earnings
ratios including certain covenants (minimum level of stockholders' equity,
current ratio, debt service coverage ratio, and minimum cash balance) that must
be met on a quarterly basis. The credit agreement also contained subjective
covenant provisions. MedRehab was in violation of these covenants at December
31, 1995. However, in connection with the merger, this line was paid off and
terminated.
Term loans at December 31, 1994 and 1995 consist primarily of the notes
payable in connection with the January 1993 purchase of the contract therapy
business, the 1994 purchase of a pharmacy and home health care business, term
note in connection with the Heritage Acquisition (See Note 3), and the credit
facility in connection with the MedRehab Merger. Payments of principal and
interest are due quarterly until February 1998 and August, 1997, respectively.
Interest accrues at 7% and 6% per year, respectively.
At December 31, 1995, mortgage loans included $8,494,000 on one facility
related to the purchase of a previously leased facility, $7,159,000 in a
mortgage guaranteed by HUD for one facility purchased in October, 1995, $866,000
for a facility purchased by the Company in 1991 and $96,000 for a condominium
acquired in the MedRehab Merger. These notes bear interest at 11 1/2 %, 10%,
10%, and 9 3/4 %, respectively.
Mortgage loans totaling $46,957,000 related to the acquisition and
construction of certain facilities were repaid during 1993. Due to early
retirement of this debt, the Company incurred an extraordinary charge of
$5,546,000 attributable to prepayment fees and the write-off of deferred
financing fees.
F-15
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS -- (CONTINUED)
A first mortgage loan totaling $2,182,000 at December 31, 1993, was
originally established for the purchase of the land underlying and the
construction of a corporate building. The loan bore interest at a fixed rate of
7.4% and amortized monthly calculated on a 25-year period. The loan was
collateralized by the land and improvements of the related corporate building.
The Company repaid the loan in full during 1994, incurring an extraordinary
charge of $86,000, net of tax benefit of $57,000, related to the write-off of
deferred financing fees.
In November 1993, the Company refinanced the First Mortgage Refinancing
Revenue Bonds, replacing them with a Tax-Exempt Low Floater instrument
collateralized by a first mortgage on a nursing facility and a five-year letter
of credit issued by a bank and guaranteed by the Company. The interest rate is
set weekly by the bank. At December 31, 1995, the rate was 3.75%. As a result of
the refinancing, the Company incurred an extraordinary loss due to early
extinguishments of debt in the amount of approximately $336,000, net of tax
benefit.
Included in other long-term debt at December 31, 1994 and 1995, are
non-interest bearing notes of approximately $350,000 due in 1997 to former
owners of acquired subsidiaries who had become employees of MedRehab. Also
included in other long-term debt are various promissory notes with interest
rates ranging from non-interest bearing to 12%. These promissory notes are
payable in installments with final payment dates ranging from 1996 through 2011.
In addition, the Company leases certain equipment, a building and an
airplane under capital leases. Assets under capital leases are capitalized using
interest rates appropriate at the inception of each lease.
Aggregate maturities of long-term debt and capital lease obligations for the
years ending after December 31, 1995 are as follows:
<TABLE>
<CAPTION>
TOTAL DEBT CAPITAL LEASES
----- ---- --------------
<S> <C> <C> <C>
1996............... $ 5,156 $ 4,115 $ 1,041
1997............... 16,518 15,487 1,031
1998............... 66,957 65,082 1,875
1999............... 862 485 377
2000............... 1,403 1,073 330
Thereafter......... 22,170 19,521 2,649
------ ------ -----
$113,066 $105,763 $7,303
======== ======== ======
</TABLE>
Interest paid, net of amounts capitalized, for the years ended December 31,
1993, 1994 and 1995 amounted to approximately $8,966,000, $2,075,000 and
$3,599,000, respectively.
10. CONVERTIBLE SUBORDINATED DEBENTURES
During 1987, the Company issued $7,200,000 of 9% Convertible Subordinated
Debentures, due June 2002, with interest payable quarterly. Payment of principal
and interest are subordinate to all principal and interest on senior
indebtedness. Mandatory sinking-fund payments commenced in July 1993 at 10% of
the original issuance per year. In July 1993, holders of $45,000 worth of
debentures elected to convert into 3,863 shares of the Company's Common Stock
with the remaining $675,000 principal being paid. On May 10, 1994, in connection
with the merger with Pinnacle Care Corporation, the remaining convertible
subordinated debentures were converted into 587,000 shares of Mariner Common
Stock.
Effective December 9, 1993, $1,822,000 in subordinated debt plus $339,000 in
accrued interest was converted into approximately 335,000 shares of common
stock. In addition, approximately 411,000 additional shares of common stock were
purchased for $4,500,000 (net of approximately $150,000 of stock issuance costs)
by MedRehab's two principal stockholders.
F-16
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
The provision for income taxes consists of the following at December 31,
1993, 1994 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1993 1994 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred federal income tax (provision) benefit $ (202) $ 3,673 $ 704
Deferred state income tax benefit ............. 22 648 120
Current federal income tax provision .......... (2,021) (7,218) (6,398)
Current state income tax provision ............ (1,019) (2,951) (2,318)
------ ------ ------
Total provision for income taxes .............. $(3,220) $(5,848) $(7,892)
======= ======= =======
</TABLE>
The provision for income taxes is reconciled to the tax provision computed
at the Federal statutory rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate .......................................... (34)% 35% 35%
State taxes, net of federal tax effect .................. 10 14 7
Reversal of deferred taxes at higher statutory rate ..... -- -- (2)
Merger and other nonrecurring items ..................... -- 15 --
Goodwill ................................................ 56 -- --
Other ................................................... (2) 4 (2)
Net operating loss carryforward utilization ............. (6) -- (1)
Change in valuation allowance ........................... 23 (26) --
-- --- ---
Income tax provision .................................... 47% 42% 37%
== == ==
</TABLE>
Deferred tax assets and liabilities are comprised of the following at
December 31, 1994 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Reserves for receivables .................. $ 3,689 $ 5,300
Deferred revenue .......................... 1,418 840
Merger costs .............................. 1,458 3,232
Accrued expenses .......................... 2,434 2,973
Federal NOL ............................... 1,705 1,095
Other ..................................... 240 558
Valuation allowance ....................... (1,865) (1,410)
------ ------
Gross deferred tax assets ............. 9,079 12,588
Deferred tax liabilities:
Fixed assets .............................. $ 3,196 $ 4,497
Write-off of deferred costs ............... 474 610
Goodwill .................................. 1,440 2,191
Other ..................................... 596 1,093
--- -----
5,706 8,391
----- -----
Net deferred tax assets ............... $ 3,373 $ 4,197
======== ========
</TABLE>
F-17
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES -- (CONTINUED)
During 1993, 1994 and 1995, the Company paid federal, state and local income
taxes in the amounts of approximately $3,318,000, $5,528,000 and $7,333,000,
respectively. As of December 31, 1995, other accrued expenses includes
$5,916,000, which has been accrued for payments of Federal, state and local
income taxes.
In connection with the merger with MedRehab, Inc., the Company acquired
significant deferred income tax assets associated with MRI's net operating loss
("NOL") carryforwards. Because of the limitations imposed by the Internal
Revenue Code, these NOLs can only be used to offset income generated by the
former MRI. Since MRI is currently in a tax loss position and has had losses in
recent years, a valuation reserve in the full amount of the net deferred income
tax asset for the NOLs has been established in accordance with the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". The NOLs
will expire at various rates through 2010.
12. MANDATORILY REDEEMABLE PREFERRED STOCK
Prior to the consummation of its initial public offering, the Company had
three classes of Convertible Mandatorily Redeemable Preferred Stock: Class A
(1,095,000 shares authorized), Class B (2,490,000 shares authorized) and Class C
(3,000,000 shares authorized), collectively referred to as the "Convertible
Preferred Stock." The Class D Nonconvertible Mandatorily Redeemable Preferred
Stock (5,948 shares authorized), issued in connection with the conversion of the
subordinated notes (Note 10), is referred to as the "Class D Stock." The Class
A, B and C shares were converted into Common Stock and accrued dividends were
reversed in conjunction with the Company's initial public offering on June 15,
1993 and the Class D Stock was redeemed prior to June 30, 1993.
13. PREFERRED STOCK
In conjunction with the Company's initial public offering in 1993, the
Company authorized 1,000,000 shares of Preferred Stock with a par value of $.01
per share. No shares of this Preferred Stock have been issued.
Effective December 9, 1993, 5,800,000 shares of MedRehab 8% convertible
preferred stock and accrued dividends thereon were converted into approximately
799,000 shares of common stock.
On May 10, 1994 in connection with the merger with Pinnacle Care
Corporation, the then outstanding Convertible Preferred Stock was converted into
2,136,332 shares of Mariner Common Stock.
14. STOCK OPTION PLAN
The Company has adopted several stock option plans. The plans provide for
the granting of incentive stock options, as defined under the Internal Revenue
Code, and nonqualified options to employees, directors, consultants and advisors
of the Company.
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING EXERCISE PRICES
------------- ----------- ---------------
<S> <C> <C>
Outstanding at December 31, 1992 ...... 670,095 $ 2.00 - $61.93
Granted ............................ 533,031 $ 2.00 - $10.63
Exercised .......................... (10,278) $ 2.00
Canceled ........................... (85,177) $ 2.00 - $46.45
-------
Outstanding at December 31, 1993 ...... 1,107,671 $ 2.00 - $61.93
Granted ............................ 1,083,808 $15.75 - $22.50
Exercised .......................... (180,418) $ 2.00 - $15.75
Canceled ........................... (525,354) $ 2.00 - $46.45
-------
Outstanding at December 31, 1994 ...... 1,485,707 $ 2.00 - $61.93
Granted ............................ 2,266,046 $ 9.75 - $18.63
Exercised .......................... (140,111) $ 2.00 - $22.50
Canceled ........................... (191,694) $ 2.00 - $46.45
-------
Outstanding at December 31, 1995 ...... 3,419,948 $ 2.00 - $61.93
=========
</TABLE>
F-18
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. STOCK OPTION PLAN -- (CONTINUED)
There were 3,050,790 incentive stock options (ISO's) outstanding at December
31, 1995 of which approximately 700,000 were exercisable. The unvested ISO's
will become exercisable in accordance with a five-year vesting schedule. The
remaining 369,158 options were non-qualified options of which 122,159 were
exercisable at December 31, 1995. The vesting schedule for options is based upon
either the passage of time or performance criteria outlined in the individual
option agreements. The maximum vesting period is ten years. The nonqualified
options are exercisable in accordance with a five-year vesting schedule. At
December 31, 1995, the exercise prices of the vested options ranged from $2.00
to $61.93. During 1993, the Company granted options at less than fair market
value and has accordingly recognized unearned compensation expense of $276,000
of which $55,000, $34,000 and $19,000 was recognized as compensation expense in
1993, 1994 and 1995, respectively. During 1994, the Company recorded a charge of
$1,375,000 relating to the accelerated vesting of certain stock options. The
charge for the options relates to a change in vesting criteria for 100,000
options granted in 1992. As a result of these changes, these options became
exercisable during the second quarter of 1994, thereby requiring the charge in
the second quarter.
During the third quarter of 1995, the exercise price of certain options was
reduced to reflect the decreased market value of the Company's stock. All of the
options repriced had been issued originally at prices significantly in excess of
$12.63, the market value on the day of the adjustment. No charge was required
for this transaction.
15. WARRANTS
During 1992, the Company issued warrants to purchase 85,000 shares of its
Class C Convertible Preferred Stock at $6.00 per share in connection with the
refinancing of certain term loans. The warrants were exercised in 1994 for
35,102 shares of Common Stock.
During 1993, 167,473 warrants to purchase Class B Convertible Preferred
Stock were exercised in conjunction with the Company's initial public offering.
At December 31, 1993 there were 24,400 warrants outstanding with an exercise
price of $3.28 which were subsequently exercised in January 1994 for 14,184
equivalent shares.
There were no warrants outstanding at December 31, 1995.
16. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) plan which covers
substantially all eligible nonunion employees. Employees who participate in the
plan may contribute up to $9,500 of their salaries or wages and the Company
contributes 5% of the employees' contributions. During 1993 and 1994, the
Company elected to contribute an additional 5% and 10%, respectively, of the
employees' contributions within the plan related to the former Pinnacle Care
Corporation. Defined contribution pension expense for the Company for the years
ended December 31, 1993, 1994, and 1995 was $61,000, $108,000 and $76,000,
respectively.
The MedRehab, Inc. Tax-Deferred Retirement Savings Plan covers substantially
all employees of MedRehab who meet the term-of-service requirements. Employees
are eligible to make contributions to the plan under the guidelines of Section
401(k) of the Internal Revenue Code. Company contributions to the plan ($24,000
in both 1995 and 1994) are at the discretion of the board of directors. All
assets of the plan are held by a trustee and total approximately $4.9 million as
of December 31, 1995.
The Company also has a defined benefit pension plan which covers certain
full-time employees. Assets held by the plan include money market funds,
government bonds, convertible bonds, common and preferred stock, and real estate
related investments. The Company incurred a pension curtailment
F-19
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
effective July 1, 1991 as a result of freezing pension benefits. There was no
service cost charge in 1993, 1994 or 1995 as a result of this curtailment.
Pension benefits are based primarily on years of service and age. The Company's
funding policy for the defined benefit plan is to fund the minimum annual
contribution required by applicable regulations. The following table sets forth
the defined benefit plan's funded status and amounts recognized in the Company's
consolidated balance sheets and statements of operations at December 31, 1993,
1994 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1993 1994 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested ........................................... $ 305 $ 393 $ 438
Nonvested ........................................ 109 102 116
--- --- ---
Accumulated benefit obligation ...................... 414 495 554
--- --- ---
Projected benefit obligation ........................ 414 495 554
Less: plan assets at fair value ..................... 260 318 439
--- --- ---
Projected benefit obligation in excess of plan assets 154 177 115
Adjustment required to recognize minimum liability .. 118 214 208
Unrecognized transition asset ....................... 13 12 10
Unrecognized net loss ............................... (131) (226) (218)
---- ---- ----
Accrued pension cost ................................ $ 154 $ 177 $ 115
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest cost on projected benefit obligation .. $ 29 $ 36 $ 36
Actual return on plan assets ................... (20) 3 (73)
Net amortization ............................... 2 (10) 59
- --- --
$ 11 $ 29 $ 22
==== ==== ====
Key Assumptions:
Weighted average discount rate of obligations 7.0% 7.5% 7.5%
Long-term rate of return on assets .......... 6.5% 7.5% 7.5%
</TABLE>
Subsequent to the curtailment date, no increases in compensation were
assumed.
17. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases a facility under a sale-leaseback agreement. The term of
the lease is 10 years. The Company has the option to renew the lease for
additional terms of up to 18 years.
F-20
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
The Company also leases certain office space and equipment under cancelable
and non-cancelable operating leases most of which may be renewed by the Company.
At December 31, 1995, long-term operating lease commitments are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
----------------
(IN THOUSANDS)
<S> <C>
1996 .................................................... $ 4,255
1997 .................................................... 2,818
1998 .................................................... 2,049
1999 .................................................... 1,639
2000 .................................................... 1,275
Thereafter .............................................. 3,468
-----
$15,504
=======
</TABLE>
Total rental expense under operating leases for 1993, 1994 and 1995 was
$5,304,000, $5,841,000 and $5,516,000, respectively.
In conjuction with the acquisition by MedRehab of one subsidiary in 1993,
approximately 10,000 shares of common stock were issued. Additional shares
("earn-out" shares) are issuable if certain future operating targets relating to
the acquired operations are met. Approximately 4,000 earn-out shares have been
issued under this agreement. Shares issued in conjuction with the acquisition
agreement may be redeemed beginning in July, 1996.
Self Insurance
The Company is self-insured for health insurance. The Company's liability
for losses is capped at 125% of expected claims as of December 31, 1995 through
a contract with an insurance company. The Company is also self-insured for
Workers' Compensation. The Company's liability for losses is capped at $500,000
per claim and $13,000,000 in aggregate through a contract with an insurance
company. The Company has an outstanding letter of credit of $1,750,000, which is
held as collateral by this insurance company.
Litigation
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, all
such matters are adequately covered by insurance or indemnification or, if not
so covered, are without merit or are of such kind, or involve such amounts, that
unfavorable disposition would not have a material effect on the financial
position of the Company.
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of each class of
financial instruments, for those instruments for which it is practicable to
estimate that value, and the estimated fair values of the financial instruments
are as follows:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short effective
maturity of these instruments.
F-21
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
Long-term Debt
The fair value of the Company's long-term debt is estimated based on the
current rates offered to the Company for similar debt. The carrying value of the
Company's long-term debt approximates its fair value as of December 31, 1994 and
1995.
19. SUBSEQUENT EVENTS (UNAUDITED)
In February 1996, the Company entered into an agreement to acquire a company
which operates eight facilities with an aggregate of 960 beds. The purchase
price is estimated to be approximately $52,000,000.
In January 1996, Mariner entered into an agreement to be the preferred
provider of subacute services to AmHS/Premier/SunHealth ("APS"), a hospital
health care alliance with approximately 1,700 member hospitals. Pursuant to this
arrangement an APS affiliate was granted warrants to purchase 210,000 shares of
Mariner Common Stock at an exercise price of $11.375 per share, as well as
warrants to purchase up to an additional 1,890,000 shares of Mariner Common
Stock over a five year period depending on the performance of the arrangements
between Mariner and APS affiliated facilities. The Company recorded a charge of
approximately $850,000 in the first quarter of 1996 as a result of the 210,000
warrants granted.
20. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma condensed statements of operations for the
years ended December 31, 1994 and 1995 give effect to the certain acquisitions
as if they had occurred at the beginning of these years. The 1994 pro forma
amounts give effect to two acquisitions consummated in 1994 (Legend and
Florida), a 1995 acquisition (Heritage) and an acquisition in 1996 (CSI). The
1995 pro forma amounts give effect only to the 1995 and 1996 transactions as the
1994 acquisitions are included in the results of the Company for the year ended
December 31, 1995. The condensed information presented includes the impact of
certain adjustments related to the acquisitions such as additional depreciation
and amortization on the purchase of property, plant and equipment, interest
expense based on additional debt and rental expense reductions.
The pro forma condensed statements of operations do not purport to be
indicative of the results that actually would have been achieved if the
Acquisitions and the merger with CSI had occurred at the beginning of the
period.
<TABLE>
<CAPTION>
UNAUDITED (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
-------------------------------------------------
PRO FORMA COMBINED
MARINER, LEGEND, PRO FORMA COMBINED
FLORIDA, HERITAGE, MARINER, HERITAGE,
CSI CSI
--- ---
1994 1995
---- ----
<S> <C> <C>
Total operating revenue .......................................................... $419,817 $499,374
Net income before extraordinary items ............................................ 9,991 12,838
Net income per share before extraordinary items .................................. .39 .45
Net income ....................................................................... 9,905 11,700
Net income per share ............................................................. .39 .41
</TABLE>
F-22
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table represents summarized results:
<TABLE>
<CAPTION>
1994 1995
---- ----
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net patient service revenue ............. $ 58,814 $ 60,594 $ 65,607 $ 75,342 $ 79,339 $ 81,753 $ 83,325 $ 93,218
Other revenue ........................... 682 608 1,085 1,412 820 1,812 6,484 8,055
--- --- ----- ----- --- ----- ----- -----
Total operating revenue ................. 59,496 61,202 66,692 76,754 80,159 83,565 89,809 101,273
Operating expenses:
Facility operating costs .............. 47,683 47,695 52,820 60,493 62,822 64,451 71,672 77,688
Corporate general and
other ................................ 4,920 13,080 5,480 7,455 6,548 16,015 8,690 8,577
Interest expense, net ................. 576 230 649 364 279 452 896 1,971
Facility rent expense, net ............ 346 523 435 435 355 563 528 384
Depreciation and
amortization ......................... 1,806 1,891 1,827 2,567 2,660 2,631 2,612 3,494
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses ................ 55,331 63,419 61,211 71,314 72,664 84,112 84,398 92,114
Operating income (loss) ................. 4,165 (2,217) 5,481 5,440 7,495 (547) 5,411 9,159
Gain (loss) on sale of
facilities ............................ 147 591 110 84 -- (11) 3 2
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income
taxes and extraordinary
items ................................. 4,312 (1,626) 5,591 5,524 7,495 (558) 5,414 9,161
Provision for income tax ................ 1,810 235 2,185 1,618 2,876 (355) 1,928 3,443
----- --- ----- ----- ----- ---- ----- -----
Income (loss) before
extraordinary items ................... 2,502 (1,861) 3,406 3,906 4,619 (203) 3,486 5,718
Extraordinary items ..................... -- (74) -- (12) -- (1,138) -- --
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) ....................... $ 2,502 $ (1,935) $ 3,406 $ 3,894 $ 4,619 $ (1,341) $ 3,486 $ 5,718
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per common
and common equivalent share ......... $ .14 $ (.11) $ .18 $ .18 $ .20 $ (.06) $ 0.15 $ .25
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
F-23
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................................. $ 4,086 $ 2,184
Accounts receivable, less allowance for doubtful accounts
of $10,078 and $12,275, respectively ................................................... 92,537 108,556
Estimated settlements due from third-party payors ......................................... 12,915 27,375
Prepaid expenses and other current assets ................................................. 6,757 14,307
Deferred income tax benefit ............................................................... 9,918 9,218
----- -----
Total current assets .................................................................. 126,213 161,640
Property, plant, and equipment, net .......................................................... 174,486 308,858
Goodwill, net of accumulated amortization of $19,084 and $6,102, respectively ................ 78,212 159,938
Intangible and other assets, net of accumulated amortization of
$6,550 and $4,868 respectively .............................................................. 30,144 14,524
Restricted cash and cash equivalents ......................................................... 1,198 1,568
Deferred income tax benefit .................................................................. 1,273 1,556
----- -----
Total assets .......................................................................... $ 411,526 $ 648,084
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease obligations ........................ $ 5,156 $ 5,359
Accounts payable .......................................................................... 10,904 29,850
Accrued payroll ........................................................................... 6,072 8,428
Accrued vacation .......................................................................... 5,053 7,246
Other accrued expenses .................................................................... 22,808 32,410
Deferred income taxes ..................................................................... 987 987
Other liabilities ......................................................................... 1,085 6,108
----- -----
Total current liabilities ............................................................. 52,065 90,388
Long-term debt and capital lease obligations, less current portion ........................... 107,910 239,302
Deferred income taxes ........................................................................ 6,007 9,149
Deferred gain ................................................................................ 2,122 2,082
Redeemable stock and other long-term liabilities ............................................. 1,030 1,633
----- -----
Total liabilities ..................................................................... 169,134 342,554
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 Par value; 50,000,000 shares authorized; 22,540,008
issued and outstanding at december 31, 1995 and 28,511,361 shares issued
and outstanding at march 31, 1996 ........................................................ 225 285
Additional paid-in capital ................................................................ 246,660 307,691
Unearned compensation ..................................................................... (15) (13)
Accumulated deficit ....................................................................... (4,478) (2,433)
------ ------
Total stockholders' equity ............................................................ 242,392 305,530
------- -------
Total liabilities and stockholders' equity ............................................ $ 411,526 $ 648,084
========= =========
</TABLE>
See accompanying notes.
F-24
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------
1995 1996
---- ----
<S> <C> <C>
Net patient service revenue ........................................................ $ 79,339 $ 132,629
Other income ....................................................................... 820 2,550
--- -----
Total operating revenue ............................................................ 80,159 135,179
------ -------
Operating expenses:
Facility operating costs ........................................................ 62,822 104,591
Corporate general and administrative ............................................ 6,548 17,227
----- ------
69,370 121,818
------ -------
Interest expense, net ........................................................... 279 4,392
Facility rent expense, net ...................................................... 355 474
Depreciation and amortization ................................................... 2,660 5,196
----- -----
Total operating expenses ........................................................... 72,664 131,880
------ -------
Income before income taxes ......................................................... 7,495 3,299
Provision for income taxes ......................................................... 2,876 1,254
----- -----
Net income ......................................................................... $ 4,619 $ 2,045
=========== ===========
Net income per common and common equivalent share:
Weighted average common and common equivalent shares
outstanding ................................................................... 22,677,000 29,235,065
========== ==========
Net income per common and common equivalent share ............................... $ 0.20 $ 0.07
=========== ===========
</TABLE>
See accompanying notes.
F-25
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------
1995 1996
---- ----
<S> <C> <C>
Cash flows (used in) provided by operating activities:
Net income ................................................................................ $ 4,619 $ 2,045
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization ......................................................... 2,661 5,195
Provision for losses on accounts receivable ........................................... 499 740
Amortization of deferred gain ......................................................... (143) (40)
Non-cash charge for warrants issued ................................................... -- 850
Amortization of deferred financing costs .............................................. -- 195
Charge for abandonment of assets ...................................................... -- 1,061
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ......................................... (10,148) 1,176
Increase in estimated settlements from third parties ............................... (3,361) (4,176)
(Increase) decrease in prepaid expenses and other current assets ................... (730) 1,955
Increase (decrease) in accounts payable ............................................ (399) 2,227
Increase in accrued liabilities .................................................... 1,776 4,090
Increase in other current liabilities .............................................. 254 1,598
--- -----
Net cash (used in) provided by operating activities ............................. (4,972) 16,916
Cash flows used in investing activities:
Purchase of plant, property and equipment ................................................. (2,374) (3,500)
Cash paid for acquisitions ................................................................ (2,618) (43,478)
Working capital deficits acquired ......................................................... -- (4,491)
Increase in intangible and other assets ................................................... (1,178) (5,273)
------ ------
Net cash used in investing activities ........................................... (6,170) (56,742)
------ -------
Cash flows from financing activities:
Drawings on line of credit borrowings ..................................................... -- 66,381
Cash deposits applied to capital lease obligation ......................................... -- (13,155)
Repayments of long term debt and capital lease obligations ................................ (461) (15,890)
Proceeds from exercise of employee stock options .......................................... 908 333
Shares issued under employee stock purchase plan .......................................... -- 156
Decrease in restricted cash ............................................................... 232 99
--- --
Net cash provided by financing activities ....................................... 679 37,924
--- ------
Decrease in cash and cash equivalents ........................................................ (10,463) (1,902)
Cash and cash equivalents at beginning of period ............................................. 37,209 4,086
------ -----
Cash and cash equivalents at end of period ................................................... $ 26,746 $ 2,184
======== ========
</TABLE>
See accompanying notes.
F-26
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements as of and for the periods ended March
31, 1995 and 1996 are unaudited. All adjustments and accruals have been made
which, in the opinion of management, are necessary for a fair presentation.
In addition to normal, recurring adjustments, corporate general and
administrative expenses for the first three months of 1996 included a charge
of $6,511,000 composed of $5,661,000 related to the pooling of interests
with MedRehab and a charge of $850,000 for warrants issued in connection
with a preferred provider agreement. Of the $5,661,000 in merger charges,
approximately $2,280,000 relates to severance and related payroll charges,
$1,061,000 relates to property write-downs, $1,143,000 relates to
transaction costs, $682,000 relates to relocation costs, and $495,000
relates to miscellaneous expenses. Results of operations for the period
ended March 31, 1996 are not necessarily indicative of those expected for
any future period.
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and the rules
and regulations of the Securities and Exchange Commission. These financial
statements have been prepared with the assumption that users of the interim
financial information have either read or have access to the Company's
audited consolidated financial statements for the year ended December 31,
1995. Accordingly, footnote disclosures which would substantially duplicate
the disclosures contained in the Company's December 31, 1995 audited
consolidated financial statements have been omitted from these unaudited
interim consolidated financial statements. Certain information and footnote
disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such instructions, rules and regulations. Although
the Company believes that the disclosures are adequate to make the
information presented not misleading, it is suggested that these unaudited
interim consolidated financial statements be read in conjunction with the
audited consolidated financial statements and the notes thereto appearing
elsewhere in this Prospectus.
The unaudited interim consolidated financial statements of the Company have
been prepared to give retroactive effect to the merger with MedRehab, Inc.
("MedRehab") which was accounted for as a pooling of interests. Accordingly,
the accompanying unaudited consolidated financial statements have been
restated to include the accounts and operations of MedRehab for all periods
presented.
2. On March 1, 1996, the Company consummated a merger with MedRehab. The
tax-free, stock-for- stock transaction was accounted for as a pooling of
interests. In total, an aggregate of approximately 2,312,500 shares of
Mariner Common Stock were exchanged for all outstanding shares of MedRehab
capital stock or will be issued upon exercise of options to purchase shares
of MedRehab capital stock. The results of MedRehab prior to the merger
included in the restated financial statements have not been separately
disclosed as they are immaterial to the results of the combined company. The
historical financial statements of the Company for all periods presented
give retroactive effect to the MedRehab merger.
3. In January 1996, Mariner completed the merger with Convalescent Services,
Inc. ("CSI") and its acquisition of certain related assets. In the merger,
all of the issued and outstanding shares of capital stock of CSI were
converted into the right to receive an aggregate of 5,853,656 shares of the
Company's Common Stock and $7,000,000 in cash. In connection with the CSI
Merger, Mariner acquired certain assets that are related to CSI's business
from affiliates of CSI's stockholders for an aggregate of approximately
$17,694,000 in cash and loaned an aggregate of $1,619,000 to the
partnerships that sold certain assets to the Company. In addition, the
Company acquired options to purchase 12 of the facilities leased by CSI from
affiliates of CSI's stockholders at fair market value and made nonrefundable
deposits of an aggregate of $13,155,000 with the lessors of the facilities
subject to such options. The options are exercisable during specified
periods between 1998 and 2010. The aggregate estimated fair market value as
of the earliest exercise date of the options of, and the aggregate purchase
price for, the 12 facilities subject to the options is approximately
$59,585,000 (which includes the deposit of $13,155,000 paid by the Company
in May 1995). Mariner financed the cash consideration paid in these
transactions with borrowings under the Company's credit facility.
F-27
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. In January 1996, Mariner entered into an agreement to be the preferred
provider of subacute services to AmHS/Premier/Sun Health ("APS"), which is
the largest hospital-health care alliance in the United States with
approximately 1,700 member hospitals. As the preferred subacute provider,
Mariner may contract individually with member hospitals and systems to
provide subacute services. This agreement provides the Company the
opportunity to more quickly expand its services in certain of its existing
markets and enter new markets with lower capital commitments. Pursuant to
this arrangement, an APS affiliate was granted warrants to purchase 210,000
shares of Mariner Common Stock at an exercise price of $11.375 per share, as
well as warrants to purchase up to an additional 1,890,000 shares of Mariner
Common Stock over a five year period depending on the performance of the
arrangements between Mariner and APS-affiliated facilities. The Company
recorded a charge of approximately $850,000 in the first quarter of 1996 as
a result of the 210,000 warrants granted. The Company will receive
management fees under the agreements it enters with APS-affiliated
facilities based on a percentage of such facility's revenues specified in
the agreement.
F-28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
MARINER HEALTH GROUP, INC.
We have audited the accompanying combined balance sheet relating to certain
assets and liabilities of Convalescent Services, Inc. and affiliates acquired by
Mariner Health Group, Inc. on January 2, 1996 (the "Company") as of December 31,
1995, and the related statements of operations, cash flows and changes in
stockholders' deficit for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of certain assets and
liabilities of Convalescent Services, Inc. and affiliates acquired by Mariner
Health Group, Inc. on January 2, 1996 as of December 31, 1995, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 28, 1996
F-29
CERTAIN ASSETS AND LIABILITIES OF
CONVALESCENT SERVICES, INC. AND AFFILIATES ACQUIRED BY
MARINER HEALTH GROUP, INC. ON JANUARY 2, 1996
COMBINED BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
1995
----
<S> <C>
ASSETS
Current assets:
Accounts receivable, less allowance for uncollectible accounts of $1,851,923 ........................ $ 22,046,539
Estimated settlements due from third parties ........................................................ 6,172,627
Prepaid expenses and other current assets ........................................................... 1,206,723
---------
Total current assets ............................................................................. 29,425,889
Restricted cash and cash equivalents .................................................................... 469,086
Property and equipment, net (note 3) .................................................................... 33,040,106
Goodwill, net ........................................................................................... 673,326
Intangible and other assets, net ........................................................................ 828,648
Due from affiliates ..................................................................................... 1,188,386
Other long-term assets (note 4) ......................................................................... 6,673,706
---------
Total non-current assets ......................................................................... 42,873,258
----------
Total assets .................................................................................. $ 72,299,147
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt (note 6) .......................................................... $ 27,367,560
Accounts payable .................................................................................... 16,719,190
Accrued payroll ..................................................................................... 1,394,153
Accrued vacation .................................................................................... 1,304,297
Other accrued expenses .............................................................................. 7,244,416
Other current liabilities ........................................................................... 2,446,325
Cash overdraft ...................................................................................... 2,193,397
---------
Total current liabilities ........................................................................ 58,669,338
Long-term debt, less current portion (note 6) ........................................................... 19,990,534
Other long-term liabilities ............................................................................. 2,459,229
---------
Total liabilities ................................................................................ 81,119,101
----------
Commitments and contingencies (notes 7 and 9)
Stockholders' deficit:
Common stock, par value $1 per share, authorized and issued 1,000,000 shares in
1995 ............................................................................................. 1,000,000
Contributed capital ................................................................................. 1,843,355
Accumulated deficit ................................................................................. (11,655,161)
Less: 250 shares of treasury stock .................................................................. (8,148)
------
Total stockholders' deficit ...................................................................... (8,819,954)
----------
Total liabilities and stockholders' deficit ................................................... $ 72,299,147
============
</TABLE>
The accompanying notes are an integral part of the
combined financial statements.
F-30
CERTAIN ASSETS AND LIABILITIES OF
CONVALESCENT SERVICES, INC. AND AFFILIATES ACQUIRED BY
MARINER HEALTH GROUP, INC. ON JANUARY 2, 1996
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Operating revenue:
Net patient service revenue ................................................................. $ 134,738,147
Other income ................................................................................ 8,146,721
Total operating revenue .................................................................. 142,884,868
Operating expense:
Facility operating costs .................................................................... 123,246,894
Interest expense ............................................................................ 3,972,605
Facility rent expense, net .................................................................. 9,749,905
Corporate, general and administrative ....................................................... 5,176,847
Depreciation and amortization ............................................................... 2,255,795
Total operating expense .................................................................. 144,402,046
Net loss .............................................................................. $ (1,517,178)
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-31
CERTAIN ASSETS AND LIABILITIES OF
CONVALESCENT SERVICES, INC. AND AFFILIATES ACQUIRED BY
MARINER HEALTH GROUP, INC. ON JANUARY 2, 1996
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Cash used in operating activities:
Net loss ............................................................................................ $ (1,517,178)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization .................................................................... 2,225,795
Provision for bad debt ........................................................................... (161,423)
Changes in operating assets and liabilities:
Increase in patient accounts receivable ....................................................... (8,965,088)
Increase in third-party settlements receivable ................................................ (3,121,208)
Increase in accounts payable and accrued expenses ............................................. 6,630,793
Decrease in receivable from affiliates ........................................................ 2,518,979
Increase in prepaids .......................................................................... (50,076)
Decrease in other assets ...................................................................... 497,872
Increase in restricted assets ................................................................. (417,139)
Increase in other current liabilities ......................................................... 763,047
-------
Net cash flows used in operating activities ............................................... (1,565,626)
----------
Cash flows provided by investing activities:
Capital expenditures ................................................................................ (1,804,977)
Disposition of assets ............................................................................... 4,170,989
---------
Net cash flows provided by investing activities ........................................... 2,366,012
---------
Cash flows used in financing activities:
Proceeds from issuance of long-term debt ............................................................ 31,562,604
Repayments of long-term debt ........................................................................ (29,135,227)
Decrease in receivable from stockholders ............................................................ 1,176,550
Dividends paid ...................................................................................... (4,952,546)
Capital distributions ............................................................................... (1,032,512)
----------
Net cash flows used in financing activities ................................................ (2,381,131)
----------
Net decrease in cash .................................................................................... (1,580,745)
Overdraft at beginning of year .......................................................................... (612,652)
--------
Overdraft at end of year ................................................................................ $ (2,193,397)
============
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-32
CERTAIN ASSETS AND LIABILITIES OF
CONVALESCENT SERVICES, INC. AND AFFILIATES ACQUIRED BY
MARINER HEALTH GROUP, INC. ON JANUARY 2, 1996
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
CONTRIBUTED
CAPITAL
COMMON (DISTRIBUTION ACCUMULATED TREASURY
STOCK TO PARTNERS) DEFICIT STOCK TOTAL
----- ------------ ------- ----- -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 ......... 1,000,000 $ 2,875,867 $ (5,185,437) $ (8,148) $ (1,317,718)
Net loss ...................... (1,517,178) (1,517,178)
Capital distributions ......... (1,032,512) (1,032,512)
Dividends paid ............... (4,952,546) (4,952,546)
--------- ----------- ------------- --------- ------------
Balance, December 31, 1995 ...... 1,000,000 $ 1,843,355 $(11,655,161) $ (8,148) $ (8,819,954)
========= =========== ============= ======== ============
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-33
CERTAIN ASSETS AND LIABILITIES OF
CONVALESCENT SERVICES, INC. AND AFFILIATES ACQUIRED BY
MARINER HEALTH GROUP, INC. ON JANUARY 2, 1996
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Presentation
The combined financial statements present the financial position, results of
operations and cash flows associated with the operation of 23 skilled nursing
facilities and a rehabilitation hospital, collectively herein referred to as the
"Company." On January 2, 1996, the assets and liabilities were acquired in a
merger by Blue Corporation, a wholly-owned subsidiary of Mariner Health Group,
Inc. ("Mariner").
The assets and liabilities acquired were "carved out" of the December 31,
1994 combined financial statements of Convalescent Services, Inc. and
Affiliates, (the "Predecessor Company") as follows:
<TABLE>
<CAPTION>
PREDECESSOR ASSETS/LIABILITIES
COMPANY ASSETS/LIABILITIES JANUARY 1, 1995
DECEMBER 31, 1994 NOT ACQUIRED (AS ADJUSTED)
----------------- ------------ -------------
<S> <C> <C> <C>
Cash ..................................................... $ 1,775,323 $ (2,576,510) $ (801,187)
Patient accounts receivable .............................. 14,108,822 (1,188,793) 12,920,029
Third party settlements receivable ....................... 2,406,627 644,792 3,051,419
Receivables from affiliates .............................. -- 4,417,293 4,417,293
Other current assets ..................................... 1,331,978 (175,331) 1,156,647
--------- -------- ---------
Total current assets .................................. 19,622,750 1,121,451 20,744,201
Restricted cash .......................................... 2,867,026 (2,626,544) 240,482
Property and equipment, net .............................. 110,091,213 (72,625,409) 37,465,804
Receivable from affiliates ............................... 1,533,070 2,000,000 3,533,070
Other long-term assets ................................... 1,598,543 (421,993) 1,176,550
Goodwill, net ............................................ 691,045 -- 691,045
Intangibles and other assets ............................. 1,966,537 (490,149) 1,476,388
--------- -------- ---------
Total assets ...................................... $138,370,184 $(73,042,644) $ 65,327,540
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR ASSETS/LIABILITIES
COMPANY ASSETS/LIABILITIES JANUARY 1, 1995
DECEMBER 31, 1994 NOT ACQUIRED (AS ADJUSTED)
----------------- ------------ -------------
<S> <C> <C> <C>
Current portion of long-term debt ................................ $ 27,945,909 $ (20,552,287) $ 7,393,622
Accounts payable ................................................. 12,115,761 (1,410,036) 10,705,725
Accrued expenses ................................................. 6,315,161 (650,280) 5,664,881
Accrued payroll .................................................. 2,757,197 (268,840) 2,488,357
Accrued vacation ................................................. 1,294,012 (121,712) 1,172,300
Other current liabilities ........................................ 3,018,479 (1,335,201) 1,683,278
--------- ---------- ---------
Total current liabilities ..................................... 53,446,519 (24,338,356) 29,108,163
---------- ----------- ----------
Long-term debt, less current portion ............................. 104,163,902 (66,626,807) 37,537,095
Other long-term assets ........................................... 4,461,518 (4,461,518) --
--------- ---------- ----------
Total liabilities ............................................. 162,071,939 (95,426,681) 66,645,258
Common stock ..................................................... 1,000,000 1,000,000
Contributed capital .............................................. 14,062,285 (11,186,418) 2,875,867
Accumulated deficit .............................................. (38,755,892) 33,570,455 (5,185,437)
Less: 250 shares of treasury stock ............................... (8,148) -- (8,148)
--- ------ ---------- ------
Total stockholders' deficit ................................... (23,701,755) 22,384,037 (1,317,718)
----------- ---------- ----------
Total liabilities and stockholders' deficit ............... $ 138,370,184 $ (73,042,644) $ 65,327,540
============= ============= =============
</TABLE>
F-34
CERTAIN ASSETS AND LIABILITIES OF
CONVALESCENT SERVICES, INC. AND AFFILIATES ACQUIRED BY
MARINER HEALTH GROUP, INC. ON JANUARY 2, 1996
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
The January 1, 1995 balance sheet includes certain assets used by the
Predecessor Company in other business activities which include an airplane, two
cars, certain leases for real property, a condominium and all leasehold
improvements incident to CSI's office space in Atlanta, Georgia which were sold
to the Predecessor Company in May 1995 in exchange for the assumption of the
liabilities related to such assets. These were assets that were used in the
management of the business prior to May 1995 when Mariner began managing the
facilities. Accordingly, these assets are presented as disposals during the
month of May. No gain or loss was recorded in connection with these disposals.
Assets and liabilities not acquired by Mariner consist of property and
equipment and related debt and equity related to 14 facilities which are owned
by the Predecessor Company.
Mariner, on January 2, 1996 entered into new leases with the Predecessor
Company which are capital leases.
In addition, a medical supplies company, CSSI, acquired by Mariner in May
1995 has also been excluded as of January 1, 1995.
All significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Equivalents
The Company considers cash on hand, deposits in banks, and all short-term
investments with original maturities of three months or less to be cash
equivalents. At December 31, 1995 cash was in an overdraft position and has been
reclassed to current liabilities for financial statement presentation purposes.
Common Stock
During 1994, the board of directors of CSI approved an amendment to the
Company's articles of incorporation which stated that the total number of shares
of capital stock which the corporation is authorized to issue is 1,000,000
shares of common stock, divided into 500,000 shares designated as "Class A
Common Stock" and 500,000 shares designated as "Class B Common Stock." All
previously outstanding shares of Common Stock were converted to Class A Common
Stock. The holders of the Class A Common stock are entitled to one vote per
share in all proceedings in which actions are taken by the shareholders of CSI,
and the holders of the Class B Common Stock are entitled to three votes per
share in all proceedings in which actions shall be taken by the shareholders of
CSI. The holders of the Class A Common Stock and the holders of the Class B
Common Stock shall vote together without distinction, and not separately, except
as to matters to which, under law, voting by classes is required. Except as to
voting rights, the Class A Common Stock and the Class B Common Stock are
identical in all respects and for all purposes, and are entitled to receive,
without distinction as to class, all dividends declared and all net assets of
CSI upon liquidation or dissolution.
F-35
CERTAIN ASSETS AND LIABILITIES OF
CONVALESCENT SERVICES, INC. AND AFFILIATES ACQUIRED BY
MARINER HEALTH GROUP, INC. ON JANUARY 2, 1996
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Revenue Recognition
Net patient service revenue is reported at the estimated net amount
realizable under contractual arrangements with patients and third-party payors.
Revenue under certain third-party payor agreements is subject to audit and
retroactive adjustment. Provisions for estimated third-party payor settlements
are provided in the period the related services are rendered. Differences
between the estimated amounts accrued and interim and final settlements are
reported in operations in the year of settlement.
Net patient service revenues payable by patients at the Company's facilities
are recorded at established billing rates. Net patient service revenues to be
reimbursed by contracts with third-party payors are recorded at the amount
estimated to be realized under these contractual arrangements. Revenues from
Medicare and Medicaid are generally based on reimbursement of the reasonable
direct and indirect costs of providing services to program participants or a
prospective payment system. The Company separately estimates revenues due from
each third party with which it has a contractual arrangement and records
anticipated settlements with these parties in the contractual period during
which services were rendered. The amounts actually reimbursable under Medicare
and Medicaid are determined by filing cost reports which are then audited and
generally retroactively adjusted by the payor. Legislative changes to state or
federal reimbursement systems may also retroactively affect recorded revenues.
Changes in estimated revenues due in connection with Medicare and Medicaid may
be recorded by the Company subsequent to the year of origination and prior to
final settlement based on improved estimates. Such adjustments and final
settlements with third party payors are reflected in operations at the time of
the adjustment or settlement.
In addition, indirect costs reimbursed under the Medicare program are
subject to regional limits. The Company's costs generally exceed these limits
and, accordingly, the Company is required to submit exception requests to
recover such excess costs. The Company believes it will be successful in
collecting these receivables; however, the failure to recover these costs in the
future could materially and adversely affect the Company.
Goodwill, Intangible and Other Assets
Intangible and other assets primarily consist of amounts identified in
connection with certain facility organization and pre-opening costs and certain
deferred costs which were incurred in connection with various financings.
In connection with each of its start-ups, the Company amortizes deferred
costs over five years. The Company's policy is to evaluate each acquisition
separately and identify an appropriate amortization period for goodwill based on
the acquired property's characteristics. Goodwill is being amortized using the
straight-line method over a 40-year period.
Costs incurred in obtaining financing are amortized as interest expense
using the straight-line method over the term of the related financial
obligation.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed on the
straight-line method over the estimated useful lives as follows:
<TABLE>
<S> <C>
Building and improvements ........ 15-40 years
Furniture and equipment .......... 3-7 years
Leasehold rights and improvements. Over the shorter of the remaining
term of the lease or life of the asset
</TABLE>
F-36
CERTAIN ASSETS AND LIABILITIES OF
CONVALESCENT SERVICES, INC. AND AFFILIATES ACQUIRED BY
MARINER HEALTH GROUP, INC. ON JANUARY 2, 1996
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Income Taxes
No provision has been made for income taxes as operations are carried out
through entities which pass taxable income or loss to the shareholders.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets to be disposed of " (SFAS 121), issued by the
Financial Accounting Standards Board in March 1995 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles to be disposed of. This statement is effective for financial
statements for fiscal years beginning after December 15, 1995. The Company does
not believe the adoption of SFAS 121 will have a material impact on the
Company's financial condition or results of operations.
3. PROPERTY AND EQUIPMENT
<TABLE>
<S> <C>
Land ..................................................... $ 4,142,696
Buildings and improvements ............................... 34,146,660
Furniture, fixtures and equipment ........................ 5,569,769
Construction in progress ................................. 715,058
-------
44,574,183
Less: accumulated depreciation ........................... 11,534,077
----------
$33,040,106
===========
</TABLE>
4. OTHER LONG-TERM ASSETS
Other long-term assets consist of the following:
<TABLE>
<S> <C>
Management fees receivable .............................. $3,912,277
Loans receivable ........................................ 2,761,429
---------
$6,673,706
==========
</TABLE>
5. RELATED PARTY TRANSACTIONS
In May 1995 Mariner and the Predecessor Company entered into a Management
Agreement (the "Management Agreement") pursuant to which Mariner would manage
all of the Company's facilities and operations. Under the Management Agreement,
Mariner would receive a monthly management fee equal to 6% of the gross
operating revenue of CSI's facilities. In addition, upon termination of the
Management Agreement, Mariner would receive a bonus management fee equal to the
net income of the facilities managed by Mariner during the term of the
Management Agreement, subject to certain adjustments.
From May 24, 1995 through December 31, 1995 approximately $10,288,000 of
management fees were paid to Mariner pursuant to the agreement.
Amounts due from Affiliates of approximately $1,188,000 at December 31,
1995, are recorded net of any offsetting payables and represent
noninterest-bearing amounts advanced to stockholders.
F-37
CERTAIN ASSETS AND LIABILITIES OF
CONVALESCENT SERVICES, INC. AND AFFILIATES ACQUIRED BY
MARINER HEALTH GROUP, INC. ON JANUARY 2, 1996
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
<TABLE>
<S> <C>
Notes payable principally to banks, interest from 8.03% To 10.95%,
payable monthly with maturity dates from 1996 to 2001 ........... $ 42,358,094
Outstanding under $5,000,000 revolving credit agreement bearing
interest at prime plus 1/2 percent, maturing january 2, 1996 .... 5,000,000
Less current portion .............................................. (27,367,560)
-----------
Long-term debt .................................................... $19,990,534
===========
</TABLE>
Principal maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996 .............................................................. $ 27,367,560
1997 .............................................................. 4,557,836
1998 .............................................................. 477,782
1999 .............................................................. 413,004
2000 .............................................................. 5,864,767
2001 and thereafter ............................................... 8,677,145
---------
$47,358,094
===========
</TABLE>
The $5,000,000 credit facility expires January 2, 1996. This agreement
requires the Company to pay a fee of 3/8 % per annum on the unused portion of
the credit facility.
The credit agreements require CSI and its affiliates to maintain certain
combined debt service coverage and other financial ratios as defined in the
agreements. Other loan agreements have covenants relating to individual
affiliates and include some cross defaults with other agreements.
At December 31, 1995, two of CSI's affiliates were not in compliance with
certain financial ratio covenants. The Company has received waivers from the
lenders for these items.
Amounts outstanding under various loan agreements are collateralized by
substantially all assets of the Company and are guaranteed by the stockholders.
The stockholders are also required to maintain an $8,000,000 unencumbered liquid
asset pool under the credit agreement.
7. LEASES AND LEASE COMMITMENTS:
On January 2, 1996 the Company rewrote certain leases for administrative
office space and two operating facilities under noncancelable operating leases.
Future minimum lease commitments for each of the five succeeding years under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 ......................................................... $ 1,154,390
1997 ......................................................... 1,124,365
1998 ......................................................... 1,124,865
1999 ......................................................... 1,125,365
2000 ......................................................... 1,152,830
2001 and thereafter .......................................... 3,025,000
---------
$8,706,815
==========
</TABLE>
F-38
CERTAIN ASSETS AND LIABILITIES OF
CONVALESCENT SERVICES, INC. AND AFFILIATES ACQUIRED BY
MARINER HEALTH GROUP, INC. ON JANUARY 2, 1996
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. INSURANCE
The Company's Texas nursing centers were nonsubscribers to the State of
Texas Workers' Compensation Program until June 1, 1995. As a nonsubscriber, the
Company bears the risk of liability for all claims incurred. Effective July 1,
1993, the Company is substantially self-insured in all states for workers'
compensation subject to certain specific and aggregate limits. Management
believes it has made adequate provision for unpaid and unreported claims
incurred. The accrued liabilities for worker's compensation self-insurance are
$2,075,000 at December 31, 1995.
The Company is under a $100,000 per occurrence self-insured retention
program for general and professional liability insurance as opposed to first
dollar coverage. Accrued liabilities of $2,235,000 have been recorded based on
an actuarial projection of reserves and incurred but not reported claims as of
December 31, 1995.
9. LITIGATION AND LEGAL MATTERS
The Company is involved in litigation and administrative proceedings in the
ordinary course of business. In the opinion of management, the Company's
recovery or liability, if any, under pending litigation and administrative
proceedings would not materially affect its financial condition or operations.
10. SUBSEQUENT EVENTS
On January 2, 1996 the Company merged with Mariner Health Group, Inc.
for approximately $218,000,000.
F-39
REPORT OF INDEPENDENT ACCOUNTANTS
To MR. STILES A. KELLETT, JR.
and MR. SAMUEL B. KELLETT
We have audited the accompanying combined balance sheets of Convalescent
Services, Inc. and Affiliates (the "Company") as of December 31, 1993 and 1994,
and the related combined statements of operations, cash flows and changes in
stockholders' deficit for each of the three years in the period ended December
31, 1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in the notes to the accompanying financial statements,
Convalescent Services, Inc. and Affiliates participate with their owners in
terms of financial support including cross-collateralization of some assets and
debt guarantees.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the combined financial position of Convalescent
Services, Inc. and Affiliates as of December 31, 1993 and 1994, and the combined
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
March 31, 1995
F-40
CONVALESCENT SERVICES, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31, 1993 AND 1994
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash .................................................................................. $ 1,983,903 $ 1,775,323
Restricted cash ....................................................................... 239,159 429,432
Patient accounts receivable, less allowance for uncollectible
accounts of $2,159,000 and $2,080,000 in 1993 and 1994,
respectively ........................................................................ 9,994,538 14,108,822
Third-party settlements receivable .................................................... 3,265,644 2,406,627
Other current assets .................................................................. 1,650,529 1,331,978
--------- ---------
Total current assets .............................................................. 17,133,773 20,052,182
Restricted assets -- noncurrent .......................................................... 2,204,823 2,437,594
Property and equipment, net .............................................................. 111,899,230 110,091,213
Receivable from affiliates ............................................................... 2,583,704 1,533,070
Receivable from stockholders ............................................................. 345,866 810,198
Investment in limited partnerships ....................................................... (325,151) 788,345
Debt issue costs, net .................................................................... 1,845,536 1,504,466
Goodwill, net ............................................................................ 691,045
Other assets ............................................................................. 612,356 462,071
------- -------
Total assets ...................................................................... $ 136,300,137 $ 138,370,184
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt ..................................................... $ 12,428,216 $ 27,945,909
Accounts payable ...................................................................... 9,856,600 12,115,761
Accrued expenses ...................................................................... 3,483,757 6,315,161
Accrued payroll and benefits .......................................................... 3,518,208 4,051,209
Advance payments from residents and patients .......................................... 1,871,474 1,733,759
Payable to stockholders ............................................................... 989,810
Other current liabilities ............................................................. 1,170,700 1,284,720
--------- ---------
Total current liabilities ......................................................... 33,318,765 53,446,519
Long-term debt, less current portion ..................................................... 121,698,395 104,163,902
Refundable advance fees .................................................................. 4,826,185 4,218,579
Deferred revenue from nonrefundable fees ................................................. 453,950 242,939
------- -------
Total liabilities ................................................................. 160,297,295 162,071,939
----------- -----------
Stockholders' deficit:
Common stock, par value $1 per share, authorized and issued 1,000 shares
in 1993 and par value $1 per share, authorized and issued 1,000,000
shares in 1994 ...................................................................... 1,000 1,000,000
Contributed capital ................................................................... 1,858,858 14,062,285
Accumulated deficit ................................................................... (25,848,868) (38,755,892)
Less: 250 shares of treasury stock .................................................... (8,148) (8,148)
------ ------
Total stockholders' deficit ....................................................... (23,997,158) (23,701,755)
----------- -----------
Total liabilities and stockholders' deficit ....................................... $ 136,300,137 $ 138,370,184
============= =============
</TABLE>
See accompanying notes.
F-41
CONVALESCENT SERVICES, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Operating revenue:
Net patient service revenue ...................................... $ 97,481,692 $113,412,523 $138,864,152
Resident fees earned ............................................. 4,035,880 3,384,100 3,918,235
Other revenue .................................................... 1,778,565 1,215,131 1,013,437
--------- --------- ---------
Total operating revenue ...................................... 103,296,137 118,011,754 143,795,824
----------- ----------- -----------
Operating expense:
Ancillary ........................................................ 18,869,013 28,508,601 42,671,466
Nursing .......................................................... 30,444,323 32,523,782 38,291,270
Dietary .......................................................... 9,403,634 9,471,527 9,943,873
Housekeeping and laundry ......................................... 4,293,340 4,187,329 4,522,634
Plant and maintenance ............................................ 5,802,484 5,948,851 6,385,150
Provision for bad debts .......................................... 728,180 1,438,199 1,114,065
Interest expense, net ............................................ 12,315,948 11,743,345 12,214,002
Rent expense ..................................................... 1,350,222 1,237,411 906,174
General and administrative -- facility ........................... 10,530,267 11,408,121 13,622,714
General and administrative -- corporate .......................... 3,419,821 3,956,537 4,781,924
Depreciation and amortization .................................... 5,447,214 5,543,211 5,916,526
Reorganization costs ............................................. 164,333
----------- ----------- -----------
Total operating expense ...................................... 102,604,446 115,966,914 140,534,131
----------- ----------- -----------
Income from operations before extraordinary item ............. 691,691 2,044,840 3,261,693
Extraordinary gain from debt extinguishment, net .................... 2,785,508
---------
Net income ................................................... $ 3,477,199 $ 2,044,840 $ 3,261,693
============ ============ ============
</TABLE>
See accompanying notes.
F-42
CONVALESCENT SERVICES, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 3,477,199 $ 2,044,840 $ 3,261,693
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................... 5,447,214 5,543,211 5,916,526
Amortization of debt issue costs ................................ 555,099 555,961 512,889
Extraordinary gain, net ......................................... (2,785,508)
Net change in:
Restricted cash .............................................. 121,387 (34,867) (190,273)
Patient accounts receivable .................................. (3,291,917) (873,858) (4,114,284)
Third-party settlements receivable ........................... (958,625) (2,393,887) 859,017
Other current assets ......................................... (16,027) (177,264) 318,551
Other assets ................................................. 243,224 (242,313) (81,476)
Accounts payable and accrued expenses ........................ 3,973,607 3,486,323 5,623,566
Advance payments from residents and patients ................. 36,959 616,993 (137,715)
Deferred revenue ............................................. (12,980) (121,247) (162,190)
Other current liabilities .................................... 11,292 520,723 114,020
------ ------- -------
Net cash flows provided by operating
activities .............................................. 6,800,924 8,924,615 11,920,324
--------- --------- ----------
Cash flows used in investing activities:
Capital expenditures ................................................ (9,638,149) (7,894,956) (3,859,028)
Receivable from affiliates .......................................... (3,023,479) 292,310 1,050,634
Investment in limited partnerships .................................. 153,193 (1,113,496)
Investment in goodwill .............................................. (708,765)
Increase in restricted assets -- noncurrent ......................... (115,406) (223,627) (232,771)
-------- -------- --------
Net cash flows used in investing activities ............... (12,777,034) (7,673,080) (4,863,426)
----------- ---------- ----------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of long-term debt ............................ 30,980,305 15,934,350 8,791,322
Repayments of long-term debt ........................................ (23,633,834) (9,405,365) (10,808,122)
Payable to stockholders ............................................. (1,658,616) (394,173) (989,810)
Receivable from stockholders ........................................ (345,866) (464,332)
Dividends paid ...................................................... (16,168,717)
Capital contributions ............................................... 16,233,808
Capital stock ....................................................... 999,000
Capital distributions ............................................... (1,413,071) (1,564,239) (4,030,381)
Debt issue costs .................................................... (434,873) (787,973) (171,819)
Outstanding checks in excess of bank balance ........................ 2,196,102 (2,670,519)
Refundable fees ..................................................... (76,748) (905,612) (656,427)
------- -------- --------
Net cash flows provided by (used in) financing
activities .............................................. 5,959,265 (139,397) (7,265,478)
--------- -------- ----------
Net increase (decrease) in cash ........................................ (16,845) 1,112,138 (208,580)
Cash at beginning of year .............................................. 888,610 871,765 1,983,903
------- ------- ---------
Cash at end of year .................................................... $ 871,765 $ 1,983,903 $ 1,775,323
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest .............................................. $ 12,914,622 $ 12,113,641 $ 12,913,434
</TABLE>
See accompanying notes.
F-43
CONVALESCENT SERVICES, INC. AND AFFILIATES
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
<TABLE>
<CAPTION>
COMMON CONTRIBUTED ACCUMULATED TREASURY
STOCK CAPITAL DEFICIT STOCK TOTAL
----- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1991 $ 1,000 $ 4,826,001 $ (31,360,740) $ (8,148) $ (26,541,887)
Net income .............. 3,477,199 3,477,199
Capital distributions ... (1,402,904) (10,167) (1,413,071)
----------- ------------ ------------- -------- -------------
Balance, December 31, 1992 1,000 3,423,097 (27,893,708) (8,148) (24,477,759)
Net income .............. 2,044,840 2,044,840
Capital distributions ... (1,564,239) (1,564,239)
----------- ------------ ------------- -------- -------------
Balance, December 31, 1993 1,000 1,858,858 (25,848,868) (8,148) (23,997,158)
Net income .............. 3,261,693 3,261,693
Contributed capital ..... 999,000 16,233,808 17,232,808
Capital Distributions ... (4,030,381) (4,030,381)
Dividends paid .......... (16,168,717) (16,168,717)
----------- ------------ ------------- -------- -------------
Balance, December 31, 1994 $ 1,000,000 $ 14,062,285 $ (38,755,892) $ (8,148) $ (23,701,755)
=========== ============ ============= ======== =============
</TABLE>
See accompanying notes.
F-44
CONVALESCENT SERVICES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Principles of Combination
The combined financial statements include the accounts of Convalescent
Services, Inc. (CSI) and certain affiliated entities (the "affiliates"),
principally partnerships, collectively referred to herein as the "Company." The
stock of CSI is wholly owned or controlled by Mr. Stiles A. Kellett, Jr. and Mr.
Samuel B. Kellett (the stockholders), who also control each of the affiliates.
At December 31, 1994, CSI owns seven nursing centers and a 36-bed
rehabilitation hospital. CSI manages for the affiliates two nursing centers and
a continuing care retirement community (CCRC). CSI leases and operates 16
nursing centers of affiliates. Approximately 24%, 31% and 38% of operating
revenues for the years ended December 31, 1992, 1993, and 1994, respectively,
were derived from the federal Medicare program. Approximately 26%, 23% and 22%
of operating revenues for the years ended December 31, 1992, 1993, and 1994,
respectively, were derived from state sponsored Medicaid programs.
All significant intercompany accounts and transactions have been eliminated.
Common Stock
During 1994, the board of directors of CSI approved an amendment to the
Company's articles of incorporation which stated that the total number of shares
of capital stock which the corporation is authorized to issue is 1,000,000
shares of common stock, divided into 500,000 shares designated as "Class A
Common Stock" and 500,000 shares designated as "Class B Common Stock." All
previously outstanding shares of Common Stock were converted to Class A Common
Stock. The holders of the Class A Common Stock are entitled to one vote per
share in all proceedings in which actions are taken by the shareholders of the
Corporation, and the holders of the Class B Common Stock are entitled to three
votes per share in all proceedings in which actions are taken by the
shareholders of the Corporation. The holders of the Class A Common Stock and the
holders of the Class B Common Stock shall vote together without distinction, and
not separately, except as to matters to which, under law, voting by classes is
required. Except as to voting rights, the Class A Common Stock and the Class B
Common Stock are identical in all respects and for all purposes, and are
entitled to receive, without distinction as to class, all dividends declared and
all net assets of the Corporation upon liquidation or dissolution.
Revenue Recognition
Net patient service revenue is reported at the estimated net amount
realizable under contractual arrangements with residents and third-party payors.
Revenue under certain third-party payor agreements is subject to audit and
retroactive adjustment. Provisions for estimated third-party payor settlements
are provided in the period the related services are rendered. Differences
between the estimated amounts accrued and interim and final settlements are
reported in operations in the year of settlement.
Resident fees earned represent monthly fees charged for residential
services, meals and certain nursing and medical services at the CCRC. Advance
fees paid by residents entering into a CCRC contract, net of the refundable
portion which is a minimum of 75% of the advance fees paid, are recorded as
deferred revenue and amortized to income using the straight-line method over the
estimated life expectancy of the resident. The refundable portion of advance
fees is recorded as a liability and is fully refunded upon a resident's
departure at the earlier of the date of a sale of a unit comparable to the
resident's vacated unit, or one year from the resident's departure date.
F-45
CONVALESCENT SERVICES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Debt Issue Costs
Costs associated with financing or refinancing of properties, including
legal fees, appraisal fees, closing fees and other directly associated expenses
are deferred and amortized using the straight-line method over the term of the
related debt. The amount of the Debt Issue Cost expense resulting from the
amortization of the Debt Issue Cost reflected in interest expense, net is
$555,000, $556,000 and $513,000 at December 31, 1992, 1993 and 1994,
respectively.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets and for
leasehold improvements over the term of the respective leases.
Income Taxes
No provision has been made for income taxes because operations are carried
out through entities which pass taxable income or loss to the owners.
Reclassifications
Certain amounts for 1992 and 1993 have been reclassified to conform with the
1994 presentation.
2. EXTRAORDINARY ITEMS
At December 31, 1991, the Company was renegotiating an affiliate's mortgage
with an outstanding principal balance of $6,200,000 and accrued interest of
$1,716,000. The 1991 financial statements included the accounts of this
affiliate due to control of the affiliate was held by the stockholder's of CSI.
These negotiations were concluded in 1992 whereby the affiliate transferred its
assets and operations to the mortgage holder, resulting in relinquishing total
control of its operations in satisfaction of the mortgage obligation and accrued
interest. As a result, the Company realized a $2,836,000 extraordinary gain in
its 1992 combined statement of operations representing the net difference
between the net assets transferred and the cancelled mortgage due plus accrued
interest as of the date of transfer.
During 1992, the Company realized an extraordinary loss of approximately
$51,000 on early extinguishment of a mortgage.
3. RESTRICTED ASSETS
Investments are stated at cost which approximates market value.
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
Cash -- principally resident funds recorded as current liabilities ....................... $ 239,159 $ 429,432
---------- ----------
Escrowed minimum liquid reserve fund required by the State of
Florida:
Money market fund -- principally U.S. Treasury Bills ................................. 1,903,564 1,961,858
Cash and cash equivalents for debt service requirements .................................. 301,259 475,736
------- -------
2,204,823 2,437,594
--------- ---------
$2,443,982 $2,867,026
========== ==========
</TABLE>
F-46
CONVALESCENT SERVICES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. RESTRICTED ASSETS -- (CONTINUED)
The escrowed minimum liquid reserve fund is a statutory requirement for
CCRCs and is calculated annually based on certain debt and operating cash
requirements.
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
Land ................................................................... $ 13,168,794 $ 13,205,505
Buildings and improvements ............................................. 110,723,603 113,129,855
Furniture, fixtures and equipment ...................................... 20,845,004 22,512,001
Construction in progress ............................................... 203,089 1,032,285
------- ---------
144,940,490 149,879,646
Less: accumulated depreciation ......................................... 33,041,260 39,788,433
---------- ----------
$111,899,230 $110,091,213
============ ============
</TABLE>
Depreciation expense was $5,212,000, $5,309,000 and $5,667,000 for the years
ended December 31, 1992, 1993 and 1994, respectively.
5. RELATED PARTY TRANSACTIONS
Payable to stockholders of approximately $990,000 at December 31, 1993 bears
interest at approximately 8.0%. This note was paid off during 1994.
Long-term receivables of approximately $346,000 and $810,000 at December 31,
1993 and 1994, respectively, are recorded net of any offsetting payables and
represent noninterest-bearing amounts advanced to stockholders.
Receivable from affiliates is recorded net of any offsetting payable.
Approximately $2,719,000 and $1,424,000 at December 31, 1993 and 1994,
respectively, bear interest at rates varying from prime plus 1% to prime plus
1.5%. The remainder is noninterest-bearing.
Other revenue in 1993 includes $678,000 for rentals and service fees charged
to an uncombined affiliate of the Kelletts. Effective January 1, 1994, the
Company owned a 100% interest in this affiliate; thus, it is combined in the
1994 financial statements and intercompany revenue is eliminated.
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
Notes payable principally to banks, interest from 7% to 11.75%,
payable monthly with maturity dates from 1995 to 2007 .............................. $112,936,066 $115,191,721
Outstanding under $40,000,000 revolving credit agreement
(canceled by the Company June 30, 1992), interest averaging
8.135% in 1994, maturing in 1995 ................................................... 16,935,545 12,388,090
Outstanding under $5,000,000 revolving credit agreement bearing
interest at 6.5% and 9% in 1993 and 1994, respectively, maturing
June 30, 1995 ...................................................................... 4,255,000 4,530,000
--------- ---------
134,126,611 132,109,811
Less current portion ................................................................. 12,428,216 27,945,909
---------- ----------
Long-term debt ....................................................................... $121,698,395 $104,163,902
============ ============
</TABLE>
F-47
CONVALESCENT SERVICES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT -- (CONTINUED)
Principal maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1995 ....................................................... $ 27,945,909
1996 ....................................................... 45,380,065
1997 ....................................................... 14,887,315
1998 ....................................................... 1,197,059
1999 ....................................................... 1,160,165
2000 and thereafter ........................................ 41,539,298
----------
$132,109,811
============
</TABLE>
The Company elected not to renew the unused portion of a $40,000,000 credit
facility which expired on June 30, 1992. The original terms under various loans
within the agreement remain in place as do the debt covenants associated with
the overall agreement. The $5,000,000 credit facility expires June 30, 1995.
This agreement requires the Company to pay a fee of 3/8% per annum on the unused
portion of the credit facility.
The credit agreements require CSI and its affiliates to maintain certain
combined debt service coverage and other financial ratios as defined in the
agreements. Other loan agreements have covenants relating to individual
affiliates and include some cross defaults with other agreements.
At December 31, 1994, three of CSI's affiliates were not in compliance with
certain financial ratio covenants. The Company obtained waiver of debt service
coverage ratio covenants for two of the affiliates through December 31, 1994.
The other affiliate achieved a 1.20 fixed coverage ratio versus a 1.25:1
requirement and a .95 actual fixed charge coverage ratio versus a 1:1
requirement. The curative provision is that the Company can either deposit with
the lender additional cash satisfactory to the lender or prepay the principal
balance of the loan to an amount necessary to achieve compliance with the ratio.
The Company elected to deposit $21,675 with the lender in order to satisfy the
requirement.
Amounts outstanding under various loan agreements are collateralized by
substantially all assets of the Company and are guaranteed by the stockholders.
The stockholders are also required to maintain an $8,000,000 unencumbered liquid
asset pool under the credit agreements.
Interest expense is net of interest income of $961,000, $888,000 and
$1,303,000 for the years ended December 31, 1992, 1993 and 1994, respectively.
Construction period interest of $34,000 and $74,000 was capitalized for the
years ended December 31, 1992 and 1993, respectively.
7. LEASES AND LEASE COMMITMENTS
In addition to the 16 leases with affiliates mentioned in note 1, the
Company leases administrative office space and one operating facility under
noncancelable operating leases. The facility lease is with a partnership
controlled by the stockholders. Future minimum lease commitments for each of the
five succeeding years under noncancelable operating leases are as follows:
<TABLE>
<S> <C>
1995 ........................................................ $ 913,997
1996 ........................................................ 925,024
1997 ........................................................ 936,314
1998 ........................................................ 947,864
1999 ........................................................ 959,708
-------
$4,682,907
==========
</TABLE>
F-48
CONVALESCENT SERVICES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. LEASES AND LEASE COMMITMENTS -- (CONTINUED)
Operating lease expense in 1992, 1993 and 1994 and minimum operating lease
commitments for each of the five succeeding years includes approximately
$500,000 for the lease controlled by the stockholders. Operating lease expense
was $1,351,000, $1,299,000 and $1,154,000 for the years ended December 31, 1992,
1993 and 1994, respectively. Operating lease expense for 1993 includes $374,000
for lease payments made prior to November 1, 1993 at which time the Company
exercised its purchase option under a lease/purchase agreement for a 120-bed
operating facility.
8. INSURANCE
The Company's Texas nursing centers are nonsubscribers to the State of Texas
Workers' Compensation Program. As a nonsubscriber, the Company bears the risk of
liability for all claims incurred. Effective July 1, 1993 the Company is
substantially self-insured in other states for workers' compensation subject to
certain specific and aggregate limits. Management believes it has made adequate
provision for unpaid and unreported claims incurred. The accrued liabilities for
workers' compensation self insurance amount is $988,000 and $2,214,000 at
December 31, 1993 and 1994, respectively.
On October 1, 1993, the Company elected to enter into a $100,000 per
occurrence self-insured retention program for general and professional liability
insurance as opposed to first dollar coverage. Accrued liabilities of $369,000
and $1,869,000 have been recorded based on an actuarial projection of reserves
and incurred but not reported claims as of December 31, 1993 and 1994,
respectively.
9. LITIGATION AND LEGAL MATTERS
The Company is involved in litigation and administrative proceedings in the
ordinary course of business. In the opinion of management, the Company's
recovery or liability, if any, under pending litigation and administrative
proceedings would not materially affect its financial condition or operations.
10. SUBSEQUENT EVENTS
On March 14, 1995, a proxy statement was furnished to holders of common
stock of Mariner Health Group, Inc., a Delaware Corporation ("Mariner"), in
connection with the solicitation of proxies by the board of directors of Mariner
for use at a special meeting of Mariner's stockholders to be held on April 11,
1995. The purpose of the meeting is to consider and vote upon a proposal to
approve the issuance of 5,853,658 shares of common stock in connection with the
merger of Mariner and CSI, pursuant to the Agreement and Plan of Merger dated as
of January 9, 1995 by and among Mariner and CSI. In the merger, all of the
issued and outstanding shares of common stock of CSI will be converted into the
right to receive an aggregate of 5,853,658 shares of common stock and $7,000,000
in cash. In connection with the merger, Mariner will also acquire certain assets
that are related to CSI's business from affiliates of CSI's stockholders for an
aggregate of $8,100,000 in cash, and will make nonrefundable deposits in the
amount of $15,000,000 for options to purchase 14 of the facilities leased by CSI
from affiliates of CSI's stockholders at fair market value.
F-49
INDEX TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Pro Forma Combined Financial Statements .................................. P-3
Pro Forma Combined Balance Sheet as of March 31, 1996 .............................. P-4
Pro Forma Combined Statement of Operations for the three months ended March 31, 1996 P-5
Pro Forma Combined Statement of Operations for the year ended December 31, 1995 .... P-6
Notes to Unaudited Pro Forma Combined Financial Information ........................ P-8
</TABLE>
P-1
[THIS PAGE INTENTIONALLY LEFT BLANK]
P-2
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On March 1, 1996, the Company completed the MedRehab Merger. In the MedRehab
Merger, Mariner issued approximately 2,312,500 shares of Common Stock in
exchange for all of MedRehab's outstanding capital stock and rights to acquire
capital stock. This transaction was accounted for as a pooling of interests.
Accordingly, the historical financial statements of the Company for all periods
presented give retroactive effect to the MedRehab Merger.
The following unaudited pro forma combined financial information gives
effect to the Recent Acquisitions and the issuance of the Notes and application
of the estimated net proceeds therefrom. The pro forma information is based on
the historical financial statements of Mariner, the entities that owned four of
the facilities (the "Heritage Facilities") acquired in the Heritage Acquisition,
CSI and certain of its affiliates (the "CSI Entities") and Regency Health Care
Centers, Inc. ("Regency"), which was the entity acquired in the 1996 Florida
Acquisition. Each of these acquisitions by Mariner is being accounted for under
the purchase method of accounting. All of the entities included in the unaudited
pro forma combined financial information have December 31 fiscal year ends.
The unaudited pro forma combined balance sheet as of March 31, 1996 gives
effect to the 1996 Florida Acquisition and the issuance of the Notes and the
application of the estimated net proceeds therefrom as if they had been
consummated on March 31, 1996. This balance sheet combines the historical
balance sheets as of March 31, 1996 of the Company and Regency. The Company's
balance sheet as of March 31, 1996 reflects the Heritage Acquisition and the CSI
Merger, which were completed prior to such date.
The unaudited pro forma combined statement of operations for the three
months ended March 31, 1996 gives effect to the 1996 Florida Acquisition and the
issuance of the Notes and the application of the estimated net proceeds
therefrom as if they had been consummated on January 1, 1996. This statement of
operations combines the statements of operations for the three months ended
March 31, 1996 of the Company and Regency. The Company's statement of operations
for the three months ended March 31, 1996 reflects the results of operations of
the Heritage Facilities and the CSI Entities from the dates of their
acquisition.
The unaudited pro forma combined statement of operations for the year ended
December 31, 1995 gives effect to the Recent Acquisitions and the issuance of
the Notes and the application of the estimated net proceeds therefrom as if they
had been consummated on January 1, 1995. This statement of operations combines
the statements of operations for the year ended December 31, 1995 of the
Company, the CSI Entities and Regency and the statement of operations of the
three entities that owned the Heritage Facilities for the nine months ended
September 30, 1995. The Company's statement of operations for the year ended
December 31, 1995 reflects the results of operations of the Heritage Facilities
from the date of their acquisition, October 2, 1995.
The unaudited pro forma combined financial information does not include the
results of operations of the 60-bed skilled nursing facility in St. Petersburg,
Florida, which was acquired by Mariner in March 1995; the 150-bed skilled
nursing facility in Nashville, Tennessee, which was acquired by Mariner in May
1995; the institutional pharmacy operation based in Dallas, Texas, which was
acquired by Mariner in October 1995; the acquisitions of two skilled nursing
facilities in connection with the Heritage Acquisition, both of which were
acquired during the fourth quarter of 1995; or the acquisition of a primary care
physician organization in Florida, which was completed in March 1996; in each
case for periods prior to their respective acquisitions. The unaudited pro forma
combined financial information also does not include any information relating to
[specify deals for which no information included]. Inclusion of this information
would not result in material changes to the information presented.
The pro forma statements may not be indicative of the results that would
actually have been obtained had the acquisitions reflected therein occurred on
the dates indicated or which may be obtained in the future. This unaudited pro
forma combined financial information should be read in conjunction with the
historical financial statements and related notes of the Company and the
historical financial statements and related notes of the CSI Entities, Regency
and the entities that previously owned the Heritage Facilities, which are
included or incorporated by reference in this Prospectus.
P-3
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 FLORIDA ACQUISITION NOTES OFFERING
------------------------ --------------
PRO FORMA PRO FORMA NOTES PRO FORMA
MARINER REGENCY ADJUSTMENTS COMBINED OFFERING COMBINED
------- ------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents .................. $ 2,184 $ 2,928 $(4,744)(a) $ 368 $7,918(j) $ 8,286
Accounts receivable, net ................... 108,556 2,690 111,246 111,246
Estimated settlements due from third
parties .................................. 27,375 797 28,172 28,172
Prepaid expenses and other current assets .. 14,307 132 14,439 14,439
Deferred income tax benefit ................ 9,218 -- 9,218 9,218
----- ----- ------ ----- ------ -----
Total current assets ................... 161,640 6,547 (4,744) 163,443 $7,918(j) 171,361
Property, plant and equipment, net ............ 308,858 24,305 333,163 333,163
Goodwill ...................................... 159,938 1,271 25,470(a) 186,679 186,679
Intangible and other assets, net .............. 14,524 506 15,030 4,500(j) 19,530
Restricted cash and cash equivalents .......... 1,568 501 2,069 2,069
Other long-term assets ........................ 293 293 293
Deferred income tax benefit ................... 1,556 1,556 1,556
----- ----- ------ ----- ------ -----
Total assets ........................... $648,084 $33,423 $20,726 $702,233 $12,418 $ 714,651
======== ======= ======= ======== ======= =========
Current liabilities:
Current maturities of long-term debt
and capital lease obligations ............ $ 5,359 $ 705 $ 6,064 $ (204) $ 5,860
Accounts payable ........................... 29,850 2,928 32,778 32,778
Accrued payroll ............................ 8,428 319 8,747 8,747
Accrued vacation ........................... 7,246 310 7,556 7,556
Other accrued expenses ..................... 32,410 427 32,837 32,837
Deferred income tax ........................ 987 987 987
Other liabilities .......................... 6,108 6,108 6,108
----- ----- ------ ----- ------ -----
Total current liabilities .............. 90,388 4,689 95,077 (204) 94,873
Long-term debt and capital lease obligations .. 239,302 23,551 23,000(a) 285,853 12,622 298,475
Deferred income taxes ......................... 9,149 2,909 12,058 12,058
Deferred gain ................................. 2,082 -- 2,082 2,082
Redeemable stock and other long term
liabilities ................................. 1,633 -- 1,633 1,633
----- ----- ------ ----- ------ -----
Total liabilities ...................... 342,554 31,149 23,000 396,703 12,418(j) 409,121
------- ------ ------ ------- ------ -------
Stockholders' equity:
Common stock ............................... 285 85 (85)(b) 285 285
Treasury stock .............................
Additional paid-in-capital ................. 307,691 1,345 (1,345)(b) 307,691 307,691
Unearned compensation ...................... (13) -- (13) (13)
Retained earnings (deficit) ................ (2,433) 844 (844)(b) (2,433) (2,433)
----- ----- ------ ----- ------ -----
Total stockholders' equity (deficit) ... 305,530 2,274 (2,274)(b) 305,530 305,530
----- ----- ------ ----- ------ -----
Total liabilities and stockholders'
equity ................................ $648,084 $33,423 $20,726 $702,233 $12,418 $714,651
======== ======= ======= ======== ======= ========
</TABLE>
See accompanying notes.
P-4
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 FLORIDA ACQUISITION NOTES OFFERING
------------------------ --------------
PRO FORMA PRO FORMA NOTES PRO FORMA
MARINER REGENCY ADJUSTMENTS COMBINED OFFERING COMBINED
------- ------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net patient service revenue ............. $132,629 $8,673 $141,302 $141,302
Other income ............................ 2,550 235 (188)(c) 2,597 2,597
----- --- ---- ----- ----- -----
Total operating revenue ................. 135,179 8,908 (188)(c) 143,899 143,899
----- --- ---- ----- ----- -----
Facility operating costs ................ 104,591 7,017 (188)(c) 111,420 111,420
Corporate general and administrative .... 17,227 279 17,506 17,506
Interest expense, net ................... 4,392 520 378(g) 5,290 1,416(j) 6,706
Facility rent expense, net .............. 474 371 845 845
Depreciation and amortization ........... 5,196 421 (80)(g) 5,537 5,537
----- --- ---- ----- ----- -----
Total operating expenses ................ 131,880 8,608 110 140,598 1,416 142,014
----- --- ---- ----- ----- -----
Operating income ........................ 3,299 300 (298) 3,301 (1,416) 1,885
Other income (loss) ..................... -- (39) 39(l) -- --
----- --- ---- ----- ----- -----
Income (loss) before income taxes and
extraordinary item .................... 3,299 261 (259) 3,301 (1,416) 1,885
Net benefit from (provision for) income
taxes ................................. (1,254) (74) 73(i) (1,255) 538(i) (717)
----- --- ---- ----- ----- -----
Income (loss) before extraordinary items 2,045 187 (186) 2,046 (878) 1,168
Extraordinary items, net of income tax
benefit ............................... --
----- --- ---- ----- ----- -----
Net income .............................. $ 2,045 $ 187 $ (186) $ 2,046 $ (878) $ 1,168
======== ====== ======= ======== ======= ========
Income per common share:
Income before extraordinary item ...... $ 0.07 $ 0.07 $ 0.04
======== ======== ========
Net income ............................ $ 0.07 $ 0.07 $ 0.04
======== ======== ========
Weighted average shares outstanding ..... 29,235 29,235 29,235
====== ====== ======
</TABLE>
See accompanying notes.
P-5
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMPLETED ACQUISITIONS
----------------------
PRO FORMA PRO FORMA
MARINER HERITAGE CSI ADJUSTMENTS COMBINED
------- -------- --- ----------- --------
<S> <C> <C> <C> <C> <C>
Net patient service revenue ............................... $337,635 $11,911 $134,738 $ $484,284
Other income .............................................. 17,171 33 8,147 (10,288)(d) 15,063
------ -- ----- ------- ------
Total operating revenue ................................... 354,806 11,944 142,885 (10,288) 499,347
------- ------ ------- ------- -------
Facility operating costs .................................. 276,633 7,321 123,247 (10,288)(d) 396,913
Corporate general and administrative ...................... 39,830 3,138 5,176 (1,157)(e) 46,987
Interest expense, net ..................................... 3,598 1,325 3,973 5,063(f) 13,959
Facility rent expense, net ................................ 1,830 9,750 (8,650)(h) 2,930
Depreciation and amortization ............................. 11,397 405 2,256 3,788(f) 17,846
------ --- ----- ----- ------
Total operating expenses .................................. 333,288 12,189 144,402 (11,244) 478,635
------- ------ ------- ------- -------
Operating income .......................................... 21,518 (245) (1,517) 956 20,712
Other income (loss) ....................................... (6) -- -- -- (6)
------- ------ ------- ------- -------
Income (loss) before income taxes and
extraordinary items ..................................... 21,512 (245) (1,517) 956 20,706
Net benefit from (provision for) income
taxes ................................................... (7,892) -- -- 24(i) (7,868)
------- ------ ------- ------- -------
Income (loss) before extraordinary items .................. 13,620 (245) (1,517) 980 12,838
Extraordinary items, net of income tax
benefit ................................................. (1,138) (1,969) -- 1,969 (1,138)
------- ------ ------- ------- -------
Net income (loss) ......................................... $ 12,482 $(2,214) $ (1,517) $ 2,949 $ 11,700
======== ======= ======== ======== ========
Income per common share:
Income before extraordinary items ...................... $ 0.60 $ 0.45
======== ========
Net income ............................................. $ 0.55 $ 0.41
======== ========
Weighted average shares outstanding ....................... 22,755 28,609
====== ======
</TABLE>
See accompanying notes.
P-6
<TABLE>
<CAPTION>
1996 FLORIDA ACQUISITION NOTES OFFERING
------------------------ --------------
PRO FORMA PRO FORMA NOTES PRO FORMA
REGENCY ADJUSTMENTS COMBINED OFFERING COMBINED
- ------- ----------- -------- -------- --------
<S> <C> <C> <C> <C>
$23,850 $10,056(k) $518,190 $518,190
1,023 (643)(k) 15,443 15,443
----- ---- ------ ------ ------
24,873 9,413 533,633 533,633
----- ---- ------ ------ ------
18,293 8,213(k) 423,419 423,419
1,516 48,503 48,503
1,442 1,511(g) 16,912 5,658(j) 22,570
1,202 4,132 4,132
1,338 28(g) 19,212 19,212
----- ---- ------ ------ ------
23,791 9,752 512,178 5,658 517,836
----- ---- ------ ------ ------
1,082 (339) 21,455 (5,658) 15,797
46 (46)(k) (6) (6)
----- ---- ------ ------ ------
1,128 (385) 21,449 (5,658) 15,791
(486) 204(i) (8,150) 2,150(i) (6,000)
----- ---- ------ ------ ------
642 (181) 13,299 (3,508) 9,791
(283) 283 (1,138) -- (1,138)
----- ---- ------ ------ ------
$359 $ 102 $ 12,161 $ (3,508) $ 8,653
==== ======== ======== ========= ========
$ 0.46 $ 0.34
======== ========
$ 0.43 $ 0.30
======== ========
28,609 28,609
====== ======
</TABLE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(a) Represents pro forma adjustments to reflect the 1996 Florida
Acquisition:
<TABLE>
<S> <C>
Total purchase price ........................................... $ 52,000
Debt assumed ................................................... 24,256
------
Cash required .................................................. 27,744
Available cash used ............................................ 4,744
-----
Additional borrowing required ................................ $ 23,000
========
Total purchase price ........................................... $ 52,000
Less: net book value of assets and liabilities acquired ........ 26,530
------
Goodwill ..................................................... $25,470
=======
</TABLE>
(b) Reflects elimination of 1996 Florida Acquisition equity accounts.
(c) Reflects reversal of management fees charged by Mariner to Regency for
management services in March, 1996.
(d) Reflects reversal of management fees charged by Mariner to CSI for
management services between May 24, 1995 and December 31, 1995.
(e) Represents the elimination of merger costs reflected by CSI as general
and administrative expenses which would not have been incurred by the Company.
(f) Certain expenses have been adjusted to reflect the transactions as
if they had occurred at the beginning of the period presented, as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
COST BASIS 1995
---------- ----
<S> <C> <C> <C>
Completed acquisitions:
Amortization of goodwill over 40 years .............. Heritage $ 9,496 $ 178
CSI 82,817 2,070
Depreciation (approximately 3% per year) ............ Heritage 17,515 394
CSI 126,900 3,807
Less: Historical amortization and depreciation
expense ........................................... (2,661)
------
Incremental increase in amortization and
depreciation expense .............................. $ 3,788
=======
Heritage -- interest expense based on new debt of
$27,011 at 6.43% .................................. 1,303
CSI -- interest expense based on debt increasing to
$134,197 at 6.75% ................................. 9,058
Less: Historical interest expense ................... (5,298)
------
Incremental increase in interest expense ............ $5,063
======
</TABLE>
(g) Certain expenses have been adjusted to reflect the 1996 Florida
Acquisition as if it had occurred at the beginning of the period presented, as
follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
COST BASIS 1995 1996
---------- ---- ----
<S> <C> <C> <C>
Depreciation of fixed assets ................ $24,305 $ 729 182
Amortization of goodwill .................... 25,470 637 159
Less: historical amortization and
depreciation expense ...................... (1,338) (421)
------ ----
Incremental increase in amortization and
depreciation expense ...................... $ 28 $ (80)
======= =====
Interest expense based on additional
debt of $23,000 at 6.57% .................. $ 1,511 $ 378
Less: historical interest expense ...........
Incremental increase in interest expense ....
</TABLE>
P-8
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION -- (CONTINUED)
(h) Adjusts facility rent to eliminate rent expense for facilities
previously managed under operating lease agreements which the Company acquired
under capital leases and to reflect rent expense on two facilities that Mariner
will lease under operating lease agreements with CSI affiliates which were not
included in the Mariner or CSI historical financial statements:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
----
<S> <C>
CSI operating leases ....................................... $(9,750)
Operating leases assumed by Mariner ........................ 1,100
-----
Pro-forma adjustment ....................................... $(8,650)
=======
</TABLE>
(i) Represents pro forma estimated income taxes payable on the operations of
the entities acquired, using Mariner's effective tax rate.
(j) Reflects the offering of the Notes resulting in a net increase in debt
of $12,418:
<TABLE>
<CAPTION>
<S> <C>
Notes issued ............................................... $ 150,000
Notes issue costs .......................................... (4,500)
Debt discount .............................................. (335)
Cash increase .............................................. (7,918)
------
Debt repaid ................................................ $137,247
========
</TABLE>
Incremental interest on the debt is calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1995 1996
---- ----
<S> <C> <C>
Interest on the Notes .......................... $ 14,250 $ 3,563
Interest on debt repaid ........................ (9,076) (2,269)
------ ------
Incremental interest ........................... 5,174 1,294
Amortization of Notes issuance costs ........... 450 113
Amortization of debt discount .................. 34 9
-- -
$ 5,658 $ 1,416
======== ========
</TABLE>
(k) Represents amounts related to facilities purchased as part of the 1996
Florida Acquisition which were acquired by Regency subsequent to December 31,
1994. Four facilities were acquired by Regency in June 1995 and one in January
1996.
<TABLE>
<CAPTION>
ST. OPERATION NOT NET
P&L PALMETTO BONIFAY AUGUSTINE BRADENTON OLATHE TOTAL ACQUIRED ADJUSTMENT
--- -------- ------- --------- --------- ------ ----- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net patient service revenue ... $2,087 $2,391 $2,423 $441 $2,714 $10,056 $10,056
Other revenue ................. 8 12 10 5 14 49 $(692) (643)
Facility operating costs
(excluding management fees) . 1,663 1,866 1,945 296 2,443 8,213 8,213
Other income .................. -- -- -- -- -- -- (46) (46)
</TABLE>
(l) Represents net loss generated from ventures not acquired by
Mariner.
P-9
================================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE EXCHANGE NOTES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS NOT BEEN A CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary ........................................................ 3
Risk Factors .............................................................. 13
The Company ............................................................... 21
Use of Proceeds ........................................................... 21
Capitalization ............................................................ 22
Exchange Offer ............................................................ 23
Certain Federal Income Tax Consequences ................................... 30
Selected Consolidated Financial Data ...................................... 31
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .............................................................. 33
Business .................................................................. 44
Management ................................................................ 56
Description of the Exchange Notes ......................................... 58
Description of Other Indebtedness ......................................... 87
Plan of Distribution ...................................................... 89
Legal Matters ............................................................. 90
Experts ................................................................... 90
Available Information ..................................................... 91
Incorporation of Certain Documents by
Reference ............................................................... 91
Index to Financial Statements ............................................. F-1
Unaudited Pro Forma Combined Financial
Statements .............................................................. P-1
</TABLE>
================================================================================
================================================================================
[Insert Logo]
MARINER HEALTH
GROUP, INC.
----------
PROSPECTUS
----------
OFFER TO EXCHANGE ITS
9 1/2 % SENIOR SUBORDINATED NOTES DUE 2006,
SERIES B, WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, FOR ANY
AND ALL OF ITS OUTSTANDING 9 1/2 % SENIOR
SUBORDINATED NOTES DUE 2006, SERIES A
, 1996
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law, the Company's certificate of
incorporation and by-laws provide for indemnification of the Company's directors
and officers for liabilities and expenses that they may incur in such
capacities. In general, directors and officers are indemnified with respect to
actions taken in good faith in a manner reasonably believed to be in, or not
opposed to, the best interests of the Company, and with respect to any criminal
action or proceeding, actions that the indemnitee had no reasonable cause to
believe were unlawful. Reference is made to the Company's restated certificate
of incorporation filed as Exhibits 3.2 and 4.2 to the Company's Registration
Statement on Form S-1 (no. 33-60736), the Company's certificate of amendment to
the restated certificate of incorporation filed as Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1994 and
the Company's by-laws filed as Exhibits 3.2 and 4.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993 and incorporated
herein by reference.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
4.1, -- Indenture dated as of April 4, 1996 between Mariner Health Group,
10.1 Inc. and State Street Bank and Trust Company (Incorporated by reference
to Exhibit 4.1, 10.1 to the Company's Current Report on Form
8-K dated April 4, 1996).
+4.2 -- Form of 9 1/2 % Senior Subordinated Note due 2006, Series B.
5 -- Opinion of Testa, Hurwitz & Thibeault, LLP.
10.2 -- Purchase Agreement dated March 29, 1996 among Mariner Health Group,
Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Alex.
Brown & Sons Incorporated, CS First Boston Corporation, Hambrecht
& Quist LLC and Salomon Brothers Inc (Incorporated by reference
to Exhibit 10.2 to the Company's Current Report on Form 8-K dated
April 4, 1996).
10.3 -- Registration Rights Agreement dated as of April 4, 1996 among Mariner
Health Group, Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Alex. Brown & Sons Incorporated, CS First Boston
Corporation, Hambrecht & Quist LLC and Salomon Brothers Inc
(Incorporated by reference to Exhibit 10.3 to the Company's Current
Report on Form 8-K dated April 4, 1996).
12 -- Statement of Computation of Ratios.
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Ernst & Young LLP.
23.3 -- Consent of Coopers & Lybrand L.L.P.
23.4 -- Consent of Coopers & Lybrand L.L.P.
23.5 -- Consent of Bennett Thrasher & Co. P.C.
23.6 -- Consent of Ryun, Givens, Wenthe & Co., P.L.C.
23.7 -- Consent of Ryun, Givens, Wenthe & Co., P.L.C.
23.8 -- Consent of Ryun, Givens, Wenthe & Co., P.L.C.
23.9 -- Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 5).
+24 -- Power of Attorney.
+25 -- Statement of Eligibility of Trustee.
</TABLE>
II-1
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
+99.1 -- Form of Letter of Transmittal.
+99.2 -- Form of Notice of Guaranteed Delivery
+99.3 -- Form of Instructions to Registered Holder.
</TABLE>
- ---------
+ Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
Not Applicable
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
Company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO.1 TO THE REGISTRATION STATEMENT ON
FORM S-4 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF NEW LONDON, CONNECTICUT ON JUNE 12, 1996.
MARINER HEALTH GROUP, INC.
By: /s/ JEFFREY W. KINELL
-------------------------
JEFFREY W. KINELL
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO.1 TO THE REGISTRATION STATEMENT ON FORM S-4 HAS BEEN SIGNED BELOW
BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
<S> <C> <C>
/s/ ARTHUR W. STRATTON, JR.* Chairman, Chief Executive Officer June 12, 1996
-------------------------- and Director (Principal Executive
ARTHUR W. STRATTON, JR. Officer)
/s/ JEFFREY W. KINELL Executive Vice President, June 12, 1996
-------------------------- Treasurer and Chief Financial
JEFFREY W. KINELL Officer (Principal Financial and
Accounting Officer)
/s/ DAVID C. FRIES* Director June 12, 1996
--------------------------
DAVID C. FRIES
/s/ CHRISTOPHER GRANT, JR.* Director June 12, 1996
--------------------------
CHRISTOPHER GRANT, JR.
/s/ STILES A. KELLETT, JR.* Director June 12, 1996
--------------------------
STILES A. KELLETT, JR.
/s/ JOHN F. ROBENALT* Director June 12, 1996
--------------------------
JOHN F. ROBENALT
*By: /s/ JEFFREY W. KINELL
--------------------
JEFFREY W. KINELL
ATTORNEY-IN-FACT
</TABLE>
II-3
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE NUMBER
<S> <C> <C>
4.1, -- Indenture dated as of April 4, 1996 between Mariner
10.1 Health Group, Inc. and State Street Bank and Trust
Company (Incorporated by reference to Exhibit 4.1, 10.1 to the
Company's Current Report on Form 8-K dated April 4, 1996)
+4.2 -- Form of 9 1/2 % Senior Subordinated Note due 2006, Series B
5 -- Opinion of Testa, Hurwitz & Thibeault
10.2 -- Purchase Agreement dated March 29, 1996 among Mariner
Health Group, Inc. and Merrill Lynch, Pierce, Fenner
& Smith Incorporated, Alex. Brown & Sons Incorporated,
CS First Boston Corporation, Hambrecht & Quist LLC and
Salomon Brothers Inc (Incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form
8-K dated April 4, 1996)
10.3 -- Registration Rights Agreement dated as of April 4, 1996
among Mariner Health Group, Inc. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Alex. Brown & Sons
Incorporated, CS First Boston Corporation, Hambrecht
& Quist LLC and Salomon Brothers Inc (Incorporated by
reference to Exhibit 10.3 to the Company's Current Report
on Form 8-K dated April 4, 1996)
12 -- Statement of Computation of Ratios
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Ernst & Young LLP
23.3 -- Consent of Coopers & Lybrand L.L.P.
23.4 -- Consent of Coopers & Lybrand L.L.P.
23.5 -- Consent of Bennett Thrasher & Co. P.C.
23.6 -- Consent of Ryun, Givens, Wenthe & Co., P.L.C.
23.7 -- Consent of Ryun, Givens, Wenthe & Co., P.L.C.
23.8 -- Consent of Ryun, Givens, Wenthe & Co., P.L.C.
23.9 -- Consent of Testa, Hurwitz & Thibeault, LLP (included
in Exhibit 5)
+24 -- Power of Attorney
+25 -- Statement of Eligibility of Trustee
+99.1 -- Form of Letter of Transmittal
+99.2 -- Form of Notice of Guaranteed Delivery
+99.3 -- Form of Instructions to Registered Holder
</TABLE>
- -----------
+ Previously filed.
----------------------
TESTA, HURWITZ & THIBEAULT, LLP
----------------------
ATTORNEYS AT LAW
HIGH STREET TOWER, 125 HIGH STREET
OFFICE (617) 248-7000 BOSTON, MASSACHUSETTS 02110 FAX (617) 248-7100
June 12, 1996
Mariner Health Group, Inc.
125 Eugene O'Neill Drive
New London, CT 06320
Ladies and Gentlemen:
We are acting as counsel for Mariner Health Group, Inc., a Delaware
corporation (the "Company"), in connection with the registration on a
Registration Statement on Form S-4 (No. 333-4266) (the "Registration Statement")
and the prospectus forming a part thereof (the "Prospectus") under the
Securities Act of 1933, as amended, of $150,000,000 aggregate principal amount
of the Company's 9 1/2% Senior Subordinated Notes due 2006, Series B (the
"Exchange Notes") proposed to be issued under an Indenture dated as of April 4,
1996 (the "Indenture") between the Company and State Street Bank and Trust
Company, as trustee, in exchange for the Company's 9 1/2% Senior Subordinated
Notes due 2006, Series A (the "Notes").
We have examined such documents, records and matters of law as we have
deemed necessary for purposes of this opinion. We have assumed that the Exchange
Notes will be sold as set forth in the Registration Statement, the Prospectus
and the Letter of Transmittal set forth as an exhibit to the Registration
Statement. We have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals and the conformity to
original documents of all documents submitted to us as copies, whether certified
or not. We have assumed the conformity of the certificates for the Exchange
Notes to the specimen of the certificate which is included as an exhibit to the
Registration Statement. Our opinions expressed herein with respect to the
validity and binding effect of the Exchange Notes are qualified to the extent
that the validity and binding effect thereof may be limited by (i) applicable
bankruptcy, reorganization, arrangements, insolvency, moratorium or similar laws
affecting the enforcement of creditors' rights generally as at the time in
effect and (ii) general principles of equity (whether considered in a proceeding
at law or in equity).
We are members only of the Bar of the Commonwealth of Massachusetts and are
not experts in, and express no opinion regarding, the laws of any jurisdiction
other than the Commonwealth of Massachusetts and the United States of America,
and the General Corporation Law of the State of Delaware.
Based upon and subject to the foregoing, we are of the opinion that the
Exchange Notes have been duly authorized and, when duly executed and
authenticated in accordance with the terms of the Indenture and delivered in
exchange for the Notes as contemplated in the Prospectus, will be valid and
binding obligations of the Company.
------------------------
TESTA, HURWITZ & THIBEAULT, LLP
------------------------
Mariner Health Group, Inc.
June 12, 1996
Page 2
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to us under the caption "Legal Matters" in the
Registration Statement.
Very truly yours,
/s/ TESTA, HURWITZ & THIBEAULT, LLP
EXHIBIT 12
MARINER HEALTH GROUP, INC.
COMPUTATION OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Three Three Three
Fiscal Year Months Months Months
Fiscal Year Ended December 31, Ended Ended Ended Ended
------------------------------------ December 31, March 31, March 31, March 31,
1991 1992 1993 1994 1995 1995 1995 1996 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pretax income from continuing
operations $(1,594) $ 4,945 $(7,182) $12,869 $21,518 $20,706 $7,495 $3,299 $1,855
Fixed charges:
Interest, net 10,356 10,113 7,379 1,819 3,598 13,959 279 4,392 6,706
Amortization of deferred financing
costs 200 399 200 200 80 195 249
Amortization of deferred gain 304 905 372 372 80 40 40
Rental Expense, net 308 307 1,079 1,739 1,830 3,032 355 474 845
------- ------- ------- ------- ------- ------- ------ ------ ------
Total fixed charges 10,664 10,420 8,962 4,862 6,000 17,563 794 5,101 7,840
------- ------- ------- ------- ------- ------- ------ ------ ------
9,070 15,365 1,780 17,731 27,518 38,269 8,289 8,400 9,695
------- ------- ------- ------- ------- ------- ------ ------ ------
Ratio of earnings to fixed charges 0.9 1.5 0.2 3.6 4.6 2.2 10.4 1.6 1.2
======= ======= ======= ======= ======= ======= ====== ====== ======
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-4 (File No.
333-4266) of our report dated May 30, 1996, on our audits of the financial
statements of Mariner Health Group, Inc. and Subsidiaries. We also consent to
the reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
June 11, 1996
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in Amendment No. 1 to the
Registration Statement on Form S-4 of Mariner Health Group, Inc. and in the
related Prospectus of our report dated February 22, 1994, with respect to the
consolidated financial statements of Pinnacle Care Corporation, which report
appears in Mariner Health Group, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1995, as amended, filed with the Securities and Exchange
Commission.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
June 10, 1996
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-4 (File No.
333-4266) of our report dated March 28, 1996, on our audit of the financial
statements of certain assets and liabilities of Convalescent Services, Inc. and
Affiliates acquired by Mariner Health Group, Inc. on January 2, 1996. We also
consent to the reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
June 11, 1996
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-4 (File No.
333-4266) of our report dated March 31, 1995, on our audits of the financial
statements of Convalescent Services, Inc. and Affiliates. We also consent to
the reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
June 11, 1996
BENNETT THRASHER & CO.
---------------------------------------------------------
A PROFESSIONAL CORPORATION CERTIFIED PUBLIC ACCOUNTANTS
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Amendment No. 1 to the
Registration Statement on Form S-4 (No. 333-4266) of Mariner Health Group, Inc.
of our report dated February 7, 1996 on our audit of the financial statements of
Regency Health Care Centers, Inc. and subsidiaries as of December 31, 1995 and
1994 and for the years then ended and to reference to our Firm under the caption
"Experts" in the Prospectus.
/s/ Bennett Thrasher & Co. P.C.
-------------------------------
BENNETT THRASHER & CO. P.C.
Atlanta, Georgia
June 10, 1996
115 Perimeter Center Place - Suite 100 - South Terraces - Atlanta, Georgia 30346
770 396 2200 - FAX 390 0394
RYUN, GIVENS, WENTHE & CO., P.L.C.
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement on
Form S-4 of Mariner Health Group, Inc. of our report dated March 28, 1995
relating to the financial statements of Heritage Health Care Centers of Central
Florida, Inc. for the period from inception (March 15, 1993) to December 31,
1994 which report appears in Mariner Health Group, Inc.'s Current Report on Form
8-K/A filed with the Securities and Exchange Commission on November 28, 1995
pursuant to the Securities Exchange Act of 1934. We also consent to the
reference to us under the heading "Experts" in the Prospectus, which is part of
this Registration Statement.
RYUN, GIVENS, WENTHE & CO., P.L.C.
/s/ RYUN, GIVENS, WENTHE & CO., P.L.C.
--------------------------------------
Certified Public Accountants
June 10, 1996
Certified Public Accountants
- --------------------------------------------------------------------------------
Regency West 7, Suite 304 Members of the SEC and Private Companies
4400 Westown Parkway Practice Sections of the Division for CPA
West Des Moines, Iowa 50266-6756 Firms of The American Institute of Certified
515-225-3141 Public Accountants
515-224-1233 Fax
RYUN, GIVENS, WENTHE & CO., P.L.C.
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement on
Form S-4 of Mariner Health Group, Inc. of our report dated March 17, 1995
relating to the financial statements of Heritage Health Care Centers of Baker
County, Inc. for the years ended December 31, 1994 and 1993 which report appears
in Mariner Health Group, Inc.'s Current Report on Form 8-K/A filed with the
Securities and Exchange Commission on November 28, 1995 pursuant to the
Securities Exchange Act of 1934. We also consent to the reference to us under
the heading "Experts" in the Prospectus, which is part of this Registration
Statement.
RYUN, GIVENS, WENTHE & CO., P.L.C.
/s/ RYUN, GIVENS, WENTHE & CO., P.L.C.
--------------------------------------
Certified Public Accountants
June 10, 1996
Certified Public Accountants
- --------------------------------------------------------------------------------
Regency West 7, Suite 304 Members of the SEC and Private Companies
4400 Westown Parkway Practice Sections of the Division for CPA
West Des Moines, Iowa 50266-6756 Firms of The American Institute of Certified
515-225-3141 Public Accountants
515-224-1233 Fax
RYUN, GIVENS, WENTHE & CO., P.L.C.
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement on
Form S-4 of Mariner Health Group, Inc. of our report dated March 17, 1995
relating to the financial statements of Inverness Health Care Center, A Limited
Partnership d/b/a Heritage Health Care Center for the years ended December 31,
1994 and 1993 which report appears in Mariner Health Group, Inc.'s Current
Report on Form 8-K/A filed with the Securities and Exchange Commission on
November 28, 1995 pursuant to the Securities Exchange Act of 1934. We also
consent to the reference to us under the heading "Experts" in the Prospectus,
which is part of this Registration Statement.
RYUN, GIVENS, WENTHE & CO., P.L.C.
/s/ RYUN, GIVENS, WENTHE & CO., P.L.C.
--------------------------------------
Certified Public Accountants
June 10, 1996
Certified Public Accountants
- --------------------------------------------------------------------------------
Regency West 7, Suite 304 Members of the SEC and Private Companies
4400 Westown Parkway Practice Sections of the Division for CPA
West Des Moines, Iowa 50266-6756 Firms of The American Institute of Certified
515-225-3141 Public Accountants
515-224-1233 Fax
