SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): June 13, 1996
Mariner Health Group, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 0-21512 06-1251310
- ---------------------------- ------------ -------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
125 Eugene O'Neill Drive, New London, Connecticut 06320
- ------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (860) 701-2000
---------------
-2-
ITEM 5. OTHER EVENTS.
This Current Report on Form 8-K of Mariner Health Group, Inc. ("Mariner" or
the "Company") is being filed to (i) disclose the consolidated balance sheets of
Mariner as of December 31, 1994 and 1995 and the related consolidated statements
of operations, cash flows and stockholder's equity for each of the three years
in the period ended December 31, 1995, which have been restated to give
retroactive effect to the merger with MedRehab, Inc., which has been accounted
for as a pooling of interests, (ii)supplementally certain historical financial
information relating to Regency Health Care Centers, Inc. ("Regency"), which was
acquired by Mariner in May 1996, and (iii) disclose certain updated pro forma
information relating to the Company and its recent acquisition.
-3-
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired. None.
(b) Pro Forma Financial Information. None.
(c) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
99.1 The following audited financial statements of Mariner,
together with the report thereon manually signed by Coopers
& Lybrand L.L.P.:
Consolidated Balance Sheets as of December 31, 1994 and 1995
Consolidated Statements of Operations for the years ended
December 31, 1993, 1994 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1994 and 1995
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1993, 1994 and 1995
Notes to Consolidated Financial Statements
99.2 The following unaudited interim financial statements of Regency:
Balance Sheets as of March 31, 1996 and 1995
Statements of Operations for the three months ended
March 31, 1996 and 1995
Statements of Cash Flows for the three months ended
March 31, 1996 and 1995
Notes to Financial Statements
-4-
99.3 The following unaudited pro forma combined financial statements:
Pro Forma Combined Balance Sheet as of March 31, 1996
Pro Forma Combined Statement of Operations for the three
months ended March 31, 1996
Pro Forma Combined Statement of Operations for the year
ended December 31, 1995
Notes to Unaudited Pro Form Combined Financial Information
</TABLE>
-5-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MARINER HEALTH GROUP, INC.
Dated: June 13, 1996 By: /s/ Jeffrey W. Kinell
---------------------------------------
Jeffrey W. Kinell
Executive Vice President, Treasurer
and Chief Financial Officer
-6-
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
99.1 The following audited financial statements of Mariner,
together with the report thereon manually signed by Coopers
& Lybrand L.L.P.:
Consolidated Balance Sheets as of December 31, 1994 and 1995
Consolidated Statements of Operations for the years ended
December 31, 1993, 1994 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1994 and 1995
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1993, 1994 and 1995
Notes to Consolidated Financial Statements
99.2 The following unaudited interim financial statements of Regency:
Balance Sheets as of March 31, 1996 and 1995
Statements of Operations for the three months ended
March 31, 1996 and 1995
Statements of Cash Flows for the three months ended
March 31, 1996 and 1995
Notes to Financial Statements
99.3 The following unaudited pro forma combined financial statements:
Pro Forma Combined Balance Sheet as of March 31, 1996
Pro Forma Combined Statement of Operations for the three
months ended March 31, 1996
Pro Forma Combined Statement of Operations for the year
ended December 31, 1995
Notes to Unaudited Pro Form Combined Financial Information
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Mariner Health Group, Inc. on Form S-8 (Nos. 33-67628, 33-77762, 33-78880,
33-99642, and 333-2780), Form S-3 (File No. 333-3314) and 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 as of December 31,
1994 and 1995 and for each of the three years in the period ended December 31,
1995, which report is included in this Form 8-K.
Boston, Massachusetts /s/ Coopers & Lybrand L.L.P.
June 11, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE COMPANY'S
FINANCIAL STATEMENTS DATED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,086
<SECURITIES> 0
<RECEIVABLES> 115,530
<ALLOWANCES> 10,078
<INVENTORY> 0
<CURRENT-ASSETS> 126,213
<PP&E> 207,766
<DEPRECIATION> 33,280
<TOTAL-ASSETS> 411,526
<CURRENT-LIABILITIES> 52,065
<BONDS> 0
0
0
<COMMON> 225
<OTHER-SE> 242,167
<TOTAL-LIABILITY-AND-EQUITY> 411,526
<SALES> 354,806
<TOTAL-REVENUES> 354,806
<CGS> 0
<TOTAL-COSTS> 333,288
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,598
<INCOME-PRETAX> 21,512
<INCOME-TAX> 7,892
<INCOME-CONTINUING> 13,620
<DISCONTINUED> 0
<EXTRAORDINARY> (1,138)
<CHANGES> 0
<NET-INCOME> 12,482
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
</TABLE>
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
REGENCY HEALTH CARE CENTERS, INC. AND SUBSIDIARIES
BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
(In Thousands)
<TABLE>
<CAPTION>
ASSETS
1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,928 $ 4,093
Investments - 668
Accounts receivable 2,690 2,418
Estimated settlements due from third party payors 797 149
Income tax refunds receivable - 52
Current portion of notes receivable from shareholders - 25
Due from affiliates 7 55
Other current assets 125 388
------ -------
Total current assets 6,547 7,848
------ -------
PROPERTY AND EQUIPMENT, less accumulated depreciation
and amortization 24,305 23,857
------ -------
OTHER ASSETS
Notes receivable from shareholders, less current portion - 225
Deferred loan costs, less accumulated amortization 506 541
Debt service funds 501 704
Investments in partnerships 45 359
Goodwill, less accumulated amortization 1,271 1,283
Other assets 248 357
------ -------
2,571 3,469
------ -------
$33,423 $35,174
======= =======
See accompanying notes to financial statements.
</TABLE>
REGENCY HEALTH CARE CENTERS, INC. AND SUBSIDIARIES
BALANCE SHEETS (CONTINUED)
MARCH 31, 1996 AND DECEMBER 31, 1995
(In Thousands, except share and per share data)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
1996 1995
---- ----
CURRENT LIABILITIES
<S> <C> <C>
Current portion of long-term debt $ 705 $ 753
Accounts payable 2,928 2,412
Accrued payroll and related costs 319 575
Accrued vacation 310 280
Other accrued expenses 371 1,497
Income taxes payable 56 -
Due to affiliates - 78
------- -------
Total current liabilities 4,689 5,595
------- -------
LONG-TERM DEBT, less current portion 23,551 24,549
------- -------
DEFERRED INCOME TAXES 2,909 2,943
------- -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 10,000,000 shares
authorized, 8,500,000 issued and outstanding 85 85
Additional paid-in capital 1,345 1,345
Retained earnings 844 657
------- -------
Total shareholders' equity 2,274 2,087
------- -------
$33,423 $35,174
======= =======
See accompanying notes to financial statements.
</TABLE>
REGENCY HEALTH CARE CENTERS, INC. AND SUBSIDIARIES
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(In Thousands)
<TABLE>
<CAPTION>
1996
----
<S> <C>
Revenues
Net patient service revenues $ 8,673
Management fees -
Other operating revenues 235
-------
8,908
-------
Expenses
Facility operations 7,017
Corporate general and administrative 279
Interest expense, net 520
Depreciation and amortization 421
Facility lease expense 371
-------
8,608
-------
Income from operations 300
-------
Other income
Loss on sale of assets (60)
Equity in income of partnership investments 21
-------
(39)
-------
Income before income taxes and extraordinary item 261
Income tax provision 74
-------
Net income $ 187
=======
See accompanying notes to financial statements.
</TABLE>
REGENCY HEALTH CARE CENTERS, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(In Thousands)
<TABLE>
<CAPTION>
1996
----
<S> <C>
Cash flows from operating activities
Net income $ 187
-------
Adjustments to reconcile net income to net cash used in
operating activities
Depreciation and amortization 421
Equity in income of partnership investments (21)
Loss on sale of assets 60
Changes in assets and liabilities, net of effects from
purchase of facility in 1996
Increase in receivables (702)
Decrease in income tax refund receivable 52
Increase in due from affiliates (7)
(Increase) decrease in other current assets 263
Decrease in other assets 7
Increase in accounts payable and
accrued expenses (571)
Increase (decrease) in income taxes payable 56
Decrease in deferred income taxes (34)
-------
Total adjustments (476)
-------
Net cash used in operating activities (289)
-------
Cash flows from investing activities
Cash acquired in purchase of facility 80
Repayment of notes receivable from shareholders 250
Purchase of investments -
Proceeds from sales of investments 66
Additions to property and equipment, net (166)
-------
Net cash provided by (used in) investing activities 230
-------
See accompanying notes to financial statements.
</TABLE>
REGENCY HEALTH CARE CENTERS, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(In Thousands)
<TABLE>
<CAPTION>
1996
----
<S> <C>
Cash flows from financing activities
Payments to affiliates $ (23)
Long-term debt additions -
Payments on long-term debt (1,083)
Distributions to shareholder -
-------
Net cash used in financing activities (1,106)
-------
Net increase (decrease) in cash and cash equivalents (1,165)
Cash and cash equivalents at beginning of period 4,093
-------
Cash and cash equivalents at end of period $ 2,928
=======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 556
=======
Income taxes $ -
=======
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
During the three months ended March 31, 1996, the Company acquired a facility
for approximately $2.2 million. In exchange for the assets, the Company assumed
the mortgage on the facility totaling approximately $2.1 million
During the three months ended March 31, 1996, the Company transferred certain
assets and liabilities to a related party.
See accompanying notes to financial statements.
REGENCY HEALTH CARE CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1:
The consolidated financial statements as of March 31, 1996 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; such adjustments consist of normal, recurring adjustments. 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 with the assumption that users of the interim financial information
have other 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. Contain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. 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 for the
year ended December 31, 1995.
NOTE 2:
At March 31, 1996, Regency had five wholly owned subsidiaries. All five
subsidiaries were acquired or formed subsequent to March 31, 1995. Regency had
no subsidiaries at March 31, 1995.
At March 31, 1996, Regency operated three skilled nursing facilities under
long-term operating leases and owned and operated four skilled nursing
facilities and one assisted living facility.
At March 31, 1995 the Company operated two skilled nursing facilities under
long-term operating leases and managed six skilled nursing facilities and two
assisted living facilities.
NOTE 3:
In February 1996, the Company agreed to sell all of its issued and outstanding
common stock to Mariner Health Group, Inc. for total consideration of
approximately $52,000,00O, consisting of approximately $28,000,000 in cash and
the assumption or repayment of an aggregate principal amount of approximately
$24,000,000 in outstanding indebtedness The transaction closed in May 1996.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial information gives
effect to (i) Mariner's merger (the "CSI Merger") with Convalescent Services,
Inc. ("CSI") in January 1996, (ii) the acquisition by Mariner of six skilled
nursing facilities with an aggregate of 686 beds in central and northern Florida
(the "Heritage Acquisition"), (iii) Mariner's merger (the "MedRehab Merger")
with MedRehab, Inc. in March 1996 and (iv) the acquisition by Mariner of seven
skilled nursing facilities and one assisted living facility with an aggregate of
960 beds in Florida, Tennessee and Kansas (the "1996 Florida Acquisition"). The
CSI Merger, Heritage Acquisition, MedRehab Merger and 1996 Florida Acquisition
are referred to herein as the "Recent Acquisitions."
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 is 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 as if it 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 statements of operations for the year ended
December 31, 1995 and the three months ended March 31, 1996 give effect to the
Recent Acquisitions 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, or the acquisitions of two skilled nursing
facilities in connection with the Heritage Acquisition, both of which were
acquired during the fourth quarter of 1995, 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 the acquisition of
a primary care physician organization in Florida, which was completed in March
1996. 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.
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 FLORIDA ACQUISITION
------------------------
PRO FORMA PRO FORMA
MARINER REGENCY ADJUSTMENTS COMBINED
------- ------- ----------- --------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 2,184 $ 2,928 $(4,744)(a) $ 368
Accounts receivable, net 108,556 2,690 111,246
Estimated settlements due from third parties 27,375 797 28,172
Prepaid expenses and other current assets 14,307 132 14,439
Deferred income tax benefit 9,218 -- 9,218
-------- ------- ------- --------
Total current assets 161,640 6,547 (4,744) 163,443
Property, plant and equipment, net 308,858 24,305 333,163
Goodwill 159,938 1,271 25,470(a) 186,679
Intangible and other assets, net 14,524 506 15,030
Restricted cash and cash equivalents 1,568 501 2,069
Other long-term assets 293 293
Deferred income tax benefit 1,556 1,556
-------- ------- ------- --------
Total assets $648,084 $33,423 $20,726 $702,233
======== ======= ======= ========
Current liabilities:
Current maturities of long-term debt and capital lease
obligations $ 5,359 $ 705 $ 6,064
Accounts payable 29,850 2,928 32,778
Accrued payroll 8,428 319 8,747
Accrued vacation 7,246 310 7,556
Other accrued expenses 32,410 427 32,837
Deferred income tax 987 987
Other liabilities 6,108 6,108
----- -----
Total current liabilities 90,388 4,689 95,077
Long-term debt and capital lease obligations 239,302 23,551 23,000(a) 285,853
Deferred income taxes 9,149 2,909 12,058
Deferred gain 2,082 -- 2,082
Redeemable stock and other long term liabilities 1,633 -- 1,633
-------- ------- --------
Total liabilities 342,554 31,149 23,000 396,703
-------- ------- ------- --------
Stockholders' equity:
Common stock 285 85 (85)(b) 285
Treasury stock
Additional paid-in-capital 307,691 1,345 (1,345)(b) 307,691
Unearned compensation (13) -- (13)
Retained earnings (deficit) (2,433) 844 (844)(b) (2,433)
-------- ------- ------- --------
Total stockholders' equity (deficit) 305,530 2,274 (2,274)(b) 305,530
-------- ------- ------- --------
Total liabilities and stockholders' equity $648,084 $33,423 $20,726 $702,233
======== ======= ======= ========
</TABLE>
See accompanying notes.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
MARINER REGENCY ADJUSTMENTS COMBINED
------- ------- ----------- --------
<S> <C> <C> <C> <C>
Net patient service revenue $132,629 $8,673 $141,302
Other income 2,550 235 (188)(c) 2,597
-------- ------ ----- --------
Total operating revenue 135,179 8,908 (188)(c) 143,899
-------- ------ ----- --------
Facility operating costs 104,591 7,017 (188)(c) 111,420
Corporate general and administrative 17,227 279 17,506
Interest expense, net 4,392 520 378(g) 5,290
Facility rent expense, net 474 371 845
Depreciation and amortization 5,196 421 (80)(g) 5,537
-------- ------ ----- --------
Total operating expenses 131,880 8,608 110 140,598
-------- ------ ----- --------
Operating income 3,299 300 (298) 3,301
Other income (loss) (39) 39(k) --
-------- ------ ----- --------
Income (loss) before income taxes and extraordinary item 3,299 261 (259) 3,301
Net benefit from (provision for) income taxes (1,254) (74) 73(i) (1,255)
-------- ------ ----- --------
Income (loss) before extraordinary items 2,045 187 (186) 2,046
Extraordinary items, net of income tax benefit --
-------- ------ ----- --------
Net income $ 2,045 $ 187 $(186) $ 2,046
======== ====== ===== ========
Income per common share:
Income before extraordinary item $ 0.07 $ 0.07
======== ========
Net income $ 0.07 $ 0.07
======== ========
Weighted average shares outstanding 29,235 $ 29,235
======== ========
</TABLE>
See accompanying notes.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
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.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
REGENCY ADJUSTMENTS COMBINED
- ------- ----------- --------
<S> <C> <C>
$23,850 $10,056(j) $518,190
1,023 (643)(j) 15,443
- ------- ------- --------
24,873 9,413 533,633
- ------- ------- --------
18,293 8,213(j) 423,419
1,516 48,503
1,442 1,511(g) 16,912
1,202 4,132
1,338 28(g) 19,212
- ------- ------- --------
23,791 9,752 512,178
- ------- ------- --------
1,082 (339) 21,455
46 (46)(j) (6)
- ------- ------- --------
1,128 (385) 21,449
(486) 204(i) (8,150)
- ------- ------- --------
642 (181) 13,299
(283) 283 (1,138)
- ------- ------- --------
$ 359 $ (102) $ 12,161
======= ======= ========
$ 0.46
========
$ 0.43
========
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>
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) 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>
(k) Represents net loss generated from ventures not acquired by Mariner.
