UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION
REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE
ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [Fee Required]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from ______ to __________.
Commission file number 0-21512
MARINER HEALTH GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1251310
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
Series A Junior Participating Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock, $.01 par value, of the
registrant held by non-affiliates of the registrant as of March 25, 1997
(computed based on the closing price of such stock on The Nasdaq National Market
on March 25, 1997) was 239,286,870.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of March 25, 1997 was 29,024,883 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, or indicated portions thereof, have been incorporated
herein by reference:
1. Specifically identified information in the Registrant's
definitive proxy statement for its annual meeting of
stockholders which is currently expected to be filed with the
Securities and Exchange Commission within 120 days of December
31, 1996 and is incorporated by reference into Part III
hereof.
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ITEM 1. BUSINESS
Mariner Health Group, Inc. ("Mariner" or the "Company") is a leading
provider of outcomes-oriented, post-acute health care services in selected
markets, with a particular clinical expertise in the treatment of short-stay
subacute patients in cost-effective alternate sites. The Company's services and
products include pre-acute care, inpatient care, comprehensive inpatient and
outpatient rehabilitation services, medical services and products (including
institutional and home pharmacy services, respiratory and infusion therapy and
durable medical equipment), home care and physician services. By providing this
continuum of care in selected markets, the Company believes that it will be
better able to maintain quality of care and control costs while coordinating the
treatment of patients from the onset of illness to recovery. The Company seeks
to cluster facilities and other post-acute health care services around large
metropolitan areas and major medical centers with large acute care hospitals
from which to generate post-acute admissions. Mariner currently operates 79
inpatient facilities and four hospital units with an aggregate of approximately
10,668 beds and 48 outpatient rehabilitation clinics and currently provides
contract rehabilitation services within 429 skilled nursing facilities.
Mariner has established standardized clinical programs based on defined
protocols to address the medical requirements of large groups of patients with
similar diagnoses in a high-quality, cost-effective manner. The Company's
MarinerCare(R) clinical programs, such as the orthopedic recovery, cardiac
recovery and pulmonary management programs, are short-stay regimens based on
defined protocols that address the needs of subacute patients. Subacute patients
are medically stable and generally require three to six hours of skilled nursing
care per day. MarinerCare programs typically involve 20 to 45 days of inpatient
care and utilize the Company's nursing, rehabilitation, pharmacy and other
ancillary medical services, with patients generally discharged directly to their
homes. Mariner is also developing standardized clinical home care programs. The
Company believes that careful adherence to its clinical programs enables it to
produce consistent and measurable clinical and financial outcomes for patients
and payors and to conduct clinical programs consistently in all of its sites.
Using a case management approach, patients' progress is carefully monitored so
that the appropriate level of care is being delivered at the right time and in
the appropriate setting under the applicable clinical program. Mariner believes
that its standardized approaches to delivering care and measuring outcomes are
particularly attractive to managed care organizations and large payors and
positions the Company to contract with payors on a case rate or capitated basis.
BACKGROUND
Traditionally, patients recuperating from a major injury, surgery or
illness remained in general acute care hospitals until they were sufficiently
well to return home. Such stays are relatively expensive, reflecting the cost of
extensive on-site equipment and services that, while necessary for hospitals to
accomplish their primary mission, are not necessary for the recuperation of
medically stable post-acute patients.
Over the past ten years, hospitals have come under increasing pressure
to reduce the length of patient stays as a means of containing costs. Employers
have begun using managed care providers, such as health maintenance
organizations and preferred provider organizations, to limit hospitalization
costs by controlling hospital utilization and by negotiating discounted fixed
rates for hospital services. Traditional third-party indemnity insurers have
begun to limit reimbursement to pre-determined amounts of reasonable charges,
regardless of actual costs, and to increase the co-payments required to be paid
by patients, thereby requiring patients to assume more of the cost of hospital
care. In 1983, Congress sought to contain Medicare hospital costs by adopting a
system based on prospectively determined prices (the "PPS system") rather than
payment of actual costs plus a specified profit. Under the PPS system, hospitals
generally receive a specified reimbursement rate regardless of how long the
patient remains in the hospital or the volume of ancillary services ordered by
the attending physician. The emergence of managed care providers and the
implementation of the PPS system have provided hospitals with an incentive to
discharge patients more quickly.
The increasing desire of payors and managed care organizations to
transfer medically stable patients out of relatively expensive acute care
hospitals to less expensive sites has provided a significant opportunity for
alternate site health care providers. Specialty long-term care hospitals,
rehabilitation hospitals, skilled nursing facilities and
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home health care providers have all been used to reduce the lengths of patient
stays at more expensive general acute care hospitals. Mariner believes that many
traditional health care providers are not well positioned to efficiently provide
health care services to patients who are medically stable and recuperating from
a major injury, surgery or illness.
MARINER'S STRATEGY
Mariner's goal is to be the lowest cost provider of high-quality,
post-acute health care services in its markets with a particular emphasis on
short-stay subacute patients. The Company believes that being the lowest cost
provider will significantly enhance its ability to respond to potential changes
in reimbursement programs and managed care competition, including its ability to
contract with payors on a case rate or capitated basis.
Mariner's strategies to achieve this goal include the following:
Patient-Focused Programmatic Care. Mariner has developed standardized
clinical programs based on defined protocols to address the medical requirements
of large groups of patients with similar diagnoses in a high-quality,
cost-effective manner at alternate site treatment settings. Each clinical
program incorporates an interdisciplinary approach to care and treatment with an
intense focus on rehabilitation and lifestyle retraining with the goal of
guiding patients to the best possible recovery in the shortest period of time
and improving patients' overall functional ability. The Company is also
designing its MarinerCare programs to include home health care. The Company
believes that careful adherence to these clinical programs enables it to better
produce consistent clinical and financial outcomes for patients and payors and
to implement clinical programs consistently in all its sites.
Outcomes and Case Management. The ability to measure clinical and
financial outcomes is central to Mariner's delivery of care. Mariner has
implemented a program to measure patients functional ability on admission, at
discharge and, for certain patients, six weeks after discharge. Each patient's
rehabilitation potential is evaluated using a standardized measurement system,
which rates a patient's independence in performing a number of basic activities
of daily living. This rating system permits Mariner to initially assess whether
the patient will benefit from the Company's programs, document the severity of a
patient's initial impairment and measure the outcome and cost of the patient's
recuperation. Using a case management approach, a patient's progress is
continually monitored so that the appropriate level of care is being delivered
at the right time and in the appropriate setting under the applicable clinical
program. Mariner believes that its standardized approaches to delivering care
and measuring outcomes are particularly attractive to managed care organizations
and large third-party payors because they facilitate such organizations' and
payors' increasing desire to be provided with outcomes data in order to manage
and contain costs. The Company currently plans to spend approximately
$25,000,000 in 1997 to upgrade its information systems in order to enhance its
ability to collect clinical and financial outcomes information on a timely
basis.
Regional Post-Acute Networks of Care. Mariner is organized into five
regions: Florida, Central, Northeast, Mid-Atlantic and Southwest. By providing
directly a broad continuum of care within a region, Mariner positions itself to
coordinate the treatment of patients from the onset of illness to recovery. By
providing this continuum of care in selected markets, the Company believes that
it will be better able to maintain quality of care, control costs and attract
managed care organizations and third-party payors.
Partnering with Key Referral Sources. Utilizing its standardized
clinical programs, regional post-acute networks of care and outcomes management
approach, Mariner seeks to allow patients and payors to coordinate all of their
post-acute health care with Mariner. By entering into arrangements with
physicians, payors and managed care organizations, as well as skilled nursing
facilities and other traditional health care providers, the Company seeks to
position itself to obtain referrals of patients who would benefit from Mariner's
clinical programs and to contract with payors on a case rate or capitated basis.
5
Commitment to Employee Training. Through Mariner University, Mariner
employees participate in extensive Company-sponsored training programs that
focus on Mariner's business philosophy, reimbursement guidelines, teamwork and
execution. The Company's success depends on its ability to deliver standardized
services throughout its markets and to maintain a high quality level of care.
Thus, Mariner is committed to an intense and on-going training process designed
to ensure the integrity and consistency of its clinical programs.
Market Driven Development. The Company introduces its clinical programs
in strategically selected metropolitan areas throughout the United States.
Mariner targets areas with strong potential demand for its services and the
potential for the Company to establish relationships with leading local health
care providers and payors. The Company typically establishes a presence in a
market by acquiring, leasing or managing one or more inpatient facilities. Once
Mariner enters a target market, it seeks to establish other sites and expand the
range of health care services it provides in that market.
As part of its expansion strategy, Mariner may acquire additional
health care facilities and businesses. Potential acquisition candidates include
individual inpatient facilities, businesses that operate multiple inpatient
facilities and other health care services businesses. The Company continuously
identifies and evaluates potential acquisition candidates and in many cases
engages in discussions and negotiations regarding potential acquisitions. There
can be no assurance that any of the Company's discussions or negotiations will
result in an acquisition. Further, if Mariner makes any acquisitions, there can
be no assurance that it will be able to operate any acquired facilities or
businesses profitably or otherwise successfully implement its expansion
strategy.
MARINER CLINICAL PROGRAMS AND SERVICES
MARINERCARE(R) PROGRAMS
Each MarinerCare program is designed to address the medical
requirements of a large group of patients with similar diagnoses in a
high-quality, cost-effective manner. MarinerCare programs are inpatient
short-stay regimens based on defined protocols and utilize various medical
services provided by Mariner. These programs are focused on the needs of
patients who are recuperating from a major injury, surgery or illness, and
incorporate specific patient admission, evaluation and discharge criteria, and
standardized treatment protocols and regimens, which have been developed over
several years based on the Company's clinical experience. Using these criteria,
the Company evaluates which patients would benefit most from its programs prior
to their admission. Upon admission, a care plan and projected discharge date are
established for each patient. Throughout a patient's inpatient stay, the Company
carefully monitors and evaluates the patient's progress and makes adjustments to
the patient's treatment. Educating patients regarding their ailments and
treatments also comprises a part of each program. MarinerCare programs typically
involve inpatient treatment periods of 20 to 45 days. At its inpatient
facilities, the Company offers a mix of MarinerCare programs tailored to serve
the demands of the local markets. In the facilities it acquires, the Company
intends to focus increasingly on treating subacute patients and implementing
appropriate MarinerCare programs or other clinical programs.
The Company currently offers the following MarinerCare programs:
Orthopedic Recovery. Patients who are recovering from orthopedic
surgery (such as joint replacements or amputations) or serious fractures may be
admitted into this MarinerCare program as early as three days after surgery or
injury. These patients typically require comprehensive rehabilitation, including
physical or occupational therapies, following stabilization of their conditions
or after surgery, and may require traction or fixation devices.
6
Cardiac Recovery. Patients who are recuperating from heart attacks or
heart surgery, or associated complications, are provided with the nursing and
rehabilitation services necessary to enable them to enter an outpatient
rehabilitation program.
Pulmonary Management. Patients with acute or chronic lung disease,
including those with tracheotomies and those who are on ventilators, are
provided with short-term intensive programs of pulmonary, physical or
occupational therapies.
Vascular and Wound Management. Patients who are recovering from surgery
for circulatory problems or from difficult-to-heal wounds or burns receive
services designed to further the healing process, such as state-of-the-art
dressing techniques, specialized bed therapies, nutritional support and physical
or occupational therapies.
Oncology Management. Patients who have undergone surgery, chemotherapy,
radiation, immunotherapy or hormone therapy as a result of cancer are provided
with a range of services, including pain management and nutritional and
psychological support.
Stroke Recovery. Patients who are recovering from strokes and require
treatment for related neurological and physical problems are provided with a
range of services, including physical, occupational and speech therapy.
Medically Complex. Under this program, Mariner treats patients with
medical complications that prolong their recuperative period from a major
illness. These secondary complications must be resolved or brought under control
before their primary diagnosis can be addressed. These patients typically
require many ancillary services and therapies. The goal of this program is to
return patients to their homes with or without support services or to have them
re-enter an acute care hospital for additional surgery or treatment.
MARINER REHABILITATION PROGRAMS
Mariner rehabilitation programs are designed to assist skilled nursing
facilities in providing comprehensive rehabilitation services and in attracting
patients who would benefit from these services. The Company provides a
contracting facility with the physical, occupational and speech therapists
necessary to provide comprehensive rehabilitation services to the facility's
patients. In selected facilities, the Company also provides MarinerCare
rehabilitation programs which include case management and quality assurance
services, as well as coordination of admissions functions with key referral
services. The Company also offers consulting services regarding managed care
reimbursement and cost containment strategies to these facilities, including
reimbursement analysis and assistance, preparation of atypical filings and
interim rate requests and subacute feasibility analysis. By utilizing Mariner's
rehabilitation programs, the Company believes that skilled nursing facilities
are able to offer a cost effective rehabilitation program which will make the
facilities service package more attractive to managed care organizations. The
Company currently provides rehabilitation programs for 429 skilled nursing
facilities.
In implementing a facility's rehabilitation programs, therapists screen
each patient in the facility to assess and identify those with functional
problems. A therapist, together with the patient's attending physician and staff
of the facility, designs a plan of care with specific long and short-term goals.
Therapists with specializations appropriate for the patient's condition meet
with the patient on a regular basis and render the prescribed rehabilitation
services. The Company's admissions coordinators assist the facility in working
with local hospitals, payors and managed care organizations to identify and
admit patients who can benefit from the facility's rehabilitation services.
Services are typically rendered in a dedicated room located in the facility
which is equipped with rehabilitation equipment.
In addition to providing comprehensive rehabilitation services at its
inpatient facilities and other skilled nursing facilities, the Company operates
48 outpatient rehabilitation clinics located in metropolitan areas. These
clinics primarily provide routine physical and occupational therapy to patients
who suffer from injuries received in the workplace, accidents and athletic
endeavors and are capable of being treated on an outpatient basis.
OTHER INPATIENT SERVICES
In Mariner's inpatient facilities, all patients receive basic medical
services, including nursing care, special diets, nutritional supplements and
various medical equipment. Inpatient care is provided by registered nurses,
licensed practicing nurses and certified nurses aides under the supervision of a
Director of Nursing. Each facility also contracts with a local licensed
physician to serve as its medical director, and establishes relationships with a
7
number of independent local specialists, who are available to care for the
facility's patients. Each of Mariner's facilities provides a broad range of case
management services over the course of treatment, including admission into the
Company's MarinerCare programs, ongoing medical evaluation, social service
needs, specialty equipment requirements, outcomes measurement, discharge
planning and arrangement for home care.
MEDICAL PRODUCTS AND SERVICES
As part of its strategy of providing a continuum of care, the Company
also offers the following products and services in selected markets:
Pharmacy Services. Mariner provides pharmaceutical goods and services
customized to meet the needs of its patients, and pharmacy consulting services
designed to evaluate, guide and monitor the administration of medication. The
Company currently has pharmacy operations in six states.
Infusion Therapy. The Company provides infusion therapies, including
hydration, total parenteral nutrition, antibiotic, peritoneal dialysis and pain
management therapies. Infusion therapies are often required in treating patients
with chronic infections, digestive disorders, cancer and chronic and severe
pain.
Medical Equipment and Supplies. Mariner provides specialized medical
equipment and supplies, including ventilators, oxygen concentrators, diagnostic
equipment and various types of durable medical equipment. Equipment and supplies
are available to patients both in its inpatient facilities and at home.
Clinical Respiratory Services. The Company provides clinical programs
for managing the pulmonary disease process for patients with acute or chronic
lung diseases. These services include rehabilitation and provision of supplies
and equipment.
HOME CARE
The Company provides skilled nursing, rehabilitation, pharmacy,
infusion therapy and respiratory services and durable medical equipment and
supplies to individuals needing such services in their homes, allowing Mariner
to continue to meet the nursing care needs of patients discharged from its
facilities.
PHYSICIAN SERVICES
Mariner provides management support services designed to allow
physicians to focus on the delivery of quality patient care, while the Company
manages the physicians' practice.
8
SOURCES OF REVENUE
The following table sets forth certain information relating to the
sources of Mariner's revenue for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
Dollars in Thousands
1994 1995 1996
---- ---- ----
$ % $ % $ %
---------- ------------ ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Private Payors (1) $141,709 54% $177,479 50% $221,446 37%
Medicare............. 68,302 26 102,713 29 217,271 37
Medicaid............. 54,133 20 74,614 21 152,092 26
---------- ------------ ------------ ----------- ------------- -------------
Total.................$264,144 100% $354,806 100% $590,809 100%
========== ============ ============ =========== ============= =============
</TABLE>
- -----------------
(1) Includes indemnity insurers, health maintenance organizations, employers,
individuals and other non-governmental payors, payments from skilled
nursing facilities for services performed under rehabilitation management
programs, and revenue classified as "other revenue."
The sources and amounts of Mariner's patient revenues are determined by
a number of factors, including the capacities of its facilities, occupancy rate,
the mix of patients and the rates of reimbursement among payor categories
(private, Medicare and Medicaid). Patient length of stay is critical to the
level of reimbursement Mariner receives for each patient. Shorter-term patients
generally have a larger number of potential payors than do longer-term patients,
who generally depend to a greater extent on Medicaid. Reimbursement levels
generally are linked to the level of care provided, and short-stay recuperating
patients typically are more medically demanding, have higher acuity levels and
require greater ancillary services. In addition, Medicare and, in certain cases,
private payors, typically cease reimbursement after defined lengths of stay or
levels of expenditure, following which Mariner is generally dependent on the
patient's own resources or Medicaid for reimbursement. Once admitted, a patient
can be discharged involuntarily only for limited reasons under Federal and state
laws, which generally do not include access to reimbursement or ability to pay.
The Company's rehabilitation program contracts typically have a term of one
year but frequently include automatic renewals and in general are terminable on
notice of 30 to 90 days by either party. 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 provided by Mariner at
costs in excess of reasonable costs in such customer's market area. In addition,
Mariner 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. However,
the Health Care Finance Administration ("HCFA") has recently published proposed
salary equivalency guidelines. Mariner is currently evaluating the effects of
these new proposals; however any final analysis on the effects of such
guidelines will depend upon the publication of final rates and rules.
Historically, reimbursement denials under these contracts have been
insignificant; however, in light of the changing regulatory environment, there
can be no assurance that this will continue in the future.
Private Payors. Private pay revenues include payments from individuals
and contract payors who pay directly for services without governmental
assistance and certain payments from skilled nursing facilities for services
performed under rehabilitation management programs. Contract payors include
indemnity insurers, health maintenance organizations, preferred provider
organizations, workers' compensation programs and other similar non-governmental
third-party payment sources. Payments from private payors are typically based on
negotiated contracts or on patient-specific terms. Typically, private payor
contracts permit such organizations to place patients in Mariner's facilities
for a negotiated per diem charge that varies with patient category, or for a per
diem base rate
9
plus Mariner's charges for ancillary services. Certain of these contracts
require Mariner to provide specified health care services for a set per diem
payment rate. These contracts are generally automatically renewed annually
unless a party provides written notice. In most of these contracts, either party
may terminate such contract without cause on 90 days' written notice or with
cause on 30 days' written notice. The amount Mariner charges to private patients
in its facilities is not subject to regulatory control in any of the states in
which Mariner operates facilities.
Medicare. Under Medicare, the Federal government provides payment for
skilled nursing care, room and board, therapies, drugs, supplies and other
subacute services provided by Mariner to eligible patients (generally, those
over age 65 and certain disabled persons). After the first 20 days of a
patient's stay, Medicare patients are subject to a 20% co-payment, all or some
of which may be paid by private payors, Medicaid, Medigap insurance or the
patient. Medicare generally does not provide reimbursement for inpatient stays
beyond the first 100 days, but may provide reimbursement for certain therapies
and supplies. Medicare provides Mariner with interim prospective payments during
the year, which are subject to later adjustment to reflect actual allowable
costs. These costs include the reasonable direct and indirect costs (including
depreciation, interest and overhead) of the services furnished at Mariner's
inpatient facilities, subject to prospectively determined ceilings on routine
operating costs except when the facility is granted an exception for the
delivery of atypical services. Medicare does not pay a rate of return on equity
capital. See "Government Regulation."
After the first three full years of a facility's operation, Medicare
reimbursement of routine operating costs is subject to a cap which is related to
regional health care costs. Mariner has received an atypical services exception
for certain of its facilities, which allows payment of the costs over the
ceiling. This exception requires annual Federal approval.
Under arrangements in which the Company bills a skilled nursing
facility for its rehabilitation services on a fee for service basis, Medicare
reimburses the facility based on a reasonable cost standard. Specific guidelines
exist for evaluating the reasonable cost of physical, occupational and speech
therapy services. Medicare applies salary-equivalency guidelines in determining
the reasonable cost of physical therapy services, which is the cost that would
be incurred if the therapist were employed by a nursing facility, plus an amount
designed to compensate the provider for certain general and administrative
overhead costs. Medicare pays for occupational and speech therapy services on a
reasonable cost basis, subject to the so-called "prudent buyer" rule for
evaluating the reasonableness of the costs. The Company's gross margins for its
physical therapy services under the salary equivalency guidelines are
significantly less than for its speech and occupational therapy services under
the "prudent buyer" rule. In addition, Mariner provides certain services between
subsidiary companies, some of which are charged at cost and others of whch are
charged at market rates. Subject to certain exceptions, Medicare's "related
party rule" generally requires that services between subsidiary Companies or
other entities deemed to be related under the rule be charged at cost. Mariner
believes that the services that are charged at market rates qualify for an
exception to Medicare's related party rule. There can be no assurance, however,
that HCFA will accept Mariner's position and the Medicare reimbursement received
for such services may be subject to audit and recoupment in future years. In the
event HCFA does not agree with the Company's position, this may result in a
reduction in reinbursements in the future periods, and may have mutual adverse
effect on the Company's business and results of operations.
In April 1995, HCFA issued a memorandum to its Medicare fiscal
intermediaries as a guideline to assess costs incurred by inpatient providers
relating to payment of occupational and speech language pathology services
furnished under arrangements that include contracts between therapy providers
and inpatient providers. While not binding on the fiscal intermediaries, the
memorandum suggested certain rates to assist the fiscal intermediaries in making
annual "prudent buyer" assessments of speech and occupational therapy rates paid
by inpatient providers. In addition, HCFA has published proposed salary
equivalency guidelines which will update current physical therapy and
respiratory therapy rates and establish new guidelines for occupational therapy
and speech therapy. Mariner is currently evaluating these proposals; however,
Mariner will not be able to determine whether these new proposals will have a
material effect on its rehabilitation operations until the publication of final
rates and rules. Through its intermediaries, HCFA is also subjecting physical
therapy, occupational therapy and speech therapy to a heightened level of
scrutiny resulting in increasing audit activity. A majority of Mariner's
provider and rehabilitation contracts provide for indemnification of the
facilities for potential liabilities in connection with reimbursement for
rehabilitation services. There can be no assurance that actions ultimately taken
by HCFA with regard to reimbursement rates for such therapy services will not
materially adversely affect the Company's results of operations.
During 1996, the Company observed a nationwide change in the practices
of its Medicare fiscal intermediaries which, on behalf of HCFA, have begun to
aggressively and retrospectively change their position on previously approved
costs. This change includes the reclassification of costs from reimbursable to
non-reimbursable and the challenging of payment for costs which had
traditionally been approved. In response to these challenges of the payment of
Medicare costs the Company changed its estimate of required reserves and
provided an additional $10,000,000 reserve for potential lower levels of
Medicare reimbursement. While the Company believes the amount of its reserve to
be sufficient, there can be no assurance that this amount will be adequate that
this amount will be adequate in the future if there is an additional change in
the practices of Mariner's fiscal intermediaries. Accordingly, Mariner may
increase the amount of its reserve based on the practices of its fiscal
intermediaries in the future. Any such increase would adversely effect Mariner's
results of operations.
10
Medicaid. The Medicaid program is designed to provide medical
assistance to individuals unable to afford medical care. Medicaid is a joint
Federal and state program in which states voluntarily participate. Reimbursement
rates, and reimbursement methods and standards, under the Medicaid program are
set by each participating state (with Federal approval as to certain aspects of
the reimbursement methods and standards), and rates and covered services vary
from state to state. In some of the states in which Mariner operates, Mariner's
inpatient facilities are paid a per diem rate for providing services to Medicaid
patients based on the applicable facility's reasonable allowable costs incurred
in providing services plus a return on equity, subject to cost ceilings for both
operating and fixed costs. In some states in which Mariner operates, individual
facilities are reimbursed, in whole or in part, on a prospective rate system.
Retroactive adjustments, if any, are based on a recomputation of the rate based
upon a field audit of the submitted cost report. In other states, each facility
is assigned a range of rates that vary depending on patient acuity and
historical costs. Certain states are studying methods for reducing expenses
under their Medicaid programs; these initiatives could have a material adverse
effect on Medicaid rates applicable to Mariner or cause delays in payment.
Certain states in which Mariner operates have undertaken a study of acuity
levels and are considering changes in their reimbursement systems to take levels
of acuity into account. Mariner cannot currently determine the potential effect
of any such changes.
Audits, Settlements and Reserves. Under current reimbursement
regulations, funds received under Medicaid and Medicare programs are subject to
audit with respect to proper application of the various payment formulas. These
audits can result in retroactive adjustment of payments received from the
program, resulting in either amounts due to the government agency from Mariner
or amounts due Mariner from the government agency. As a result of certain issues
raised by in recent audits, in the third quarter of 1996, the Company changed
its estimate of required reserves and provided an additional $10,000,000
reserves on its estimated settlements from third party payors. There can no
assurance that there will not be additional material adjustments in the future.
MARKETING AND PATIENT ADMISSION
INPATIENT FACILITIES
In marketing MarinerCare programs, the Company pursues a two-pronged
strategy. It markets its facilities, programs and services, first to payors and
managed care organizations at the corporate level and, second, to professionals
responsible for discharging patients at local hospitals at the facility level.
At the corporate level, Mariner's sales personnel seek to establish
relationships with payors and managed care organizations, who are increasingly
important sources of referrals for subacute patients. The Company develops
contractual relationships with such payors and organizations on a local,
regional and national basis.
Each facility maintains admissions coordinators who develop admissions
goals based on the availability of resources for each of its MarinerCare
programs and who call on acute care hospitals to evaluate patients for admission
to Mariner's facilities. The admissions coordinators work closely with
hospitals, payors and managed care organizations to educate them about the
Company's facilities, programs and services and to determine which patients
would benefit from the Company's programs. Patients admitted to Mariner's
facilities are generally discharged to the facility from general acute care
hospitals.
REHABILITATION PROGRAMS
Mariner markets its rehabilitation programs to skilled nursing
facilities primarily through regional administrators, who contact administrators
and other personnel of skilled nursing facilities. The Company seeks to
demonstrate to the administrator of a skilled nursing facility that Mariner
offers a complete solution to the facility's rehabilitation services needs in a
cost-effective manner. Mariner emphasizes that its therapists are based at the
facility and do not move from site to site, resulting in improved consistency
and continuity of patient care. Depending on the facility's needs, Mariner will
also staff the facility's rehabilitation management program with case managers
and admissions, management and marketing personnel, and will provide
reimbursement and other management support services. These individuals work with
the facility's staff to attract subacute patients whose recovery would be
benefited by intensive rehabilitation therapy, with the goal of improving the
utilization of the facility's rehabilitation management program as well as the
facility's other services.
11
QUALITY ASSURANCE
Mariner has developed a comprehensive quality assurance program at all
of its facilities and units. This program requires that each site meet Mariner's
standards, which include comprehensive training requirements and satisfactory
results on patient satisfaction surveys. Mariner's quality assurance program
includes a training program for all new Mariner employees and periodic training
programs for clinical personnel. Mariner believes that its utilization of
standardized protocols facilitates its clinical staffs' training and skill
retention.
Each facility is subject to audit by Mariner's corporate personnel at
least annually to review its compliance with Mariner's standards. Also, Mariner
has developed a patient satisfaction questionnaire which is included in each
patient's discharge package. Facility administrators' performance reviews and
bonuses are dependent in part upon the results of the facility's quality
assurance audit and its patient satisfaction questionnaires.
FACILITIES
The following table provides information by state about each of the
facilities owned, leased and managed by the Company as of March 28, 1997:
<TABLE>
<CAPTION>
OWNED FACILITIES LEASED FACILITIES MANAGED FACILITIES TOTAL
FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Florida Region
Florida 16 1,929 9 1,128 3 445 28 3,502
Southwest Region:
Colorado --- --- 2 237 --- --- 2 237
Kansas 1 100 --- --- --- --- 1 100
Oklahoma --- --- 1 161 --- --- 1 161
Texas 6 952 5 685 1 146 12 1,783
Northeast Region:
Connecticut 2 250 1 90 --- --- 3 340
Massachusetts 6 748 --- --- --- --- 6 748
Mid-Atlantic Region:
Maryland 7 1,191 3 576 2 53 12 1,820
New Jersey --- --- --- --- 1 40 1 40
Pennsylvania 2 205 --- --- 1 30 3 235
West Virginia 1 186 --- --- --- --- 1 186
Central Region:
Georgia 1 165 --- --- --- --- 1 165
Illinois 1 120 --- --- --- --- 1 120
Indiana 1 100 --- --- --- --- 1 100
North Carolina 1 150 --- --- --- --- 1 150
Ohio 1 93 --- --- --- --- 1 93
South Carolina 3 308 --- --- --- --- 3 308
Tennessee 2 210 2 253 --- --- 4 463
Wisconsin 1 117 --- --- --- --- 1 117
------ ------- ------- ------- --------- ------- -------- ----------
Totals 52 6,824 23 3,130 8 714 83 10,668
====== ======= ======= ======= ========= ======= ======== ==========
</TABLE>
The Company also owns its 80,000 square foot headquarters facility
located in New London, Connecticut. The Company's leases are generally
long-term. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" in Item 7 of this
Report.
12
SIGNIFICANT DEVELOPMENTS IN 1996
THE TRANSACTIONS WITH CONVALESCENT SERVICES, INC.
On January 9, 1995, the Company, Convalescent Services, Inc. ("CSI"),
CSI's stockholders (the "CSI Stockholders") and certain of their affiliates
entered into certain agreements governing the merger (the "CSI Merger") of Blue
Corporation, a Georgia corporation and wholly owned subsidiary of the Company
("Merger Sub"), with and into CSI and the acquisition of certain related assets
(the "Transactions"). CSI operated subacute-oriented skilled nursing Facilities
that provided restorative nursing care and specialty medical services, including
rehabilitation programs, respiratory therapy, infusion therapy, wound care
treatment and Alzheimer disease management. 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.
May 1995 Closing. By late April 1995, however, a number of conditions
to the closing of the CSI Merger had not been satisfied. On May 24, 1995, the
parties entered into agreements reflecting the changes to the terms and
conditions of the proposed Transactions and completed certain transactions
related to the proposed Transactions (the "May 1995 Closing"). At the May 1995
Closing, Mariner and CSI entered into a Management Agreement (the "Management
Agreement") pursuant to which Mariner would manage all of CSI's Facilities and
operations. Under the Management Agreement, Mariner would receive a monthly
management fee equal to 6% of the gross operating revenue of the CSI facilities.
In addition, upon termination of the Management Agreement, Mariner would receive
a bonus management fee equal to the net income of the facilities managed by
Mariner during the term of the Management Agreement, except that only 66% of the
net income of The Westbury Place and none of the net income of the Haltom
Convalescent Center would be included in determining the bonus management fee.
The Management Agreement would terminate on the sooner of (1) the closing of the
Transactions, (2) if Mariner's stockholders did not approve the issuance of the
5,853,658 shares of Common Stock in connection with the CSI Merger, (3) January
2, 1996 or (4) if the proposed Transactions were terminated in accordance with
the applicable agreements.
At the May 1995 Closing, Mariner acquired substantially all the assets
of Convalescent Supply Services, Inc. ("CSSI"), a Georgia corporation owned by
Stiles A. Kellett, Jr. and Samuel B. Kellett (the "Kelletts"). Immediately prior
to its acquisition, CSSI provided enteral, urological, wound care and ostomy
products to CSI's facilities. CSSI's principal assets included a five-year
agreement to supply CSI's facilities, accounts receivable, inventories and a
partnership interest in a joint venture that provided pharmacy services in
Florida. The purchase price for CSSI's assets was $6,500,000 in cash and the
assumption of CSSI's trade payables.
In addition, the Kelletts purchased at the May 1995 Closing certain
assets from CSI, which assets are used by the Kelletts in their other business
activities and included an airplane, two cars, certain leases for real property,
a condominium and all leasehold improvements and all personalty incident to
CSI's office space in Atlanta, Georgia, in exchange for the assumption of the
liabilities related to such assets. Finally, Mr. Stiles A. Kellett, Jr. was
appointed as a director of the Company for a term ending at the Company's Annual
Meeting of Stockholders in 1996. At the Annual Meeting of Stockholders in 1996,
Mr. Kellett was elected as a director of Mariner for a three-year term ending in
1999.
January 1996 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 CSI Merger was effected by the filing of a Certificate of
Merger with the Secretary of State of Georgia on January 2, 1996.
Pursuant to the CSI Merger Agreement, all of the issued and outstanding
shares of capital stock of CSI were converted into the right to receive an
aggregate of 5,853,656 shares of Mariner common stock, $.01 par value ("Common
Stock"), and $7,000,000 in cash. As a result of the CSI Merger, the Kelletts
each received 2,072,696 shares of Common Stock.
13
The shares of Common Stock issued in the CSI Merger were not registered
under the Securities Act of 1933 (the "Securities Act") and, consequently,
constitute "restricted securities" as that term is defined in Rule 144 under the
Securities Act. Because the shares of Common Stock received by the former
stockholders of CSI (the "CSI Stockholders") in the CSI Merger are restricted
securities, they will not be eligible for sale under Rule 144 until April 29,
1997 (the effective date of the Rule 144 rule changes), subject to the further
limitations described below, and may be resold in the public market only in
compliance with the registration requirements of the Securities Act or pursuant
to a valid exemption therefrom. The Company and the CSI Stockholders have
entered into (i) a Stockholders Agreement relating to certain voting and stock
transfer matters and (ii) a Registration Rights Agreement granting the CSI
Stockholders certain registration rights with respect to the Common Stock
received by them in the CSI Merger (each described below).
Also on January 2, 1996, Mariner acquired substantially all the assets
of Meadow Rehab Corp., a Georgia corporation owned by the Kelletts ("MRC"). The
assets of MRC consisted of a 50% partnership interest in IHS Rehab Partnership,
Ltd. ("IHS Rehab"), which leases the North Dallas Rehabilitation Hospital in
Dallas, Texas. CSI owns the remaining 50% partnership interest in IHS Rehab. The
purchase price for MRC's assets was $1,600,000 in cash and the Company assumed
MRC's outstanding indebtedness, which amounted to approximately $335,000.
In addition, Mariner acquired the assets that constituted the skilled
nursing facilities known as Arlington Heights Nursing Center in Fort Worth,
Texas, and Randol Mill Manor in Arlington, Texas. Prior to the CSI Merger, these
facilities were leased by CSI from partnerships owned by the Kelletts. The
purchase prices for these facilities aggregated approximately $9.7 million. In
addition, the Company made interest-free loans to the partnerships that owned
Arlington Heights Nursing Center and Randol Mill Manor, with principal amounts
of $955,521 and $663,256, respectively, which mature on May 24, 1999 and 2000,
respectively. The Kelletts have agreed to guaranty the repayment of these loans.
In connection with the CSI Merger, CSI (which as of July 31, 1996
merged with and into another wholly owned subsidiary of Mariner, Mariner Health
Care of Nashville, Inc.) entered into leases on 14 skilled nursing facilities
(collectively, the "Leased Facilities") from partnerships owned or controlled by
the Kelletts (the "Lessors"). Each of the leases for the Leased Facilities (the
"Leases") has a base term of eight years and four months from January 2, 1996 as
well as a number of five-year renewal terms at the option of CSI, except that
the Lease for Centerville Care Center has a term of seven years and four months
with no renewal terms. Each lease provides for a fixed rent, which will not
increase over the base or renewal terms of such Lease. The aggregate annual rent
for the Leased Facilities is approximately $8,040,000. In addition to paying
scheduled rent for each Leased Facility, CSI is required to pay all utilities,
insurance and property taxes and to maintain the Leased Facility, reasonable
wear and tear excepted.
If the Company leases a Leased Facility for all optional renewal terms,
the Compny may purchase such Leased Facility at the end of the last renewal term
for its fair market value, as determined by agreement between the Company and
the applicable Lessor or, absent such agreement, by appraisal at such time. For
each Leased Facility other than Bethany Village Health Care Center and North
Dallas Restorative Care Center, the Company also will have the option (the
"Options") to purchase the Leased Facility for a fixed price during specified
one-year periods for the applicable Lease. The Options are exercisable during
specified periods between 1998 and 2010. The fixed prices are based on
appraisals that estimate the fair market value of each Leased Facility as of the
date the Option for each Leased Facility is first exercisable. The aggregate
estimated fair market value as of the earliest exercise date of the Options of,
and the aggregate purchase price for, the 12 Leased Facilities subject to the
Options is approximately $59,585,000. On May 24, 1995, the Company made a
deposit of an aggregate of $13,155,000 with the Lessors for the Options. If the
Company exercises an Option for a Leased Facility, the portion of such
$13,155,000 deposited by the Company for the Option for that Leased Facility
will be credited toward the purchase price for that Leased Facility. If an
Option is not exercised during the applicable exercise period, the applicable
portion of such deposit will be forfeited by the Company. If an Option is
exercised, approvals from health care regulatory authorities may be required to
consummate the purchase of the Leased Facility.
Stockholders Agreement. Pursuant to the terms of a stockholders
agreement (the "Stockholders Agreement") between Mariner and the CSI
Stockholders, the CSI Stockholders are prohibited from selling any
14
shares of Common Stock beneficially owned by them prior to May 24, 1997. Between
May 24, 1997 and May 24, 1998, the CSI Stockholders are prohibited from selling
more than 50% of the shares of Common Stock beneficially owned by them. After
May 24, 1998, the CSI Stockholders may sell the shares of Common Stock
beneficially owned by them without limitation as to volume imposed by the
Stockholders Agreement. Sales of such shares must otherwise be made in
compliance with the other terms of the Stockholders Agreement.
The Stockholders Agreement prohibits each of Stiles A. Kellett, Jr. and
the trusts for the benefit of his family members that are CSI Stockholders as a
group, and Samuel B. Kellett and the trusts for the benefit of his family
members that are CSI Stockholders as a group, from acquiring, directly,
indirectly or as part of a group, more than 12.5% of the total voting power of
the outstanding voting securities of the Company, without the prior written
consent of the Company. The CSI Stockholders have also agreed not to (1) solicit
or initiate any offer or proposal for a business combination involving the
Company or any of its subsidiaries, or involving the acquisition of a
substantial portion of any of their assets; (2) solicit, or become a participant
in any solicitation of, proxies from any holder of voting securities of the
Company in connection with any vote on any matter; (3) participate in a group
with respect to any voting securities of the Company, other than the group that
currently exists among the CSI Stockholders; or (4) grant any proxies with
respect to any voting securities of the Company to any person, unless such proxy
specifies that the person holding the proxy shall vote in compliance with the
Stockholders Agreement (other than as recommended by the Board), or deposit any
voting securities of the Company in a voting trust or enter into any other
arrangement or agreement with respect to the voting thereof.
In addition, the CSI Stockholders have agreed to grant Mariner a right
of first refusal on any sale, transfer or other disposition of voting securities
of Mariner by a CSI Stockholder or any affiliate of a CSI Stockholder where such
sale, transfer or other disposition involves voting securities of Mariner
representing more than 1% of the then issued and outstanding shares of Common
Stock. The right of first refusal does not, however, apply to sales, transfers
or other dispositions of voting securities of Mariner in registered public
offerings or in transactions pursuant to Rule 144 or Rule 145 under the
Securities Act, if the transferee in such transfer is not known to the CSI
Stockholder.
Under the Stockholders Agreement, an agent designated by the CSI
Stockholders (the "Stockholders Agent") has the right to designate one person to
serve on Mariner's Board of Directors. The director designee must be reasonably
acceptable to the Company. Mariner is obligated to use all reasonable efforts to
cause the designee to be elected as a director. Effective as of June 2, 1995,
Mr. Stiles A. Kellett, Jr. was appointed as a director of the Company for a term
ending at the Company's annual meeting of stockholders in 1996, at which time he
was elected for a three-year term ending at the Company's Annual Meeting of
Stockholders in 1999.
The provisions of the Stockholders Agreement relating to the
Stockholders Agent's right to designate a director and voting matters terminate
on the date on which the CSI Stockholders own less than 5% of the total voting
power of the outstanding voting securities of the Company. All other provisions
of the Stockholders Agreement terminate (1) with respect to Stiles A. Kellett,
Jr. and the trusts for the benefit of his family members that are CSI
Stockholders as a group, on the date on which they own less than 2.5% of the
total voting power of the outstanding voting securities of the Company, and (2)
with respect to Samuel B. Kellett and the trusts for the benefit of his family
members that are CSI Stockholders as a group, on the date on which they own less
than 2.5% of the total voting power of the outstanding voting securities of the
Company.
Registration Rights Agreement. The CSI Stockholders are also entitled
to require the Company to register under the Securities Act the shares of Common
Stock issued to them in the Merger pursuant to a registration rights agreement
(the "Registration Rights Agreement"). The Registration Rights Agreement
provides that if the Company proposes to register shares of Mariner Common Stock
under the Securities Act at any time after May 24, 1997, subject to certain
exceptions, the CSI Stockholders shall be entitled to include the shares of
Common Stock issued to them in the Merger in such registration. If such
registration involves an underwritten public offering, the CSI Stockholders'
rights to include shares is subject to the satisfaction of the rights of the
Company's other stockholders who have contractual registration rights and to the
rights of the managing underwriter of the offering to exclude for marketing
reasons some or all of the CSI Stockholders' shares from such registration.
15
The CSI Stockholders have the additional right under the Registration
Rights Agreement to require the Company to prepare and file on three occasions a
registration statement under the Securities Act with respect to their shares of
Mariner Common Stock. This right is exercisable at any time after May 24, 1997
and, if the person designated by the Stockholders Agent to be nominated for
election as a director of Mariner pursuant to the Stockholders Agreement stands
for election and is not elected, once within 120 days after the meeting at which
such designee is not elected. Except for registrations requested after the
Stockholders Agent's designee is not elected, Mariner is not required to
register more than 50% of the shares of Mariner Common Stock to be issued in the
Merger between May 24, 1997 and May 24, 1998. The Company is required to use all
reasonable efforts to effect such registration, subject to certain conditions
and limitations. Mariner is generally required to bear the expenses of all
registrations under the Registration Rights Agreement, except for underwriter's
discounts and commissions or any stock transfer taxes attributable to the shares
being offered and sold. The CSI Stockholders' right to request such
registrations will terminate when the CSI Stockholders own less than 5% of the
total voting power of the outstanding voting securities of Mariner.
CERTAIN OTHER COMPLETED ACQUISITIONS AND ARRANGEMENTS
Premier. In January 1996, Mariner entered into an agreement to be the
preferred provider of subacute services to Premier, which is one of the largest
hospital-health care alliance in the United States. As the preferred subacute
provider, Mariner may contract individually with member hospitals and systems to
provide subacute services. Pursuant to this arrangement, a Premier 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
Premier-affiliated facilities. None of such performance based warrants became
exercisable in fiscal 1996. The Company recorded a charge of approximately
$850,000 in the first quarter of 1996 as a result of the 210,000 warrants
granted. The Company will receive management fees under the agreements it enters
with Premier-affiliated facilities based on a percentage of such facility's
revenues specified in the agreement.
MedRehab Merger. In March 1996, the Company completed its merger (the
"MedRehab Merger") with MedRehab, Inc. ("MedRehab") which, at the time of the
MedRehab Merger, provided contract physical medicine and rehabilitation services
to approximately 227 sites of which 149 were skilled nursing facilities and the
remaining 78 sites included hospitals and schools.
1996 Florida Acquisition. In May, 1996 the Company completed its
acquisition of a company that operates seven skilled nursing facilities and one
assisted living facility with an aggregate of 960 beds in Florida, Tennessee and
Kansas (the "1996 Florida Acquisition"). All of the issued and outstanding
shares of common stock of that company were converted into the right to receive
an aggregate of approximately $28,050,000 in cash. The Company financed the
consideration paid in the 1996 Florida Acquisition with a portion of the net
proceeds from the sale of its Senior Subordinated Notes and borrowings under its
Credit Facility.
Jacksonville Facility. On October 1, 1996, the Company acquired a
163-bed facility in Jacksonville, Florida. The total purchase price was
$9,850,000. Mariner funded the purchase price by assuming two HUD mortgages in
the aggregate principal amount of approximately $4,236,000. The Company borrowed
$6,500,000 under its Credit Facility to fund the remainder of the cash price and
to replace reserves required by the HUD mortgage agreements.
Allegis. In a two-part closing consummated on October 1, 1996 and
November 1, 1996, Mariner acquired certain assets of Allegis Health Services,
Inc. ("Allegis") and certain of its affiliates. Under the terms of the
acquisition agreement, the Company purchased five inpatient facilities, assumed
two operating leases and one capital lease and purchased Allegis' institutional
pharmacy and its rehabilitation program management subsidiary. The total
purchase price consisted of the assumption of approximately $12,000,000 in debt,
including the capital lease, and $98,000,000 in cash borrowed under its Credit
Facility. The cash portion of the purchase price was adjusted to $100,000,000
based on a multiple of the net operating income of the assets acquired as
defined in the purchase agreement.
Additionally, during the course of 1996, Mariner entered into various
joint venture arrangements for the provision of management services for
physicians; commenced operation of several new home health agencies in Florida
and other states; acquired certificates of need for additional home health
agencies; and has acquired or commenced operations of two new institutional
pharmacies, one of which was acquired in the Allegis acquisition described
above.
16
For certain information regarding completed acquisitions, including
those described above, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" in Item
7 of this Report.
As part of its expansion strategy, Mariner may acquire additional
health care facilities and businesses. Potential acquisition candidates include
individual inpatient facilities, businesses that operate multiple inpatient
facilities and other health care services businesses. The Company continuously
identifies and evaluates potential acquisition candidates and in many cases
engages in discussions and negotiations regarding potential acquisitions. There
can be no assurance that any of the Company's discussions or negotiations will
result in an acquisition. Further, if Mariner makes any acquisitions, there can
be no assurance that it will be able to operate any acquired facilities or
businesses profitably or otherwise successfully implement its expansion
strategy. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" found in Item 7 to this
Report.
COMPETITION
Mariner's subacute care facilities compete primarily on a local and
regional basis with other skilled care providers, including general and chronic
care hospitals, skilled nursing facilities, rehabilitation centers and other
subacute care providers. Many of such providers currently have underutilized
facilities and are expanding into subacute care by converting some or all of
such facilities to subacute care. In particular, a number of nursing care
facilities and general acute care hospitals are adding subacute care units. In
addition, a number of services provided by the Company compete with services
traditionally provided by general acute care hospitals, rehabilitation
facilities and other providers. Some competing providers have greater financial
resources than those of the Company or may operate on a non-profit basis or as
charitable organizations. The degree of success with which Mariner's facilities
compete varies from location to location and depends on a number of factors. The
Company believes that the programs and quality of care provided, the reputation
of its facilities and the level of its charges for services are significant
competitive factors. Mariner seeks to meet competition through its patient focus
and the relatively low cost of its programs.
Mariner's competition in the rehabilitation business in most markets
reflects the fragmented nature of the rehabilitation services industry. There
are numerous providers of contract rehabilitation services, some of which merely
provide a therapist to a nursing facility and others of which provide total
rehabilitation program management like the Company. Most of the Company's
clinics compete directly or indirectly with outpatient rehabilitation providers,
the rehabilitation therapy departments of acute care hospitals, physicians'
offices, private physical therapy practices and chiropractors.
GOVERNMENT REGULATION
The Company and the health care industry generally are subject to
extensive Federal, state and local regulation governing licensure,
certification, conduct of operations and participation in reimbursement
programs. Political, economic and regulatory influences are subjecting the
health care industry in the United States to fundamental change. Numerous
proposals for comprehensive reform of the nation's health care system have been
introduced in Congress. Many potential approaches are under consideration,
including controls on health care spending through limitations on the growth of
private health insurance premiums and Medicare and Medicaid spending, and other
fundamental changes to the health care delivery system. In addition, some of the
states in which Mariner operates are considering or have adopted various health
care reform proposals. The Company anticipates that Congress and state
legislatures will continue to review and assess alternative health care delivery
systems and payment methodologies and public debate of these issues will likely
continue in the future. Due to uncertainties regarding the ultimate features of
reform initiatives and their enactment and implementation, the Company cannot
predict which, if any, of such reform proposals will be adopted, when they may
be adopted or what impact they may have on the Company.
In addition, both the Medicare and Medicaid programs are subject to
statutory and regulatory changes, administrative rulings, interpretations of
policy, intermediary determinations and governmental funding restrictions, all
of which may materially decrease the rate of program payments to health care
facilities. Since 1983, Congress has consistently attempted to limit the growth
of Federal spending under the Medicare and Medicaid programs. The
17
Company can give no assurance that payments under such programs will in the
future remain at a level comparable to the present level or be sufficient to
cover the costs allocable to such patients. In addition, many states are
considering reductions in their Medicaid budgets.
Certificate of Need Requirements. Most states in which the Company
operates or is considering expansion possibilities have statutes which require
that prior to the addition or construction of new beds, the addition of new
services, the acquisition of certain medical equipment or certain capital
expenditures in excess of defined levels, a state agency must determine that a
need exists. These CON programs are designed to avoid duplication in health care
facilities. CONs usually are issued for a specified maximum expenditure and
require implementation of the proposed improvement within a specified period of
time. Some states also require obtaining an exemption from CON review, or a
reclassification of an existing CON, for acquisitions of existing health care
facilities. Several states have instituted moratoria on new CONs, or otherwise
stated their intent not to grant approvals for new beds. Such moratoria may
adversely affect the Company's ability to expand in such states, but may also
provide a barrier to entry to potential competitors.
Where required, appropriate CONs are obtained for the Company's
facilities and managed units. Depending on the licensure of the facility in
which it is located, a managed or leased unit may operate under the host
facility's CON, although Mariner may seek a new CON to enable the unit to
participate in certain Federal and state health-related programs.
Licensing. The inpatient facilities operated or managed by the Company
must be licensed by state authorities. Each of the facilities is so licensed.
Both initial and continuing qualification of a skilled nursing facility to
maintain such licensure and participate in the Medicare and Medicaid programs
depend upon many factors including, among other things, accommodations,
equipment, services, patient care, safety, personnel, physical environment, and
adequate policies, procedures and controls. In addition, the Company's
outpatient rehabilitation clinics, pharmacy services and other health care
services are generally subject to regulation and, in many instances, licensure
or certification requirements.
Medicare and Medicaid Certification. In order to receive Medicare and
Medicaid reimbursement, a skilled nursing facility must meet the applicable
requirements of participation set forth by the United States Department of
Health and Human Services ("HHS") relating to the type of facility, its
equipment, its personnel and its standards of medical care, as well as comply
with all state and local laws and regulations. In addition, Medicare regulations
generally require that entry into such facilities be through physician referral.
The Company must offer services to Medicare and Medicaid recipients on a
non-discriminatory basis and may not preferentially accept private pay or
commercially insured patients. In addition, the Company's outpatient
rehabilitation clinics, pharmacy services and other health care services are
generally subject to applicable Medicare and Medicaid certification
requirements.
Medicare Related Party Rule. Subject to certain exceptions, Medicare's
related party rule generally requires that services between related entities be
changed at cost. Mariner provides certain services between subsidiary companies,
some of which are charged at cost and others of which are charged at market
rates. Mariner believes that the services which are charged at market rates
qualify for an exception to Medicares's related party rule. There can be no
assurance, however, that HCFA will endorse Mariner's position and the Medicare
reimbursement received for such services may be subject to audit and recoupment
in future years.
Inspections. State and local agencies inspect all health care
facilities on a regular basis to determine whether such facilities are in
compliance with governmental operating and health standards and conditions for
participation in government medical assistance programs. Such surveys include
reviews of patient utilization of health care facilities and standards for
patient care. If such an agency determines that a facility fails to comply with
certain regulatory requirements, it may, or may be required to, take various
adverse actions, including the imposition of fines, temporary suspension of
admission of new patients to the facility, suspension or decertification from
participation in the Medicare or Medicaid programs and, in extreme
circumstances, revocation of the facility's license.
Fraud and Abuse Laws. Various Federal and state laws regulate the
relationship between providers of health care services and physicians or others
able to refer medical services, including employment or service contracts,
leases and investment relationships. These laws include the fraud and abuse
provisions of the Medicare and Medicaid and similar state statutes (the "Fraud
and Abuse Laws"), which prohibit the payment, receipt, solicitation or offering
of any direct or indirect remuneration intended to induce the referral of
Medicare or Medicaid patients or for the ordering or providing of Medicare or
Medicaid covered services, items or equipment. Violations of these provisions
may result in civil and criminal penalties and/or exclusion from participation
in the Medicare and Medicaid programs and from state programs containing similar
provisions relating to referrals of privately insured patients. HHS has
interpreted these provisions broadly to include the payment of anything of value
to influence the referral of Medicare or Medicaid business. HHS has issued
regulations which set forth certain "safe harbors," representing business
relationships and payments that can safely be undertaken without violation of
18
the Fraud and Abuse Laws. In addition, certain Federal and state requirements
generally prohibit certain providers from referring patients to certain types of
entities in which such provider has an ownership or investment interest or with
which such provider has a compensation arrangement, unless an exception is
available. The Company considers all applicable laws in planning marketing
activities and exercises care in an effort to structure its arrangements with
health care providers to comply with these laws. However, because there is no
procedure for obtaining advisory opinions from government officials, Mariner is
unable to provide assurances that all of its existing or future arrangements
will withstand scrutiny under the anti-fraud and abuse statute, safe harbor
regulations or other state or federal legislation or regulations, nor can it
predict the effect of such rules and regulations on these arrangements in
particular or on Mariner's operations in general. While certain of Mariner's
contracts may not fall within the safe harbors, Mariner believes that its
business relationships comply with the Fraud and Abuse Laws.
INSURANCE
Mariner maintains professional liability insurance, comprehensive
general liability insurance and other insurance coverage on all of its
facilities. Mariner believes that its insurance is adequate in amount and
coverage for its current operations. See Note 15 of the Consolidated Financial
Statements appearing in Item 8 of this Report.
EMPLOYEES
As of December 31, 1996, Mariner employed approximately 14,000 full and
part-time employees. The employees at seven of Mariner's skilled nursing
facilities, representing approximately 8% of Mariner's work force, are
represented by labor unions. Two of the Company's union contracts expire in
1997, on April 30, 1997 and July 30, 1997, respectively. Management cannot
predict the impact of continued or increased union represention or
organizational activities on its future operations. Management of Mariner
considers the relationship between Mariner and its employees to be good.
Mariner competes with general acute care hospitals, nursing homes and
other care facilities for the services of physicians, registered nurses,
therapists and other professional personnel. From time to time, there have been
shortages in the supply of available physicians, registered nurses and various
types of therapists. Competition for licensed therapists is intense and turnover
is very high. Mariner places substantial emphasis on recruiting and retaining
therapists, employing a staff of recruiters dedicated to identifying,
interviewing and hiring therapists. In general, therapists prefer clinic
employment over contract services employment, primarily because a clinic
practice generally involves less acutely ill patients. The turnover in a clinic
practice is therefore lower than in a contract practice. Although Mariner
believes that it will be able to attract and retain sufficient physicians,
nursing personnel and therapists to meet its needs, there can be no assurance
that it will be able to do so.
ITEM 2. PROPERTIES
The Company's executive offices are located at 125 Eugene O'Neill
Drive, New London, Connecticut, 06320. Information regarding other Mariner
properties appears under the heading "Facilities" in Item 1 of this Report.
ITEM 3. LEGAL PROCEEDINGS
As is typical in the health care industry, Mariner is subject to
claims, investigations or legal actions from time to time in the ordinary course
of business. The Company's Massachusetts pharmacy operations are presently under
review for certain matters with respect to technical requirements. The Company
currently believes that the outcome of such review will not have a material
adverse effect on Mariner. Mariner has also assumed claims and legal actions
brought against certain of the companies which it has acquired, which material
claims and legal actions are covered by indemnification agreements by the
companies' former owners. Mariner believes that all such claims and actions
currently pending against it either are adequately reserved for, covered by
insurance or by indemnification or would not have a material adverse effect on
Mariner if decided in a manner unfavorable to Mariner.
19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of March 28, 1997, who are
elected on an annual basis and serve at the discretion of the Board of
Directors, are as follows:
<TABLE>
<CAPTION>
Name Age Position and Offices Served
---- --- -------------------- ------
<S> <C> <C> <C>
Arthur W. Stratton, Jr., M.D. 51 Chairman of the Board, President, 1988-Present
Chief Executive Officer & Director
David N. Hansen 44 Executive Vice President, Chief 1996-Present
Financial Officer and Treasurer
</TABLE>
Dr. Stratton has been Chairman of the Board of Directors and Chief
Executive Officer of the Company since founding the Company in 1988. He also
served as President of the Company since inception until May 1994 and from
February 1995 to the present. Prior to founding the Company, Dr. Stratton was a
practicing physician and served in a number of administrative capacities in
acute care hospitals.
Mr. Hansen has served as Executive Vice President, Treasurer and Chief
Financial Officer of the Company since October, 1996. Prior to joining Mariner,
Mr. Hansen was a partner at Coopers & Lybrand L.L.P from 1988 to 1996.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is quoted on the Nasdaq National Market under the
symbol MRNR. The following table sets forth for the periods indicated, the high
and low sales prices for the Common Stock:
1996 High Low
4th Quarter................................. $15.250 $6.750
3rd Quarter................................. 19.750 13.625
2nd Quarter................................. 20.125 15.000
1st Quarter................................. 20.125 14.875
1995 High Low
4th Quarter................................. $16.750 $8.875
3rd Quarter................................. 16.625 11.625
2nd Quarter................................. 19.750 11.250
1st Quarter................................. 21.750 17.250
On March 25, 1997 the closing sale price of the Common Stock was $9.000
per share. As of March 25, 1997, there were approximately 968 holders of record
of the Common Stock.
Mariner has not paid any cash dividends on the Common Stock and does
not anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings to fund the development and growth
of its business. In addition, certain provisions of Mariner's revolving credit
facility and the Indenture relating to the Company's 9 1/2% Senior Subordinated
Notes due 2006 restrict or prohibit the payment of cash dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" in Item 7 of this Report and Note
10 of Notes to Consolidated Financial Statements in Item 8 of this Report.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial information presented below for
each of the five years ended December 31, 1996 has been derived from the
Company's audited consolidated financial statements. The selected consolidated
financial information should be read in conjunction with "Management's
Discussion and Analysis of
21
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and the notes thereto appearing in Items 7 and 8,
respectively, to this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net patient service revenue(1) $169,132 $209,238 $260,357 $337,635 $578,755
Other income 1,279 1,568 3,787 17,171 12,054
---------- ---------- ---------- ---------- ----------
Total operating revenue 170,411 210,806 264,144 354,806 590,809
Operating expenses:
Facility operating costs (2) 130,803 167,785 208,691 276,633 459,127
Corporate general and administrative (3) 17,961 34,902 30,935 39,830 52,500
Depreciation and amortization 6,282 6,843 8,091 11,397 21,376
Interest expense, net 10,113 7,379 1,819 3,598 26,256
Facility rent expense, net 307 1,079 1,739 1,830 3,727
---------- ---------- ---------- ---------- -- ----------
Total operating expenses 165,466 217,988 251,275 333,288 562,986
---------- ---------- ---------- ---------- -- ----------
Operating income (loss) 4,945 (7,182) 12,869 21,518 27,823
Net gain (loss) on sale of assets 415 364 932 (6) (826)
---------- ---------- ---------- ---------- -- ----------
Income (loss) before income taxes and 5,360 (6,818) 13,801 21,512 26,997
extraordinary items
Net provision for income taxes (1,634) (3,220) (5,848) (7,892) (10,799)
---------- ---------- ---------- ---------- -- ----------
Income (loss) from continuing operations before
extraordinary 3,726 (10,038) 7,953 13,620 16,198
items
Extraordinary items (439) (5,882) (86) (1,138) ---
---------- ---------- ---------- ---------- -- ----------
Net income (loss) $ 3,287 $(15,920) $ 7,867 $ 12,482 $ 16,198
========== ========== ========== ========== ==========
Income (loss) per common and common equivalent shares:
Income (loss) from operations before
extraordinary items $ .50 $ (.92) $ .41 $ .60 $ .55
Extraordinary items (.07) (.51) --- (.05) ---
---------- ---------- ---------- ---------- -- ----------
Net Income (loss) $ .43 $ (1.43) $ .41 $ .55 $ .55
========== ========== ========== ========== ==========
Weighted average number of Common and Common
equivalent shares outstanding 5,917 11,608 19,251 22,755 29,210
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 25,205 $ 55,348 $ 71,217 $ 74,148 $ 68,154
Total assets 182,981 208,467 296,933 411,526 881,233
Long-term debt and capital lease obligations, less
current 87,874 36,874 24,506 107,910 265,545
portion
Subordinated debt 11,668 2,611 1,694 1,356 149,691
Convertible redeemable preferred stock (4) 24,097 790 891 1,030 ---
Nonconvertible redeemable preferred stock (5) 6,580 --- --- --- ---
Total stockholders' equity 21,205 127,229 228,148 242,392 324,788
</TABLE>
- ------------
(1) Includes a charge of $10,000,000 in 1996 related to additional reserves on
Medicare receivables.
(2) Includes $4,333,000 related to a significant change in business focus at the
Company's Baltimore facility in 1995. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7 of this
Report.
(3) During 1994, the Company recorded a charge of $9,327,000, of which
$7,952,000 relates to the merger with Pinnacle Care Corporation, which was
accounted for as a pooling of interests, and $1,375,000 relates to the
accelerated vesting of certain stock options. Of the merger costs,
approximately $4,627,000 was reserved for employee severance, payroll and
relocation, $2,878,000 was reserved for transaction costs including
investment bankers', legal and accounting fees, $172,000 was reserved for
customer relations, $150,000 for operations relocation, $66,000 for investor
relations and $59,000 was reserved for employee relations.
During 1995, the Company accrued costs totaling $8,073,000 related to the
CSI Merger and the consolidation of various regional and satellite offices
to the New London, Connecticut office. Of this total charge, approximately
$3,691,000 related to severance and related payroll costs and approximately
$4,382,000 related to expenses incurred to close the Company's regional
offices.
During 1996, the Company recorded a charge of $6,511,000 of which $5,661,000
related to the merger with MedRehab, Inc. which was accounted for as a
pooling of interests and $850,000 was a charge for the warrants granted to
the Premier affiliate.
22
(4) Converted into shares of Common Stock upon the closing of the Company's
initial public offering of its common stock, par value $.01 per share (the
"Common Stock").
(5) Redeemed during 1993.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, including statements regarding, among other items, (i) the Company's
growth strategies, including its intention to make acquisitions; (ii)
anticipated trends in the Company's business and demographics; (iii) the
Company's ability to continue to control costs and maintain quality of care;
(iv) the Company's ability to respond to changes in regulations; and (v) the
Company's ability to enter into contracts with managed care organizations and
other payors. These forward-looking statements are based largely on the
Company's expectations and are subject to a number of risks and uncertainties,
certain of which are beyond the Company's control. Actual results could differ
materially from these forward-looking statements as a result of the factors
described below in "Risk Factors" including, among others (i) changes in the
health care industry as a result of political, economic or regulatory
influences; (ii) changes in regulations governing the health care industry; and
(iii) changes in the competitive marketplace. In light of these risks and
uncertainties, there can be no assurance that the forward-looking information
contained in this Report will in fact transpire.
OVERVIEW
Mariner's net patient service revenue is derived primarily from providing
inpatient health care services to subacute patients, rehabilitation programs in
skilled nursing facilities, outpatient rehabilitation services in freestanding
clinics and other post-acute medical services. The growth in Mariner's net
patient service revenue and operating profitability depends on two principal
factors: (i) the shift by the Company toward treatment of short-stay, medically
demanding subaccute patients and away from less medically demanding patients,
and (ii) the addition of a variety of alternate sites and expansion of
post-acute health care services. Subacute patients typically require three to
six hours of skilled nursing care per day, in contrast to the more than six
hours of skilled nursing care per day required by acute care hospital patients
and the less than two hours of custodial nursing care per day required by
traditional nursing home residents. These subacute patients typically are
recuperating from a major injury, surgery or illness and, after a relatively
short transition period, generally are discharged to their homes. The Company's
clinical programs, including MarinerCare programs, have been designed for these
patients.
During 1996, as a result of the CSI Merger, the 1996 Florida
Acquisition, the Allegis acquisiton and other inpatient facility acquisitions,
the Company added 41 facilities with a total of 5,915 beds. Since these
acquisitions, the Company has been focusing these facilities increasingly on
treating medically demanding subaccute patients. With the existing patient
populations acquired with these facilities, Mariner currently expects that a
significant length of time may be required before such patient population
changes sufficiently to require a level of care, and to have a length of stay,
comparable to that experienced in the Company's other facilities. As a result,
the addition of these facilities adversely affected the Company's 1996 operating
profitability and overall operating statistics. See "Patient Focus" and "Site
Expansion".
Patient Focus. Mariner believes that short length of patient stay and high
bed turnover maximize net patient service revenue and operating margins. As
compared to less medically demanding patients, short-stay subacute patients
generally require more intense skilled nursing care and more rehabilitation,
pharmacy and other ancillary medical services. The median length of stay for
patients discharged in the applicable period from facilities owned or leased by
the Company during the applicable period increased from 20 days in 1995 to 23
days in 1996. The bed turnover rate for the inpatient facilities owned or leased
by the Company during the applicable period has deceased from 2.7 times in 1995
to 2.1 times in 1996. The increase in median length of stay and decease in bed
turnover rate from 1995 to 1996 resulted principally from the acquisition of
facilities in 1996. Newly acquired facilities generally contain an existing
patient population, and consequently a significant length of time may be
required before such patient population changes sufficiently to require a level
of care, and to have a length of stay, comparable to that experienced in the
Company's existing facilities. In the facilities the Company acquires, the
Company intends to focus on treating subacute patients and implementing
appropriate MarinerCare programs or other clinical programs.
The Company's focus on short-stay subacute patients has historically
provided the Company with an attractive payor mix. Short-stay medical care is
covered by a wider range of payors, including indemnity insurers, health
maintenance organizations, employers, Medicare and Medicaid, while long-term
(more than 100 days) medical care typically is covered by Medicaid. Percentage
of revenue generated from Medicare and private payors decreased from 79% in 1995
to 74% in 1996. The decrease in payor mix from 1995 to 1996 resulted principally
from the result of the acquisition of additional new facilities in 1996 which
were more heavily dependent on Medicaid reimbursment.
By continuing to emphasize short-stay subacute patients, Mariner has
historically increased the percentage of its revenue generated from Medicare and
private payors (including indemnity insurers, health maintenance organizations,
employers and individuals) in newly acquired facilities.
Even among the Company's patients for whom Medicaid is the primary payor,
Mariner has focused increasingly on treating those patients with substantial
medical problems who require three or more hours of skilled nursing care per
day. Typically, Mariner is reimbursed by Medicaid at substantially higher rates
for these patients than for less medically demanding custodial care patients.
The net patient service revenue generated by the Company's Medicaid patients
decreased from $36,685 per bed in 1995 to $34,046 per bed in 1996. This decrease
was primarily due to the geographic shift in the percentage of revenues derived
from Florida and Texas which have lower Medicaid rates than the Northeast or
Midwest regions.
The Company's rehabilitation programs have also focused on subacute
patients in skilled nursing facilities who require intensive rehabilitation
therapy over a short period. The number of rehabilitation programs with skilled
nursing facilities has decreased from 440 as of December 31, 1995 to 429 as of
December 31, 1996.
Despite this decrease in programs, revenue from private payors and
reimbursement under Medicare have increased as a percentage of total revenue
from these programs.
In addition, the Company has expanded the range of post-acute health
care services it provides directly in selected local markets in an effort to
treat patients throughout their recovery. As a result, the Company receives
revenues from these services both during a patient's inpatient stay and after
discharge.
23
As a result of these trends, Mariner's average revenue per occupied bed
per year decreased from $61,495 in 1995 to $58,795 in 1996. Revenue per
rehabilitation program increased from $318,088 in 1995 to $412,265 in 1996.
These trends are illustrated in the following table:
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Inpatient Operations
Licensed beds (1) 3,114 4,397 9,962
Average occupancy rates 89% 88% 88%
Median length of stay (2) 25 days 20 days 23 days
Bed turnover rate (3) 2.6x 2.7x 2.1x
Revenue per occupied bed per year (4):
Private payors and Medicare (5) $ 97,932 $101,863 $ 93,189
Medicaid $ 36,254 $ 36,685 $ 34,046
Company as a whole $ 60,126 $ 61,495 $ 58,795
Percentage of average daily census:
Private payors and Medicare (5) 39% 38% 42%
Medicaid 61% 62% 58%
Rehabilitation Operations:
Revenue per rehabilitation program per $234,800 $318,088 $ 412,265
year (6)
Outpatient clinic visits per year 297,699 272,423 221,128
Payor Mix (Company revenue as a whole):
Private payors and Medicare (5) 80% 79% 74%
Medicaid 20% 21% 26%
- -----------------
</TABLE>
(1) Facilities owned and leased as of the end of the applicable period.
(2) Based on those patients who were discharged during the applicable period
from facilities owned or leased by Mariner.
(3) Represents total discharges divided by average number of licensed beds
during the applicable period.
(4) Represents applicable net patient service revenue divided by the average
daily census of patients generating such revenue.
(5) Private payors includes indemnity insurers, health maintenance
organizations, employers, individuals and other non-governmental payors,
and for payor mix, payments from skilled nursing facilities for services
performed under rehabilitation management programs and revenue classified
as "other income."
(6) Represents aggregate revenue from rehabilitation programs with skilled
nursing facilities during the applicable period divided by the average
number of such programs as of the end of the applicable period.
24
Site Expansion. Mariner has expanded by acquiring, leasing and
developing freestanding inpatient facilities, by entering into arrangements to
manage hospital-based subacute units and to provide rehabilitation programs and
by expanding the other post-acute health care services it provides. The
Company's site expansion is illustrated in the following table:
December 31,
-------------------------------
1994 1995 1996
---- ---- ----
Sites of Service:
Owned and leased freestanding inpatient 26 33 75(1)
facilities
Managed freestanding inpatient facilities
and hospital-based units 5 29(1) 8
Rehabilitation programs with skilled
nursing facilities 447 440 429
Outpatient rehabilitation clinics 65 57 48
(1) Includes 23 skilled nursing facilities and one rehabilitation hospital with
an aggregate of 3,288 beds which became owned or leased by the Company on
January 2, 1996 upon completion of the CSI Merger.
Mariner acquires established skilled nursing facilities and converts
them into facilities focusing increasingly on treating medically demanding
subacute patients. Historically, net patient revenue and operating margins from
acquired inpatient facilities have increased gradually over a period of years as
MarinerCare programs are implemented, and, as intensity of care and ancillary
service requirements increase, length of patient stay decreases and payor mix
improves. An acquired facility may contain an existing patient population, and
consequently a significant length of time may be required before such patient
population changes sufficiently to require a level of care, and to have alength
of stay, comparable to that experienced in the Company's existing facilities.
During this conversion period, Mariner would generally expect to realize lower
revenue for these existing patients than could otherwise be obtained for new
patients. Facilities undergoing conversion are expected to continue to generate
increased net patient service revenue and operating margins as they continue to
emphasize short-stay subacute patients.
Mariner also develops new freestanding inpatient facilities and
renovates acute care hospitals which are dedicated primarily to providing
MarinerCare programs and other services to subacute patients. Net patient
service revenue and operating margins typically increase gradually at newly
opened facilities, which have low initial occupancy rates. Because newly opened
facilities require a basic complement of staff on the day it opens regardless of
patient census, these facilities initially generate significant losses. As
patient census increases at a facility, margins improve, regardless of whether
the patients are subacute or medically less demanding. Margins typically
increase at newly opened facilities as patient and payor mix improve and
ancillary service use increases. These facilities generally have taken six to
nine months before their revenues have been sufficient to cover their operating
costs, and nine to fifteen months before they have contributed positively to the
Company's net earnings. Leased units have substantially the same operating
characteristics as newly opened facilities with less significant financing
costs.
Managed freestanding inpatient facilities and hospital-based managed
subacute care units typically provide significantly higher profit margins with
substantially lower revenue than the Company's owned and leased facilities
because the host facility generally bears the related operating and capital
expenses while paying the Company a management fee. Unlike freestanding
inpatient facilities owned or leased by the Company, managed facilities and
units typically do not require significant start-up costs or capital outlays by
the Company.
The Company incurs start-up expenses for new rehabilitation programs as
therapists are hired and necessary equipment is acquired. These programs and
clinics typically become profitable within six months of opening and generate
positive cash flow in 12 to 18 months.
25
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as a
percentage of total operating revenue for the three years ended December 31,
1994, 1995 and 1996, and the percentage changes in the dollar amounts of revenue
and expenses for 1995 as compared to 1994, and 1996 as compared to 1995.
<TABLE>
<CAPTION>
Percent of Revenue Percentage Increase (Decrease)
1995 1996
Year Ended December 31, Over Over
-----------------------
1994 1995 1996 1994 1995
<S> <C> <C> <C> <C> <C>
Revenues:
Net patient service revenue(1) 98.6% 95.2% 98.0% 29.7% 71.4%
Other revenue 1.4 4.8 2.0 353.4 (29.8)
---------- ---------- ----------
Total operating revenue 100.0% 100.0% 100.0% 34.3% 66.5%
========== ========== ==========
Operating and administrative expenses:
Facility operating costs (2) 79.0 78.0 77.8 32.6 66.0
Corporate general & administrative (3) 11.7 11.2 8.9 28.8 31.8
Interest expense, net 0.7 1.0 4.4 97.8 629.7
Facility rent expense, net 0.7 0.5 0.6 5.2 103.7
Depreciation and amortization 3.1 3.2 3.6 40.9 87.6
---------- --------- ----------
Total operating expenses 95.2% 93.9% 95.3% 32.6% 68.9%
========== ========== ==========
</TABLE>
- -----------------
(1) Includes a charge of $10,000,000 in 1996 related to additional reserves on
Medicare receivables.
(2) Includes a charge related to a significant change in business focus at the
Company's Baltimore facility of 1.2% for the year ended December 31, 1995.
(3) Includes merger and other non-recurring costs related to the merger with
Pinnacle Care Corporation amounting to 3.5% of total operating revenue for
the year ended December 31, 1994. Includes costs related to the CSI Merger
and the consolidation of various regional and satellite offices to the
Company's New London, Connecticut office amounting to 2.3% of total
operating revenue for the year ended December 31, 1995. Includes merger and
other non-recurring costs related to the merger with MedRehab, Inc. and
issuance of warrants amounting to 1.2% of revenue for the year ended
December 31, 1996.
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Revenue. Total operating revenue increased 34% from $264,144,000 in
1994 to $354,806,000 in 1995 and 67% to $590,809,000 in 1996.
Net patient service revenue increased by $77,278,000, or 30%, from 1994
to 1995 and by $241,120,000, or 71%, from 1995 to 1996. The increase from 1994
to 1995 resulted primarily from the inclusion of revenue generated from the
facilities and businesses acquired during 1995, as well as the inclusion of a
full year of revenue from the eight facilities acquired during 1994. The
increase in 1996 was due primarily to the inclusion of all revenue from the CSI
Facilities that were acquired on January 2, 1996, the eight facilities acquired
or leased in the 1996 Florida Acquisition and eight facilities acquired or
leased from Allegis, as well as inclusion of a full year of revenue from
facilities and businesses acquired in 1995. The Company also experienced
increases in the use of ancillary medical services at its inpatient facilities.
The revenue increases in each of 1995 and 1996 were partially offset by
reductions due to the cancellation or non-renewal of contracts for certain
rehabilitation programs.
Other revenue includes fees earned from contracts to manage inpatient
subacute care units within selected health care facilities and in 1995, included
fees of $11,227,000 relating to the management of certain CSI Facilities. The
reduction in other revenue from 1995 to 1996 resulted primarily from the
termination of the management agreements with certain of the CSI Facilities,
which were acquired on January 2, 1996. See "Business--Significant Developments
in 1996--Transactions with Convalescent Services, Inc." appearing in Item 1 to
this Report.
Facility Operating Costs. Facility operating costs consist primarily of
employee salaries, wages and benefits, food, ancillary supplies, pharmacy
supplies, plant operations, and, in 1995, costs related to a significant change
in the business focus at the Company's Baltimore facility. Most clinical staff
and rehabilitation therapists are paid an hourly wage. Salaries, wages and
benefits as a percentage of revenue are higher at newly opened inpatient
facilities, which require a basic compliment of staff on the day the facility
opens regardless of the patient census, than at pre-existing inpatient
facilities. As the patient census increases and patient mix improves at its
inpatient facilities, Mariner has experienced decreases in these costs as a
percentage of revenue at such facilities.
26
Various other types of operating expenses, including medical supplies, pharmacy
supplies, nutritional support services and expenses associated with the
provision of ancillary services, vary more directly with patient census, as well
as with general rates of inflation.
Facility operating costs increased 33% from $208,691,000 in 1994 to
$276,633,000 in 1995 and 66% to $459,127,000 in 1996. These increases were
principally the result of adding new facilities, providing more ancillary
medical services and adding therapists and aides to service new rehabilitation
programs. In addition, these costs included $4,333,000 related to a significant
change in focus at the Company's Baltimore facilities in 1995. As a percentage
of total operating revenue, these costs decreased from 79.0% in 1994 to 78.0% in
1995 and 77.8% in 1996.
Corporate General and Administrative. Corporate general and
administration expenses include the expenses of the Company's corporate office,
which provides marketing, financial and management services. These expenses
increased 29% from $30,935,000 in 1994 to $39,830,000 in 1995 and 32% to
$52,500,000 in 1996. The increases were, in part, a result of additional
personnel required to support the facilities acquired during 1994, 1995 and
1996.
During 1994, the Company recorded a charge of $9,327,000, of which
$7,952,000 related to the merger with Pinnacle Care Corporation, which was
accounted for as a pooling of interests, and $1,375,000 related to the
accelerated vesting of certain stock options. Of the merger costs, approximately
$4,627,000 was for employee severance, payroll and relocation, $2,878,000 was
incurred for transaction costs including investment bankers', legal and
accounting fees, $172,000 for customer relations, $150,000 for operations
relocation, $66,000 for investor relations and $59,000 for employee relations.
The charge for the options relates to a change in vesting criteria for
100,000 options granted in 1992. As a result of these changes, these options
become exercisable during the second quarter of 1994, thereby requiring the
charge in the second quarter.
During 1995, the Company accrued costs totaling $8,073,000 related to
the merger with CSI and the consolidation of various regional and satellite
offices to the New London, Connecticut office. Of this total charge,
approximately $3,691,000 related to severance and related payroll costs and
approximately $4,382,000 related to expenses incurred to close the Company's
regional offices.
During 1996, the Company recorded a charge of $6,511,000 of which
$5,661,000 related to the merger with MedRehab which was accounted for as a
pooling of interests and $850,000 was a charge for the warrants granted to the
Premier affiliate. Of the charge related to the MedRehab merger, approximately
$2,825,000 was for employee severance, payroll and relocation, $1,143,000 for
transaction costs, $1,061,000 to write-off abandoned property and software,
$382,000 for relocation of operations, $200,000 for customer relations and
$50,000 for employee relations.
As a percentage of total operating revenue, corporate general and
administrative expenses were 12% in 1994, 11% in 1995 and 9% in 1996.
Interest Expense, Net. Net interest expense increased 98% from
$1,819,000 in 1994 to $3,598,000 in 1995 and 630% to $26,256,000 in 1996. The
increases were due to additional borrowings which were primarily used to fund
acquisitions.
Facility Rent Expense, Net. Net rent expense increased from $1,739,000
in 1994 to $1,830,000 in 1995, and $3,727,000 in 1996. The increases resulted
from the lease costs associated with new leases entered in connection with
certain acquisitions during 1996.
Depreciation and Amortization. Depreciation and amortization expense
increased 41% from $8,091,000 in 1994 to $11,397,000 in 1995, and 88% to
$21,376,000 in 1996, principally as a result of the increase in the number of
facilities as a result of acquisition activities, the opening of new facilities
and businesses, and the completion of facility renovations.
Provision for Income Taxes. During 1996, Mariner's tax rate reflects
the reversal of a valuation allowance on certain deferred tax assets. The
Company believes that it will be able to take advantage of these assets before
they expire and has reflected this in its tax rate in 1996. The Company
currently expects the effective tax rate to increase from 40% to 44% in 1997
due, primarily, to the effect of non-deductible goodwill associated with certain
acquisitions.
27
Extraordinary Items. In 1994 Mariner incurred $86,000 of extraordinary
losses, net of income tax benefit, related to early repayment of mortgage
obligations.
In 1995, the Company amended certain significant terms of its Credit
Facility. As a result of the amendment, the Company has charged off its
remaining unamortized deferred financing fees of $1,836,000 with a resulting tax
benefit of $698,000.
28
LIQUIDITY AND CAPITAL RESOURCES
Mariner has financed its operations, acquisitions and capital
expenditures primarily from cash provided by operations and the proceeds from
stock issuances and borrowings. As of December 31, 1996, working capital and
cash and cash equivalents were $68,154,000 and $4,616,000, respectively.
Mariner has a $250,000,000 senior secured revolving credit facility
with a syndicate of banks (the "Credit Facility"). As of December 31, 1995 and
1996, principal balances outstanding under the Credit Facility were
approximately $64,500,000 and $132,000,000, respectively, and letters of credit
outstanding under this facility were $2,612,000 and $5,499,000, respectively.
Mariner has used, and intends to continue to use, borrowings under the Credit
Facility to finance the acquisition and development of additional subacute care
facilities and related businesses, and for general corporate purposes, including
working capital. Mariner's obligations under the Credit Facility are
collateralized by a pledge of the stock of its subsidiaries and are guaranteed
by all of the Company's subsidiaries. In addition, the Credit Facility is
secured by mortgages on certain of the Company's inpatient facilities, leasehold
mortgages on certain inpatient facilities leased by the Company, and security
interests in certain other properties and assets of the Company and its
subsidiaries. The Credit Facility matures on April 30, 1999 and provides for
prime or LIBOR-based interest rate options. The borrowing availability and rate
of interest varies depending upon specified financial ratios. The Credit
Facility also contains covenants which, among other things, require the Company
to maintain certain financial ratios and impose certain limitations or
prohibitions on the Company with respect to the incurrence of indebtedness,
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.
On April 4, 1996, the Company sold $150,000,000 aggregate principal
amount of its 9-1/2% Senior Subordinated Notes due 2006 (the "Notes"). The Notes
mature on April 1, 2006. The Notes are unsecured senior subordinated obligations
of Mariner and, as such, are subordinated in right of payment to all existing
and future senior indebtedness of Mariner, including indebtedness under the
Credit Facility. From the net proceeds of approximately $144,456,000 from the
sale of the Notes, $131,000,000 was used to repay all outstanding indebtedness
under the Credit Facility (including interest and certain other fees) and the
remainder was used to pay a portion of the purchase price for the 1996 Florida
Acquisition. The Notes contain certain covenants, including, among other things,
covenants with respect to the following matters: (i) limitation on indebtedness;
(ii) limitation on restricted payments; (iii) limitation on the incurrence of
liens; (iv) restriction on the issuance of preferred stock of subsidiaries; (v)
limitation on transactions with affiliates; (vi) limitation on sale of assets;
(vii) limitation on other senior subordinated indebtedness; (viii) limitation on
guarantees by subsidiaries; (ix) limitation on the creation of any restriction
on the ability of the Company's subsidiaries to make distributions; and (x)
restriction on mergers, consolidations and the transfer of all or substantially
all of the assets of the Company to another person. The Notes were issued under
an Indenture dated as of April 4, 1996 by and among the Company and State Street
Bank and Trust Company, as trustee (the "Indenture").
Accounts receivable (net of allowances) were $92,537,000 and
$126,938,000 at December 31, 1995 and 1996, respectively. Estimated settlements
due from third-party payors aggregated $12,915,000 and $18,912,000 at December
31, 1995 and 1996, respectively. The number of days sales in accounts receivable
and estimated settlements due from third-party payors was approximately 96 days
at December 31, 1995 and 78 days at December 31, 1996. The decrease was
primarily due to (i) the acquisition of receivables in the Allegis aquisition
and (ii) the $10,000,000 increased reserve for potential lower levels of
Medicare reinbursement. The decrease also resulted from improved collections and
the completion of centralization of the billing functions.
In January 1996, Mariner completed the CSI Merger and its acquisition
of certain related assets. In the merger, all of the issued and outstanding
shares of capital stock of CSI were converted into the right to receive an
aggregate of 5,853,656 shares of the Company's Common Stock and $7,000,000 in
cash. In connection with the CSI Merger, Mariner acquired certain assets that
are related to CSI's business from affiliates of CSI's stockholders for an
aggregate of approximately $17,694,000 in cash and loaned an aggregate of
$1,619,000 to the partnerships that sold certain assets to the Company. In
addition, the Company acquired options to purchase 12 of the facilities leased
by CSI from affiliates of CSI's stockholders at fair market value and made
nonrefundable deposits of an aggregate of $13,155,000 with the lessors of the
facilities subject to such options. The options are exercisable during specified
periods between 1998 and 2010. The aggregate estimated fair market value as of
the earliest
29
exercise date of the options, and the aggregate purchase price for, the 12
facilities subject to the options is approximately $59,585,000 (which includes a
deposit of $13,155,000 already paid by the Company). Mariner financed the cash
consideration payable in these transactions with borrowings under the Credit
Facility.
On March 1, 1996, the Company completed the MedRehab Merger. Mariner
issued an aggregate of approximately 2,312,500 shares of its Common Stock for
all of MedRehab's outstanding capital stock and options to purchase MedRehab
capital stock in a merger that is being accounted for as a pooling of interests.
In addition, the Company prepaid an aggregate principal amount of approximately
$14,000,000 of MedRehab's outstanding indebtedness at the closing of the
MedRehab Merger. The Company repaid this indebtedness with funds it borrowed
under the Credit Facility. Certain former MedRehab stockholders exercised the
right to require the Company to repurchase their shares of Mariner Common Stock
for approximately $1,326,000.
In March 1996, Mariner acquired a primary care physician organization
in the Orlando, Florida area. In this transaction, Mariner issued an aggregate
of 48,722 shares of its Common Stock and paid an aggregate of $1,500,000 in cash
which was financed under the Credit Facility.
In May, 1996 the Company completed the 1996 Florida Acquisition which
involved seven skilled nursing facilities and one assisted living facility with
an aggregate of 960 beds in Florida, Tennessee and Kansas. All of the issued and
outstanding shares of common stock were converted into the right to receive an
aggregate of approximately $28,050,000 in cash. The Company financed the
consideration paid in the 1996 Florida Acquisition with a portion of the net
proceeds from the sale of the Notes and borrowings under the Credit Facility.
On October 1, 1996, the Company acquired a 163-bed facility in
Jacksonville, Florida. The total purchase price was $9,850,000. Mariner funded
the purchase price by assuming two HUD mortgages in the aggregate principal
amount of approximately $4,236,000. The Company borrowed $6,500,000 under its
Credit Facility to fund the remainder of the cash portion of the purchase price
and to replace reserves required by the HUD mortgage agreements.
In a two-part closing consummated on October 1, 1996 and November 1,
1996, Mariner acquired certain assets of Allegis and certain of its affiliates.
Under the terms of the acquisition agreement, the Company purchased five
inpatient facilities, assumed two operating leases and one capital lease and
purchased Allegis' institutional pharmacy and its rehabilitation program
management subsidiary. The total purchase price of $110,000,000 consisted of the
assumption of $12,000,000 in debt, including the capital lease, and $98,000,000
in cash. Under the terms of the agreement, $103,000,000 of the purchase price
was paid at the closings during the fourth quarter of 1996. Approximately
$98,000,000 of that amount plus certain closing costs was borrowed under the
Credit Facility. The remaining $2,000,000 was paid upon attaining certain
financial performance conditions for 1996. This amount was borrowed under the
Credit Facility.
From January 1, 1997 through March 25, 1997, the Company also borrowed
approximately $ 43,200,000 under the Credit Facility primarily to fund working
capital requirements.
The Company intends to expand its clinical programs in strategically
selected metropolitan areas throughout the United States. The Company also
intends to expand its pharmacy, home health care and outpatient rehabilitation
services. In addition to acquiring individual facilities, Mariner may acquire
businesses that operate multiple facilities or ancillary health care services
businesses. The Company continuously identifies and evaluates potential
acquisition candidates and in many cases engages in discussions and negotiations
regarding potential acquisitions. There can be no assurance that any of the
Company's discussions or negotiations will result in an acquisition. Further, if
the Company makes any acquisitions, there can be no assurance that it will be
able to operate any acquired facilities or businesses profitably or otherwise
successfully implement its expansion strategy. Mariner currently has no
agreements with respect to any acquisition.
The Company's capital expenditures for the years ended December 31,
1995 and 1996 were approximately $11,943,000 and $22,502,000, respectively. The
Company has currently budgeted approximately $75,000,000 for capital
expenditures during 1997. The Company's currently planned capital expenditures
include approximately $25,000,000 for upgrading the Company's information
systems, approximately $25,000,000 for expansion of existing facilities, as well
as the costs of maintaining the Company's inpatient facilities and offices and
approximately $25,000,000 for the construction of three new inpatient sites. The
Company currently estimates that
30
it spends approximately $300 per bed per year for maintenance of its inpatient
facilities.
Mariner believes that its future capital requirements will depend upon
a number of factors, including cash generated from operations and the rate at
which it acquires additional inpatient facilities or other health care services
businesses and the rate at which it adds rehabilitation programs. Mariner
expects to fund such capital expenditures with borrowings under its Credit
Facility and cash from operations. Mariner currently believes that the cash from
operations and borrowings under the Credit Facility will be sufficient to meet
its needs through at least December 31, 1997.
RECENTLY ISSUED PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued FASB
Statement No. 128, "Earnings Per Share." This standard is designed to impove the
earnings per share ("EPS") information provided in financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements, and increasing the comparability of EPS data on an international
basis. The Company will implement the new standard in its fiscal year ending
December 31, 1997. The impact of the implementation of this standard has not yet
been determined.
31
IMPACT OF INFLATION
The health care industry is labor intensive. Wages and other labor
costs are especially sensitive to inflation. Increases in wages and other labor
costs as a result of inflation, or increases in federal or state minimum wages
without a corresponding increase in Medicare and Medicaid reimbursement rates,
could adversely impact the Company.
32
RISK FACTORS
Except for the historical information contained herein, the matters
contained in this Report include forward-looking statements that involve risks
and uncertainties. The following factors, among others, could cause actual
results to differ materially from those contained in forward-looking statements
made in this Report and presented elsewhere by management from time to time.
Such factors, among others, may have a material adverse effect upon the
Company's business, results of operations and financial condition.
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS
Mariner derives a significant portion of its revenue from the Medicaid
and Medicare programs. In the years ended December 31, 1994, 1995 and 1996, the
Company derived 20%, 21%, and 26% respectively, of its revenue from Medicaid
programs and 26%, 29%, and 37%, respectively, of its revenues from the Medicare
program. These programs are subject to retroactive rate adjustments,
administrative rulings and government funding restrictions, all of which may
decrease the level of program reimbursements to the Company. Funds received by
the Company from the Medicare and Medicaid programs are subject to audit which
can result in the Company having to refund overpayments. In addition, there can
be no assurance that facilities owned, leased or managed by Mariner now or in
the future that participate in the Medicare and Medicaid programs will initially
meet or continue to meet the requirements for participation in the Medicare and
Medicaid programs. Legislation and regulations have been proposed on the federal
and state levels that would have the effect of materially limiting or reducing
reimbursement levels for the Company's programs and services. Mariner cannot
predict whether any of these proposals will be adopted or, if adopted, the
effect (if any) such proposals will have on the Company. Furthermore, the
Company has observed a nationwide change in the practices of its Medicare Fiscal
Intermediaries which, on behalf of HCFA, the federal agency responsible for
administering the Medicare program, have begun to aggressively and
retrospectively change their position on previously approved costs. This change
includes the reclassification of costs from reimbursable to non-reimbursable and
the challenging of payment for costs which had traditionally been approved. In
response to these challenges of the payment of Medicare costs on an
industry-wide basis, the Company has provided additional reserve amounts for
potential lower levels of Medicare reimbursement.
In addition, Mariner provides certain services between subsidiary
companies, some of which are charged at cost and others of whch are charged at
market rates. Mariner believes that the services which are charged at market
rates qualify for an exception to Medicare's related party rule. There can be no
assurance, however, that HCFA will endorse Mariner's position and the Medicare
reimbursement received for such services may be subject to audit and recoupment
in future years.
In April 1995, HCFA issued a memorandum to its Medicare fiscal
intermediaries as a guideline to assess costs incurred by inpatient providers
relating to payment of occupational and speech language pathology services
furnished under arrangements that include contracts between therapy providers
and inpatient providers. While not binding on the fiscal intermediaries, the
memorandum suggested certain rates to assist the fiscal intermediaries in making
annual "prudent buyer" assessments of speech and occupational therapy rates paid
by inpatient providers. In addition, HCFA is in the process of promulgating new
salary equivalency guidelines which will update current physical therapy and
respiratory therapy rates and establish new guidelines for occupational therapy
and speech therapy. Mariner will not be able to determine whether these new
proposals will have a material effect on its rehabilitation operations until the
publication of final rates and rules. HCFA through its intermediaries is
subjecting physical therapy, occupational therapy and speech therapy to a
heightened level of scrutiny resulting in increasing audit activity. A majority
of Mariner's provider and rehabilitation contracts provide for indemnification
of the facilities for potential liabilities in connection with rehabilitation
services. The Company's gross margins for its physical therapy services under
Medicare's salary equivalency guidelines are significantly less than for its
speech and occupational therapy services which are currently reimbursed by
Medicare under the prudent buyer standard. There can be no assurance that
actions ultimately taken by HCFA with regard to reimbursement rates for such
therapy services will not materially adversely affect the Company's results of
operations. See "Business--Sources of Revenue" in Item 1 of this Report.
In addition to reducing revenue from federal and state payors, the
imposition of more stringent reimbursement guidelines or a decrease in the level
of Medicare or Medicaid reimbursement for these services could adversely affect
the ability of skilled nursing facilities or other health care providers that
depend on Medicare or Medicaid reimbursement to pay the Company for
rehabilitation program services and may cause such facilities to reduce the
rates that they are willing to pay the Company for such services. Any
significant decrease in Medicare or Medicaid reimbursement levels, or the
imposition of significant restrictions on participation in Medicare or Medicaid
programs, could have a material adverse effect on the Company. Certain states in
which Mariner operates have undertaken a study of acuity levels and are
considering changes in their reimbursement systems to take levels
33
of acuity into account. Accordingly, there can be no assurance that the rates
paid to Mariner by Medicare, Medicaid, private payors or by skilled nursing
facilities under rehabilitation programs will continue to be adequate to
reimburse the Company for the costs of providing services to covered
beneficiaries. Mariner has also agreed under certain of its contracts with
private payors (and intends to continue to agree as part of its business
strategy) to provide certain health care services to covered patients on a case
rate or capitated basis. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 of this Report and
"Business--Sources of Revenue" in Item 1 of this Report.
FLUCTUATION OF QUARTERLY RESULTS OF OPERATIONS
The Company's operating revenue and net income generally fluctuate from
quarter to quarter. The fluctuation is related to several factors including: the
timing of Medicaid rate increases, changes in the level of Medicare
reimbursement, the timing of acquisitions in operating results of acquired
facilities, overall census, payor mix, acuity levels, seasonal census cycles and
the number of working days in a given quarter. In addition, a significant amount
of the Company's operating expenses are relatively fixed in the short term. As a
result, if projected revenues are not realized in the expected period, the
Company's operating results for that period could be adversely affected. Such
quarterly fluctuations may result in volatility in the price of the Company's
Common Stock.
HEALTH CARE REFORM
Current political, economic and regulatory influences are likely to
lead to fundamental changes in the health care industry in the United States.
Numerous proposals for comprehensive reform of the nation's health care system
have been introduced over the past few years in Congress. Many potential
approaches are under consideration, including controls on health care spending
through limitations on the growth of private health insurance premiums and
Medicare and Medicaid spending and other fundamental changes to the health care
delivery system. In addition, some of the states in which the Company operates
are considering or have adopted various health care reform proposals and are
considering reductions in their state Medicaid budgets. Mariner anticipates that
Congress and state legislatures will continue to review and assess alternative
health care delivery systems and payment methodologies and that public debate of
these issues will likely continue in the future. Due to uncertainties regarding
the ultimate features of reform initiatives and their enactment and
implementation, the Company cannot predict which, if any, of such reform
proposals will be adopted, when they may be adopted or what impact they may have
on the Company. In addition, the cost and service considerations which have
generated proposals for health care reform have also resulted in, and are
expected to continue to result in, strategic realignments and combinations in
the health care industry which may, over time, have a significant impact on the
Company's strategic direction and operating results. There can be no assurance
that future legislation, health care or budgetary, or other changes in the
administration or interpretation of governmental health care programs will not
materially adversely affect the results of operations of Mariner. Concern about
the potential effects of the proposed reform measures have contributed to the
volatility of prices in securities of companies in health care and related
industries, including the Company, and may similarly affect the price of the
Company's Common Stock in the future.
Included in President Clinton's 1998 Budget proposals are significant
changes to the Medicare payment system. Proposals that are under active
consideration include, prospective payment for both Home Care and Skilled
Nursing Facilities, and bundling of post acute care services. These, and other
proposals which are being considered, could have a significant effect on
payments to the entire healthcare industry, including Mariner. Each of the
legislative proposals offered by the President provides for significant
reductions in the overall rate of Medicare and Medicaid spending growth. These
proposals are subject to approval and amendment by Congress, and the Company
cannot predict their impact on the Company or its operations at this time. There
is active discussion concerning the foregoing and balancing of the federal and
state budgets, and the form of any final legislation enacted could differ
significantly from current proposals.
Aspects of certain of the health care proposals, such as reductions in
funding of the Medicare and Medicaid programs, potential changes in
reimbursement regulations by HCFA for contract therapy services, containment of
health care costs, proposals to reimburse health care providers on a basis not
linked to costs on an interim basis that
34
could include a short-term freeze on prices charged by health care providers and
greater state flexibility in the administration of Medicaid, could materially
adversely affect the Company.
UNCERTAINTY OF REGULATION
The Company and the health care industry generally are subject to
extensive federal, state and local regulation governing licensure and conduct of
operations at existing facilities, construction of new facilities, acquisition
of existing facilities, addition of new services, certain capital expenditures,
reimbursement for services rendered and disposal of medical waste. Changes in
applicable laws and regulations or new interpretations of existing laws and
regulations could have a material adverse effect on licensure, eligibility for
participation, permissible activities, operating costs and the levels of
reimbursement from governmental and other sources. There can be no assurance
that regulatory authorities will not adopt changes or new interpretations of
existing regulations that could adversely affect the Company. The failure to
maintain or renew any required regulatory approvals or licenses could prevent
the Company from offering existing services or from obtaining reimbursement. In
certain circumstances, failure to comply at one facility may affect the ability
of the Company to obtain or maintain licenses or approvals under Medicare and
Medicaid programs at other facilities.
Recently effective provisions of the regulations adopted under the
Omnibus Budget Reconciliation Act of 1987 ("OBRA"), as amended, have expanded
remedies available to HCFA to enforce compliance with the detailed regulations
mandating minimum health care standards and may significantly affect the
consequences to the Company if annual or other HCFA facility surveys identify
noncompliance with these regulations. Remedies include fines, new patient
admission moratoriums, denial of reimbursement, federal or state monitoring of
operations, closure of facilities and termination of provider reimbursement
agreements. In the ordinary course of its business, the Company receives notices
from time to time of deficiencies for failure to comply with various regulatory
requirements. Although the Company reviews such notices and takes appropriate
corrective action, there can be no assurance that the Company's facilities will
be able to remedy the deficiencies in all situations or remain continuously in
compliance with regulatory requirements. Adverse actions against a facility by
applicable regulatory agencies may adversely affect the facility's ability to
continue to operate, the ability of the Company to provide certain services, and
the facility's eligibility to participate in the Medicare or Medicaid programs.
These actions may adversely affect the Company's business and results of
operations.
The Company is also subject to federal and state laws which govern
financial and other arrangements between health care providers. These laws often
prohibit certain direct and indirect payments or fee-splitting arrangements
between health care providers, including physicians, that are designed to induce
or encourage the referral of patients to, or the recommendation of, a particular
provider for medical products and services. These laws include the federal
"Stark legislations" which prohibit any remuneration for physician referrals,
and, with limited exceptions, physician ownership of ancillary service providers
and the federal "antikickback law" which prohibits, among other things, the
offer, payment, solicitation, or receipt of any form of remuneration in return
for the referral of Medicare and Medicaid patients. The Office of the Inspector
General of the Department of Health and Human Services, the Department of
Justice and other federal agencies interpret these fraud and abuse provisions
liberally and enforce them aggressively. Recently federal laws and initiatives,
including the Kennedy/Kassebaum Act and Operation Restore Trust, have
significantly expanded the federal government's involvement in curtailing fraud
and abuse and increased the monetary penalties for violation of these
provisions. In addition, some states restrict certain business relationships
between physicians and other providers of health care services. Many states
prohibit business corporations from providing, or holding themselves out as a
provider of, medical care. Possible sanctions for violation of any of these
restrictions or prohibitions include loss of licensure or eligibility to
participate in reimbursement programs (including Medicare and Medicaid), asset
forfeitures and civil and criminal penalties (including monetary penalties).
These laws vary from state to state, are often vague and have seldom been
interpreted by the courts or regulatory agencies. From time to time, the Company
has sought guidance as to the interpretation of these laws; however, there can
be no assurance that such laws will ultimately be interpreted in a manner
consistent with the practices of the Company.
Many states have adopted certificate of need or similar laws which
generally require that the appropriate state agency approve certain acquisitions
or capital expenditures in excess of defined levels and determine that a need
exists for certain new bed additions, new services, and the acquisition of such
medical equipment or capital expenditures or other changes prior to beds and/or
services being added. Many states have placed a moratorium on granting
additional certificates of need or otherwise stated their intent not to grant
approval for new beds. To the
35
extent certificates of need or other similar approvals are required for
expansion of Company operations, either through facility acquisitions or
expansion or provision of new services or other changes, such expansion could be
adversely affected by the failure or inability to obtain the necessary
approvals, changes in the standards applicable to such approvals and possible
delays associated with the expenses of obtaining such approvals.
The Company's pharmacy business is also subject to inspection by state
agencies regarding record keeping, inventory control and other aspects of the
pharmacy business.
The Company is unable to predict the future course of federal, state
and local regulation or legislation, including Medicare and Medicaid statutes
and regulations. Further changes in the regulatory framework could have a
material adverse effect on the financial results of the Company's operations.
DIFFICULTY OF INTEGRATING RECENT ACQUISITIONS; MANAGEMENT OF GROWTH
The successful integration of the businesses Mariner acquires is
important to the Company's future performance. The anticipated benefits from any
of these acquisitions may not be achieved unless the operations of the acquired
businesses are successfully combined with those of the Company in a timely
manner. The integration of the Company's recent and proposed acquisitions will
require substantial attention from management. The diversion of the attention of
management, and any difficulties encountered in the transition process, could
have a material adverse effect on Mariner's revenue and operating results. In
addition, the process of integrating the various businesses could cause the
interruption of, or a loss of momentum in, the activities of some or all of
these businesses, which could have a material adverse effect on the Company's
operations and financial results. There can be no assurance that Mariner will
realize any of the anticipated benefits from these acquisitions.
The Company's growth has placed a significant burden on the Company's
management, operating personnel, financial and operating systems. The Company's
ability to manage its growth effectively and assimilate the operations of
acquired facilities or businesses, or newly expanded or developed facilities,
will require it to continue to attract, train, motivate, manage and retain key
employees and to expand its operational and financial systems. If the Company is
unable to manage its growth effectively, it could be materially adversely
affected.
EXPANSION RISKS AND IMPACT ON FUTURE OPERATING RESULTS
Mariner's strategy includes expanding by establishing or acquiring
additional freestanding subacute care facilities, managing subacute care units
within general acute care hospitals and acquiring ancillary health care services
businesses. As part of its strategy, the Company may acquire businesses that
operate one or more freestanding inpatient facilities or rehabilitation,
pharmacy, home care, medical equipment and other health care businesses. There
is significant competition for acquisition and expansion opportunities in the
Company's businesses. As this competition intensifies due to ongoing
consolidation in the health care industry, the costs of capitalizing on such
opportunities may increase. Mariner competes for acquisition and expansion
opportunities with companies that have significantly greater financial and
management resources. There can be no assurance that the Company will be able to
compete successfully for these opportunities, operate the acquired businesses
profitably or otherwise implement successfully its expansion strategy. Mariner's
expansion will depend on its ability to create demand in new markets for its
clinical programs and to staff new facilities and rehabilitation programs, as
well as on the availability of facilities and businesses for acquisition or
management. Such expansion and growth place significant demands on the Company's
financial and management resources. If Mariner is unable to manage its growth
effectively, the quality of its services, its ability to recruit and retain key
personnel and its results of operations could be materially and adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7 of this Report.
An acquired facility may contain an existing patient population and,
consequently, a significant length of time may be required before such patient
population changes sufficiently to require a level of care, and to have a length
of stay, comparable to that provided in the Company's existing facilities.
During this conversion period, Mariner would generally expect to realize lower
reimbursement rates for these existing patients than could otherwise be obtained
for new patients. If the Company acquires a business that operates multiple
facilities, the time required to convert the acquired facilities may be longer
than that required to convert individual facilities. As a result, the expected
lower reimbursement rates could persist for a longer period, having a material
adverse effect on the Company's operating results. Further, the effort required
to make such newly acquired facilities more comparable to the Company's existing
facilities may place significant demands on Mariner's financial and management
resources.
The Company may also open new freestanding inpatient facilities, which
typically have low initial occupancy rates. Because newly opened facilities
require a basic complement of staff on the day the facility opens regardless of
the patient census, these facilities initially generate significant operating
losses.
35
As a result of these factors, as well as expansion into new markets and
the addition of ancillary services, Mariner could experience significant
fluctuations in operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 of this Report.
LEVERAGE
As of December 31, 1996, the Company had approximately $423 million of
outstanding indebtedness (not including debt under operating leases), which
represented 57% of its total capitalization. In addition, the Company had $113
million of availability under the Credit Facility. In 1996, the Company
requested that its lenders increase the size of the Credit Facility to $250
million, extend the maturity of the Credit Facility and further reduce the
restrictions which the Credit Facility imposes on the operations of the
Company's business. This request was approved by the lenders. Although the
Company's cash flow from operations has been sufficient to meet its debt service
obligations in the past, there can be no assurance that the Company's operating
results will continue to be sufficient for the Company to meet its obligations.
The Company's ability to comply with the terms of the Notes and the Credit
Facility, to make cash payments with respect to the Notes and under the Credit
Facility and to satisfy its other debt or to refinance any of such obligations
will depend on the future performance of the Company, which in turn, is subject
to prevailing economic conditions and financial and other factors beyond its
control.
The degree to which the Company is leveraged could have important
consequences to the holders of the Company's securities, including the
following: (i) the Company's ability to obtain additional financing for
acquisitions, capital expenditures, working capital or general corporate
purposes may be impaired in the future; (ii) a substantial portion of the
Company's cash flow from operations must be dedicated to the payment of
principal and interest on the Notes and borrowings under the Credit Facility and
other indebtedness, thereby reducing the funds available to the Company for its
operations and other purposes; (iii) certain of the Company's borrowings are and
will continue to be at variable rates of interest, which exposes the Company to
the risk of increased interest rates; and (iv) the Company may be substantially
more leveraged than certain of its competitors, which may place the Company at a
relative competitive disadvantage and make the Company more vulnerable to
changing market conditions and regulations.
RESTRICTIONS IMPOSED BY INDEBTEDNESS
The Credit Facility contains a number of covenants that, among other
things, restrict the ability of the Company to incur additional indebtedness,
pay dividends, prepay subordinated indebtedness, dispose of certain assets,
enter into sale and leaseback transactions, create liens, make capital
expenditures and make certain investments or acquisitions and otherwise restrict
corporate activities. In addition, under the Credit Facility, the Company is
required to satisfy specified financial covenants, including total indebtedness
to cash flow, total senior indebtedness to cash flow and minimum net worth
tests. The ability of the Company to comply with such provisions may be affected
by events beyond the Company's control. The breach of any of these covenants
could result in a default under the Credit Facility. In the event of any such
default, depending on the actions taken by the lenders under the Credit
Facility, the Company could be prohibited from making any payments on the Notes.
In addition, such lenders could elect to declare all amounts borrowed under the
Credit Facility, together with accrued interest, to be due and payable. The
Credit Facility is secured by the capital stock of the Company's subsidiaries
and certain other assets of the Company's subsidiaries, and if the Company were
unable to repay borrowings under the Credit Facility, the lenders under the
Credit Facility (the "Banks") could proceed against their collateral. If the
Banks or the holders of any other secured indebtedness were to foreclose on the
collateral securing the Company's obligations to them, it is possible that there
would be insufficient assets remaining after satisfaction in full of all such
indebtedness to satisfy in full the claims of the holders of the Notes. The
Indenture subjects the Company to certain restrictive covenants, including,
among other things, covenants with respect to the following matters: (i)
limitation on indebtedness; (ii) limitation on restricted payments; (iii)
limitation on the incurrence of liens; (iv) restriction on the issuance of
preferred stock of subsidiaries; (v) limitation on transactions with affiliates;
(vi) limitation on sale of assets; (vii) limitation on other senior subordinated
indebtedness; (viii) limitation on guarantees by subsidiaries; (ix) limitation
on the creation of any restriction on the ability of the Company's subsidiaries
to make distributions; and (x) restriction on mergers, consolidations and the
transfer of all or substantially all of the assets of the Company to another
person. In addition, the loan instruments governing the indebtedness of certain
of the Company's subsidiaries contain certain restrictive covenants which limit
the payment of dividends and distributions, and the transfer of assets to, the
Company and require such subsidiaries to satisfy specific financial
37
covenants. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" in Item 7 of this
Report.
DEPENDENCE ON KEY PERSONNEL; DEMAND FOR PERSONNEL
Mariner believes that it has benefited substantially from the
leadership and experience of its executive officers and members of its
management team. If such executive officers were to leave the Company, the
Company's business and results of operations could be materially adversely
affected. Further, the Company's growth strategy is dependent in large part on
its ability to attract and retain management, marketing and other personnel at
its facilities. From time to time, there have been shortages in the supply of
available registered nurses and various types of therapists. Mariner's ability
to provide rehabilitation services is dependent on its ability to recruit and
retain licensed therapists. The Company competes with general acute care
hospitals, skilled nursing facilities, rehabilitation hospitals, contract
rehabilitation companies and other health care providers for the services of
physicians, registered nurses, therapists and other professional personnel.
There can be no assurance that the Company will be able to attract and retain
the qualified personnel necessary for its business and planned growth. The loss
of a significant number of members of this management team, or the failure to
attract or retain the qualified personnel necessary for its business and planned
growth, could have a material adverse effect on the Company's business and
results of operations. See "Business--Employees" and "Management" in Item 1 of
this Report.
COMPETITION
The health care industry is highly competitive. Mariner competes with
general acute care hospitals, skilled nursing facilities, rehabilitation
hospitals, contract rehabilitation companies and other health care providers.
Many of the Company's competitors have underutilized facilities and are
expanding into subacute care by converting some of their facilities into
subacute units. In particular, a number of nursing care facilities and acute
care hospitals are adding subacute units. The Company's facilities generally
operate in communities that are also served by competing facilities, some of
which may be newer or offer more programs. Many of these competitors have
significantly greater resources than the Company and are affiliated with
institutions or chains that are larger and have greater access to capital than
the Company or operate on a non-profit or charitable basis. Cost containment
efforts, which encourage more efficient utilization of hospital services, have
resulted in decreased hospital occupancy in recent years. These cost containment
efforts, as well as the prospect of health care reform, have also caused many
health care providers to combine with other health care providers to achieve
greater efficiencies and to reduce costs. The Company expects this trend, which
may increase competition in its markets, to continue. See
"Business--Competition" in Item 1 of this Report.
DEPENDENCE ON CONTRACT RENEWALS
The Company provides rehabilitation program services pursuant to
contracts with skilled nursing facilities and other parties. These contracts are
generally for terms of one year and cancelable on 30 to 90 days' notice by
either party. The number of rehabilitation contracts with skilled nursing
facilities has decreased from 447 as of December 31, 1994 to 429 as of December
31, 1996. In addition, each year a number of contracts have been canceled or not
renewed by the Company or its clients. In March 1996, the Company completed the
MedRehab Merger, which added physical medicine and rehabilitation services
contracts for approximately 227 sites (including 149 skilled nursing
facilities). The decision by a significant number of Mariner's skilled nursing
facility clients to cancel or not renew these contracts could have a material
adverse effect on the Company's results of operations. See "Business--Mariner
Clinical Programs and Services."
POTENTIAL VOLATILITY OF STOCK PRICE
There has been significant volatility in the market prices of
securities of health care companies. Mariner believes factors such as
legislative and regulatory developments and quarterly variations in financial
results could cause the market price of the Company's Common Stock to fluctuate
substantially. In addition, the stock market has experienced volatility that has
particularly affected the market prices of many health care service companies'
stocks and that often has been unrelated to the operating performance of such
companies. These market fluctuations may adversely affect the price of the
Company's Common Stock.
38
CONTROL BY SIGNIFICANT STOCKHOLDERS
As of March 25, 1997 and based on their most recent filings with the
Commission on Schedule 13D, one stockholder group (the former owners of CSI)
reported beneficial ownership representing 20.8% of the Company's Common Stock.
As a result of such holding and one seat on the board of directors, this
stockholder group may have the ability to exert significant influence over the
outcome of all matters submitted to the Company's stockholders for approval,
including the election of directors.
ANTI-TAKEOVER PROVISIONS; STOCKHOLDER RIGHTS PLAN; POSSIBLE ISSUANCE OF
PREFERRED STOCK
The Company's Stockholders Rights Plan and certain provisions of the
Company's certificate of incorporation and by-laws may make it more difficult
for a third party to acquire, or discourage acquisition bids for, the Company.
In addition, in the event of a change of control, the Credit Facility also
contains an event of default upon a "change of control" as defined therein which
obligates the Company to repay amounts outstanding under the Credit Facility
upon an acceleration of the indebtedness issued thereunder. Further, if a
"change in control" (as defined in the Indenture) should occur, each holder of
the Notes has the right to require that the Company purchase such holder's Notes
at a purchase price in cash equal to 101% of the principal amount of such Notes,
plus accrued and unpaid interest thereon through the date of purchase. These
provisions could limit the price that certain investors might be willing to pay
in the future for shares of the Company's Common Stock. In addition, shares of
Mariner's preferred stock may be issued in the future without further
stockholder approval and upon such terms and conditions, having such rights,
privileges and preferences, as the Board of Directors may determine. The rights
of the holders of the Company's Common Stock will be subject to, and may be
adversely affected by, the rights of any holders of preferred stock that may be
issued in the future. Mariner has no present plans to issue any shares of
preferred stock. The Company may also issue additional shares of its Common
Stock in the future without further stockholder approval. The issuance of
preferred stock or additional shares of the Company's Common Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or discouraging a third party from acquiring, a
majority of the outstanding voting stock of the Company.
SUBORDINATION
The Notes are senior subordinated obligations of the Company and, as
such, are subordinated in right of payment to all existing and future senior
indebtedness of the Company, including indebtedness under the Credit Facility.
The Notes rank pari passu with all senior subordinated indebtedness of the
Company and will rank senior to all other subordinated indebtedness of the
Company. The Notes will also be effectively subordinated to all existing and
future liabilities of the Company's subsidaries. As of March 27, 1997, the
aggregate amount of senior indebtedness of the Company and indebtedness of the
Company's subsidiaries (excluding intercompany indebtedness) that would have
effectively ranked senior to the Notes would have been approximately $ 285.1
million. In addition, under the Indenture, the Company would have been permitted
to borrow up to an additional $ 101.5 million under the Credit Facility and,
provided certain tests are met, will be able to borrow additional senior
indebtedness. In the event of a bankruptcy, liquidation or reorganization of the
Company or in the event that any default in payment of, or the acceleration of,
any debt occurs, holders of senior indebtedness of the Company will be entitled
to payment in full from the proceeds of all assets of the Company prior to any
payment of such proceeds to holders of the Notes. In addition, the Company may
not make any principal or interest payments in respect of the Notes if any
payment default exists with respect to senior indebtedness or any other default
on Designated Senior Indebtedness (as defined in the Indenture) occurs and the
maturity of such indebtedness is accelerated, or in certain circumstances prior
to such acceleration for a specified period of time, unless, in any case, such
default has been cured or waived, any such acceleration has been rescinded or
such indebtedness has been repaid in full. Consequently, there can be no
assurance that the Company will have sufficient funds remaining after such
payments to make payments to the holders of the Notes.
HOLDING COMPANY STRUCTURE
Substantially all of the Company's assets are held by its subsidiaries.
As a result, the Company's rights, and the rights of its creditors (including
holders of the Notes) to participate in the distribution of assets of any
subsidiary upon such subsidiary's liquidation or reorganization will be subject
to the prior claims of such subsidiary's creditors, except to the extent that
the Company is itself reorganized as a creditor of such subsidiary, in which
case the claims of the Company would still be subject to the claims of any
secured creditor of such subsidiary and of any holder of indebtedness of such
subsidiary senior to that held by the Company. As of March 27, 1997 the
Company's subsidiaries would have had approximately $141.6 million of
indebtedness (excluding intercompany indebtedness and indebtedness outstanding
under the Credit Facility which is guaranteed by the Company's subsidiaries)
outstanding.
The Notes are obligations exclusively of the Company. The Notes will
not be guaranteed by any of the Company's subsidiaries. Since the operations of
the Company are currently conducted through subsidiaries, the Company's cash
flow and its ability to service its debt, including the Notes, is dependent upon
the earnings of its subsidiaries and distributions to the Company. The
subsidiaries are seperate and distinct legal entities and have no obligation,
contingent or otherwise, to pay amounts due pursuant to the Notes or to make any
funds availible therefor. In addition, all of the Company's subsidiaries have
guaranteed the obligations of the Company under the Credit Facility. Moreover,
the payment of dividends and the making of loan advances to the Company by its
subsidiaries are contingent upon the earnings of those subsidiaries and are
subject to various business considerations and, for certain subsidiaries,
restrictive loan covenants contained in the instruments governing the
indeptedness of such subsidiaries, including covenants which restrict in certain
circumstances the payment of dividends and distributions and the transfer of
assets to the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
MARINER HEALTH GROUP, INC.
We have audited the consolidated financial statements and the financial
statement schedule of Mariner Health Group, Inc. and subsidiaries (the
"Company") listed in Item 14(a) of this Form 10-K. These financial statements
and the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits.
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 provide a reasonable basis for our opinion.
In our opinion, 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, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 7, 1997
40
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,086 $ 4,616
Accounts receivable, less allowance for doubtful accounts
of $10,078 and $11,872 respectively 92,537 126,938
Estimated settlements due from third-party payors 12,915 18,912
Prepaid expenses and other current assets 6,757 8,880
Deferred income tax benefit 9,918 11,008
----------------- -----------------
Total current assets 126,213 170,354
Property, plant and equipment, net 174,486 386,425
Goodwill, net of accumulated amortization of $19,084 and $10,561,
respectively 78,212 280,803
Intangible and other assets, net of accumulated amortization of
$6,550 and $5,813, respectively 30,144 20,991
Restricted cash and cash equivalents 1,198 2,885
Deferred income tax benefit 1,273 19,775
----------------- -----------------
Total assets $ 411,526 $ 881,233
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease obligations $ 5,156 $ 8,030
Accounts payable 10,904 31,024
Accrued payroll 6,072 9,944
Accrued vacation 5,053 8,235
Other accrued expenses 22,808 41,141
Deferred income taxes 987 25
Other liabilities 1,085 3,801
----------------- -----------------
Total current liabilities 52,065 102,200
Long-term debt and capital lease obligations 107,910 415,236
Deferred income taxes 6,007 18,073
Deferred gain 2,122 1,955
Other long-term liabilities 1,030 18,981
----------------- -----------------
Total liabilities 169,134 556,445
Commitments and contingencies (Note 15)
Stockholders' equity :
Common stock, $.01 par value; 50,000,000 shares authorized; 22,540,008 and
28,978,225 issued and outstanding at December 31, 1995 and
1996, respectively 225 290
Additional paid-in capital 246,660 312,786
Unearned compensation (15) (8)
Retained earnings (accumulated deficit) (4,478) 11,720
----------------- -----------------
Total stockholders' equity 242,392 324,788
----------------- -----------------
Total liabilities and stockholders' equity $ 411,526 $ 881,233
================= =================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
41
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS
ENDED DECEMBER 31,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net patient service revenue $ 260,357 $ 337,635 $ 578,755
Other revenue 3,787 17,171 12,054
------------- -------------- -------------
Total operating revenue 264,144 354,806 590,809
------------- -------------- -------------
Operating expenses:
Facility operating costs 208,691 276,633 459,127
Corporate, general and administrative 30,935 39,830 52,500
------------- -------------- -------------
239,626 316,463 511,627
Interest expense 1,917 4,440 26,853
Interest income (98) (842) (597)
Facility rent expense, net 1,739 1,830 3,727
Depreciation and amortization 8,091 11,397 21,376
------------- -------------- -------------
Total operating expenses 251,275 333,288 562,986
Operating income 12,869 21,518 27,823
Net gain (loss) on sale of assets 932 (6) (826)
------------- -------------- -------------
Income before income taxes and extraordinary items 13,801 21,512 26,997
Net provision for income taxes (5,848) (7,892) (10,799)
------------- -------------- -------------
Income before extraordinary items 7,953 13,620 16,198
Extraordinary items (86) (1,138) ---
------------- -------------- -------------
Net income $ 7,867 $ 12,482 $ 16,198
============= ============== =============
Net income per common and common equivalent share:
Income from continuing operations before extraordinary items $ 0.41 $ 0.60 $ 0.55
Extraordinary items --- (0.05) ---
------------- -------------- -------------
Net income $ 0.41 $ 0.55 $ 0.55
============= ============== =============
Weighted average number of common and common equivalent shares
outstanding 19,251 22,755 29,210
============= ============== =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
42
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from (for) operating activities:
Net income $ 7,867 $ 12,482 $ 16,198
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 8,125 11,418 22,274
Amortization of deferred gain (905) (1,468) (167)
Loss on facility closure --- 1,801 826
Extraordinary item-loss due to early retirement of debt 143 1,138 ---
Non-recurring charges 1,375 --- 850
(Gain) loss on disposal of assets (508) 20 1,061
Earnings from partnerships (123) (14) ---
Provisions for losses on accounts receivable 1,338 3,698 2,738
Changes in operating assets and liabilities:
Increase in accounts receivable (17,063) (40,787) (24,848)
(Increase) decrease in estimated settlements from third
party payors (2,578) (7,156) 235
(Increase) decrease in prepaid expenses and other current
assets (830) (3,397) 1,059
Decrease in income taxes receivable 731 --- ---
Increase (decrease) in accounts payable (970) 3,778 10,968
Increase (decrease) in accrued liabilities 11,383 6,884 (4,779)
Decrease in other current liabilities (2,515) (166) (6,921)
Increase in deferred income taxes (4,321) (824) 6,313
--------------- --------------- ---------------
Net cash provided by (used in) operating activities 1,149 (12,593) 25,807
--------------- --------------- ---------------
Cash flows for investing activities:
Purchase of property, plant and equipment (8,875) (11,943) (22,502)
Proceeds from sale of plant, property and equipment --- --- 3,080
Increase in other assets (766) (3,210) (35,500)
Payments related to prior acquisitions --- 1,055 ---
Decrease in restricted cash --- 756 4
Cash paid for acquisitions, net of cash acquired (60,134) (52,389) (168,697)
Purchase deposits --- (19,500) ---
--------------- --------------- ---------------
Net cash used in investing activities (69,775) (85,231) (223,615)
--------------- --------------- ---------------
Cash flows from financing activities:
Drawings on line of credit 47,250 80,775 217,481
Proceeds from debt offering, net --- --- 149,666
</TABLE>
43
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Repayments of debt (64,610) (17,921) (173,063)
Proceeds from issuance of stock, net of offering costs 83,634 --- ---
Exercise of stock options 995 1,008 3,887
Shares issued under employee stock purchase plan --- 400 310
Other increases from financing activities 564 439 55
------------------ --------------- ---------------
Net cash provided by financing activities 67,833 64,701 198,336
------------------ --------------- ---------------
Increase (decrease) in cash and cash equivalents (793) (33,123) 530
Cash and cash equivalents at beginning of year 38,002 37,209 4,086
------------------ --------------- ---------------
Cash and cash equivalents at end of year $ 37,209 $ 4,086 $ 4,616
================== =============== ===============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
RETAINED
ADDITIONAL EARNINGS
PAR PAR PAID-IN UNEARNED (ACCUMULATED
SHARES VALUE SHARES VALUE CAPITAL COMPENSATION DEFICIT) TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 1,375 1,375
options
Shares purchased under
Employee Stock Purchase Plan 5,711 95 95
Tax benefit arising from
exercise of 294 294
employee stock options
Issuance of Common Stock 4,027,538 40 83,536 83,576
Cancellation of options (86) 86 --
Amortization of stock plan 34 34
expense
----------------------------------------------------------------------------------------------
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 purchased 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 326 326
options
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
Net income 16,198 16,198
Exercise of options 491,702 5 3,882 3,887
Issuance of warrants 850 850
Warrants exercised 17,177 55 55
Shares purchased under
Employee Stock Purchase Plan 26,958 310 310
Issuance of Common Stock 5,902,380 60 59,576 59,636
Tax benefit arising from
exercise of employee stock
options 1,453 1,453
Amortization of stock plan
expense 7 7
----------------------------------------------------------------------------------------------
Balance at December 31, 1996 28,978,225 $ 290 --- --- $312,786 $ (8) $ 11,720 $ 324,788
==============================================================================================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-45-
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 merger of MedRehab, Inc. ("MedRehab" or "MRI") on
March 1, 1996, 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 revenue includes 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
46
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.
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; however, an increase in denials
could materially and adversely affect the Company.
Under arrangements in which the Company bills a skilled nursing
facility for its rehabilitation services on a fee for service basis, Medicare
reimburses the facility based on a reasonable cost standard. Specific guidelines
exist for evaluating the reasonable cost of physical, occupational and speech
therapy services. Medicare applies salary-equivalency guidelines in determining
the reasonable cost of physical therapy services, which is the cost that would
be incurred if the therapist were employed by a nursing facility, plus an amount
designed to compensate the provider for certain general and administrative
overhead costs. Medicare pays for occupational and speech therapy services on a
reasonable cost basis, subject to the so-called "prudent buyer" rule for
evaluating the reasonableness of the costs. The Company's gross margins for its
physical therapy services under the salary equivalency guidelines are
significantly less than for its speech and occupational therapy services under
the "prudent buyer" rule. In addition, Mariner provides certain services between
subsidiary companies, some of which are charged at cost and others of whch are
charged at market rates. Mariner believes that the services which are charged at
market rates qualify for an exception to Medicare's related party rule. There
can be no assurance, however, that HCFA will endorse Mariner's position and the
Medicare reimbursement received for such services may be subject to audit and
recoupment in future years.
In April 1995, HCFA issued a memorandum to its Medicare fiscal
intermediaries as a guideline to assess costs incurred by inpatient providers
relating to payment of occupational and speech language pathology services
furnished under arrangements that include contracts between therapy providers
and inpatient providers. While not binding on the fiscal intermediaries, the
memorandum suggested certain rates to assist the fiscal intermediaries in making
annual "prudent buyer" assessments of speech and occupational therapy rates paid
by inpatient providers. In addition, HCFA is in the process of promulgating new
salary equivalency guidelines which will update current physical therapy and
respiratory therapy rates and establish new guidelines for occupational therapy
and speech therapy. Mariner will not be able to determine whether these new
proposals will have a material effect on its rehabilitation operations until the
publication of final rates and rules. HCFA through its intermediaries is also
subjecting physical therapy, occupational therapy and speech therapy to a
heightened level of scrutiny resulting in increasing audit activity. A majority
of Mariner's provider and rehabilitation contracts provide for indemnification
of the facilities for potential liabilities in connection with reimbursement for
rehabilitation services. There can be no assurance that actions ultimately taken
by HCFA with regard to reimbursement rates for such therapy services will not
materially adversely affect the Company's results of operations.
During 1996, the Company observed a change in the practices of its
Medicare fiscal intermediaries which, on behalf of HCFA, the federal agency
responsible for administering the Medicare program, have begun to aggressively
and retrospectively change their position on previously approved costs. This
change includes the reclassification of costs from reimbursable to
non-reimbursable and the challenging of payment for costs which had
traditionally been approved. In response to these challenges of the payment of
Medicare costs, the Company changed its estimate of required reserves and
provided an additional $10,000,000 reserve for potential lower levels of
Medicare reimbursement.
Other Revenue
Other revenue 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 certain
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, 1994, 1995 and 1996 of $35,039,000, $50,738,000 and $69,950,000
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, 1994, 1995 and 1996, were
$173,652,000, $225,895,000 and $389,177,000, 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.
47
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.
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.
During 1996, the Company wrote-off approximately $14,007,000 of fully
amortized goodwill and approximately $2,585,000 of fully amortized other
intangible assets.Amortization expense related to goodwill and intangible assets
for the years ended December 31, 1994, 1995 and 1996 was $2,396,000, $3,112,000,
and $6,158,000, 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 and amortization 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.
Net Income Per Common and Common Equivalent Share
Net income per common and common equivalent share is calculated based
on net income divided by the weighted average number of common and common
equivalent shares outstanding during the year. Fully diluted net income per
common and common equivalent share has not been presented as amounts would not
differ significantly from those presented.
During 1997, the Financial Accounting Standards Board issued FASB
Statement No. 128, "Earnings Per Share." This standard is designed to improve
the earnings per share ("EPS") information provided in financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements, and increasing the comparability of EPS data on an international
basis. The Company will implement the new standard in its fiscal year ending
December 31, 1997. The impact of the implementation of this standard has not yet
been determined.
48
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year financial statement presentation.
3. MERGERS AND ACQUISITIONS
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 period immediately
preceding the acquisition are as follows:
<TABLE>
<CAPTION>
MARINER PINNACLE COMBINED
------- -------- --------
<S> <C> <C> <C>
Three months ended March 31, 1994:
Total revenue $ 23,026 $ 23,951 $ 46,977
Net income 1,230 1,366 2,596
</TABLE>
The combined financial results presented above include adjustments made
to conform accounting policies of the two companies. There were no intercompany
transactions between the two companies for the period presented.
During 1994, the Company recorded general and administrative charges 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.
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. Goodwill totaling
approximately $951,000 was recorded in connection with this transaction.
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
49
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 been 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 occurred 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. As a result,
Mariner received $11,227,000 of management fees from facilities controlled by
Stiles A. Kellett, Jr. and Samuel B. Kellett (the "Kelletts") during 1995. 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 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 connection with 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, comprised of
$33,000,000 in cash and the assumption of 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; accordingly, the purchase prices have been allocated to the assets
acquired based on their fair value with any excess accounted for as goodwill.
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.
50
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 immediately
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>
The combined financial results presented above include adjustments made
to conform accounting policies of the two companies. There were no intercompany
transactions between the two companies for the period presented. As of December
31, 1996, other accrued expenses includes $2,009,000 which has been accrued
primarily to pay remaining scheduled severance amounts to certain employees.
In March 1996, Mariner acquired a primary care physician organization
in the Orlando, Florida area. In this transaction, Mariner issued an aggregate
of 48,722 shares of its Common Stock and paid an aggregate of $1,500,000 in cash
which was financed under the Credit Facility. The Company has recorded a total
of $2.4 million in goodwill related to this transaction.
In May 1996, the Company acquired seven skilled nursing facilities and
one assisted living facility with an aggregate of 960 beds in Florida, Tennessee
and Kansas (the "1996 Florida Acquisition"). All of the issued and outstanding
shares of common stock were converted into the right to receive an aggregate of
approximately $28,050,000 in cash. The Company financed the consideration paid
in the 1996 Florida Acquisition with a portion of the net proceeds from the sale
of the Notes and borrowings under the Credit Facility. Goodwill totaling
approximately $38,000,000 was recorded in connection with this transaction.
In the fourth quarter of 1996, Mariner consummated its acquisition of
certain assets of Allegis Health Services, Inc. ("Allegis") and certain of its
affiliates. Under the terms of the acquisition agreement, the Company purchased
five inpatient facilities, assumed two operating leases and one capital lease
and purchased Allegis' institutional pharmacy and its rehabilitation program
management subsidiary. The total purchase price of $110,000,000 consisted of the
assumption of $12,000,000 in debt, including the capital lease of approximately
$5,000,000, and $98,000,000 in cash. Under the terms of the agreement,
$103,000,000 of the purchase price was paid at the closings during the fourth
quarter of 1996. Approximately $98,500,000 of that amount plus certain closing
costs was borrowed under the Credit Facility. The remaining $3,000,000 was paid
when certain financial performance conditions were met for 1996. Of this amount,
approximately $1.6 million was paid in 1997 at which time goodwill was adjusted
to a total of $73.4 million for this transaction.
On October 1, 1996, the Company acquired a 163-bed facility in
Jacksonville, Florida. The total purchase price was $9,850,000. Mariner funded
the purchase price by assuming two HUD mortgages in the aggregate principal
amount of approximately $4,236,000. The Company borrowed $6,500,000 under its
Credit Facility to fund the remainder of the cash portion of the purchase price
and to replace reserves required by the HUD mortgage agreements. Of the total
purchase price, approximately $4.1 million was accounted for as goodwill.
During 1996, all acquisition were accounted for as purchase except for
the merger with MedRehab Inc. which was accounted for as a pooling of interests.
In connection with the CSI and 1996 Florida Acquistions, the Company posted
additional purchase accounting reserves in the fourth quarter of 1996 of
$9,000,000 consisting of $7,000,000 for third party settlements and $2,000,000
for litigation.
4. DISPOSITIONS OF FACILITIES
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 year ended December 31, 1994, the facility generated $403,000 of net patient
service revenue, and $202,000 of income from continuing operations before income
taxes, extraordinary items and cumulative effect of change in accounting
principle, respectively.
51
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 10% and 24% of the Company's accounts
receivable and estimated settlements due from third party payors are from
Medicaid programs and 21% and 31% are from Medicare programs at December 31,
1995 and 1996, 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 its 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
totaled $1,244,000 at December 31, 1996. Additional deferred gains of $711,000
relate to prior Pinnacle transactions.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
DECEMBER 31,
1995 1996
Land and improvements $ 15,342 $ 32,433
Building and improvements 141,453 329,141
Furniture and equipment 48,588 63,361
Leasehold rights and improvements 429 2,841
Software --- 2,348
Construction in progress 1,954 3,850
----------- ----------
207,766 433,974
Less: accumulated depreciation (33,280) (47,549)
----------- ----------
$ 174,486 $ 386,425
=========== ==========
52
Depreciation expense related to property, plant and equipment for the
years ended December 31, 1994, 1995 and 1996 was $5,695,000, $8,285,000 and
$15,218,000, respectively.
Interest costs associated with construction or renovations are
capitalized in the period in which they are incurred. No interest was
capitalized during 1994, 1995, or 1996.
Included in property, plant and equipment is equipment, furniture, land
and buildings under capital leases with cost bases totaling $3,973,000 and
$94,582,000 at December 31, 1995 and 1996, respectively. Accumulated
amortization on equipment under capital leases is approximately $188,000 and
$2,479,000 at December 31, 1995 and 1996 respectively. These non-cash
transactions have been excluded from the consolidated statements of cash flows.
8. RESTRICTED CASH AND CASH EQUIVALENTS
Approximately $1,198,000 and $2,885,000 of the Company's cash is
restricted for capital improvements and collateral under the terms of various
financing arrangements at December 31, 1995 and 1996, respectively. This
includes amounts related to debt assumed in connection with certain
acquisitions.
9. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1996
---- ----
(IN THOUSANDS)
--------------
<S> <C> <C>
Senior Subordinated Notes $ --- $ 149,691
Revolving credit and term loan agreement 64,500 132,000
Mortgage loans 16,615 51,232
Tax exempt low floater with annual maturities of
$395,000 through October 2010 5,875 5,480
Term loans and other 18,775 8,361
Capital lease obligations 7,301 76,502
---------------- --------------
113,066 423,266
Current maturities of long-term debt (4,115) (4,802)
Current portion of capital lease obligations (1,041) (3,228)
---------------- --------------
$ 107,910 $ 415,236
================ ==============
</TABLE>
On April 4, 1996, the Company sold $150,000,000 aggregate principal
amount of its 9-1/2% Senior Subordinated Notes due 2006 (the "Notes"). The Notes
mature on April 1, 2006. The Notes are unsecured senior subordinated obligations
of Mariner and, as such, are subordinated in right of payment to all existing
and future senior indebtedness of Mariner, including indebtedness under the
Credit Facility. The Notes contain certain covenants, including, among other
things, covenants with respect to the following matters: (i) limitation on
indebtedness; (ii) limitation on restricted payments; (iii) limitation on the
incurrence of liens; (iv) restriction on the issuance of preferred stock of
subsidiaries; (v) limitation on transactions with affiliates; (vi) limitation on
the sale of assets; (vii) limitation on other senior subordinated indebtedness;
(viii) limitation on guarantees by subsidiaries; (ix) limitation on the creation
of any restriction on the ability of the Company's subsidiaries to make
distributions; and (x) restriction on mergers, consolidations and the transfer
of all or substantially all of the assets of the Company to another person. The
Notes were issued under an Indenture dated as of April 4, 1996 by and among the
Company and State Street Bank and Trust Company, as trustee (the "Indenture").
53
Mariner has a $250,000,000 senior secured revolving credit facility
with a syndicate of banks (the "Credit Facility"). As of April 30, 1996, the
Company entered into an amendment to the Credit Facility to increase the size of
the Credit Facility to $200,000,000 from $175,000,000, extend the maturity of
the Credit Facility and reduce certain restrictions that the Credit Facility
imposes on the operations of the business of the Company and its subsidiaries.
As of July 1, 1996 the terms were amended to provide for borrowings of up to
$250,000,000. As of December 31, 1995 and 1996, principal balances outstanding
under the Credit Facility were approximately $64,500,000 and $132,000,000
respectively, and letters of credit outstanding under this facility were
$2,612,000 and $5,499,000, respectively. Mariner has used, and intends to
continue to use, borrowings under the Credit Facility to finance the acquisition
and development of additional subacute care facilities and related businesses,
and for general corporate purposes, including working capital. Mariner's
obligations under the Credit Facility are collateralized by a pledge of the
stock of its subsidiaries and are guaranteed by all of the Company's
subsidiaries. In addition, the Credit Facility is collateralied by mortgages on
certain of the Company's inpatient facilities, leasehold mortgages on certain
inpatient facilities leased by the Company, and security interests in certain
other properties and assets of the Company and its subsidiaries. The Credit
Facility matures on April 30, 1999 and provides for prime or LIBOR-based
interest rate options. The borrowing availability and rate of interest varies
depending upon specified financial ratios. The Credit Facility also contains
covenants which, among other things, require the Company to maintain certain
financial ratios and impose certain limitations or prohibitions on the Company
with respect to the incurrence of indebtedness, senior indebtedness, liens and
capital leases; the payment of dividends on, and the redemption or repurchase
of, its capital stock; investments and acquisitions, including acquisitions of
new facilities; the merger or consolidation of the Company with any person or
entity; and the disposition of any of the Company's properties or assets. The
weighted average interest rate on the outstanding balances at December 31, 1995
and 1996 was 6.43% and 7.13%, respectively.
Term loans at December 31, 1995 and 1996 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, a term
note in connection with the Heritage Acquisition (See Note 3), the MedRehab
merger, and an airplane. A total of $4,670,000 of term loans are unsecured. An
airplane is pledged as collateral on the note given at the purchase date.
Interest accrues at rates ranging from 6% to 12%.
At December 31, 1996, mortgage loans collateralized by the properties
included $8,494,000 on one facility related to the purchase of a previously
leased facility, $8,448,000 in mortgages guaranteed by HUD, $17,291,000 for
facilities acquired in the 1996 Florida Acquisition, $9,408,000 for former CSI
facilities, $7,497,000 related to Allegis facilities, and $94,000 for a
condominium acquired in the MedRehab Merger. These notes bear interest rates
ranging from 8.0% to 11.5%, with terms expiring from August, 1998 to April,
2011.
In November 1993, the Company refinanced the certain debt instruments
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, 1996, the rate was 3.75%.
In addition, the Company leases certain equipment, land and buildings
under capital leases. Assets under capital leases are capitalized using interest
rates appropriate at the inception of each lease. (See Note 3).
Aggregate maturities of long-term debt and capital lease obligations
for the years ending after December 31, 1996 are as follows:
<TABLE>
<CAPTION>
TOTAL DEBT CAPITAL LEASES
<C> <C> <C> <C>
1997 $ 8,030 $ 4,802 $ 3,228
1998 13,766 5,999 7,767
1999 144,256 141,660 2,596
2000 9,733 7,038 2,695
2001 11,238 1,124 10,114
Thereafter 236,243 186,141 50,102
------------ ------------- --------------
$ 423,266 $ 346,764 $ 76,502
============ ============= ==============
</TABLE>
54
Interest paid for the years ended December 31, 1994, 1995 and 1996
amounted to approximately $2,075,000, $3,599,000 and $ 22,939,000.
respectively.
10. INCOME TAXES
The provision for income taxes consists of the following at December
31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1995 1996
---- ---- ----
(IN THOUSANDS)
--------------
<S> <C> <C> <C>
Deferred Federal income tax benefit $ 3,673 $ 704 $ 963
Deferred state income tax benefit 648 120 280
Current Federal income tax provision (7,218) (6,398) (9,340)
Current state income tax provision (2,951) (2,318) (2,702)
------------- ------------- --------------
Total provision for income taxes $ (5,848) $ (7,892) $ (10,799)
============= ============= ==============
</TABLE>
The provision for income taxes is reconciled to the tax provision
computed at the Federal statutory rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Statutory rate 35% 35% 35%
State taxes, net of Federal effect 14% 7% 7%
Reversal of deferred taxes at higher statutory rate --- (2%) ---
Permanent differences 15% --- 6%
Net operating loss carryforward utilization --- (1%) ---
Change in valuation allowance (26%) --- (5%)
Other 4% (2%) (3%)
-------- -------- ------------
42% 37% 40%
======== ======== ============
</TABLE>
55
Deferred tax assets and liabilities are comprised of the following at
December 31, 1995 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1996
---- ----
(IN THOUSANDS)
--------------
<S> <C> <C>
Deferred tax assets:
Reserves for receivables $ 5,300 $ 4,439
Deferred revenue 840 500
Merger costs 3,232 657
Accrued expenses 2,973 22,761
Federal NOL 1,095 1,631
Valuation allowance (1,410) ---
Other 558 795
------------- ------------
$ 12,588 $ 30,783
------------- ------------
Deferred tax liabilities:
Fixed assets. $ 4,497 $ 13,551
Write-off of deferred costs 610 601
Goodwill 2,191 3,128
Tax Lease --- 805
Other 1,093 13
------------- ------------
$ 8,391 $ 18,098
------------- ------------
Net deferred tax asset $ 4,197 $ 12,685
============= ============
</TABLE>
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 was expected to be 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 assets was established at December 31, 1995 in accordance
with the Statement of Financial Accounting Standard No. 109, "Accounting for
Income Taxes." The NOLs expire at various times through 2010. In 1996, it was
determined, based on MRI's estimated profitability that it was more likely than
not that the NOLs could be utilized in 1996 and future years. Accordingly, the
valuation allowance was reversed at December 31, 1996.
The establishment of reserves in conjunction with the acquisition of
certain entities resulted in an increase to the long-term deferred tax asset of
$16,193,000. The long-term deferred tax liability was increased by $8,949,000
due to the acquisition of assets with a different tax basis.
During 1994, 1995 and 1996, the Company paid Federal, state and local
income taxes in the amounts of approximately $5,528,000, $7,333,000 and
$10,922,000 respectively. As of December 31, 1996, other accrued expenses
includes $5,918,000 which has been accrued for Federal, state and local income
taxes.
11. STOCK OPTION PLANS
The Company has five stock-based compensation plans. In October 1995,
the FASB issued SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 is
effective for periods beginning after December 15, 1995. SFAS 123 requires that
companies either recognize compensation expense for grants of stock, stock
options, and other equity instruments based on fair value, or provide pro forma
disclosure of net income and earnings per share in the notes to the financial
statements. The Company adopted the disclosure provisions of SFAS 123 in 1996
and has applied APB Opinion 25 and related interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its stock
option plans. Had compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates as calculated
in accordance with SFAS 123, the Company's net income and earnings per share for
the years ended December 31, 1996 and 1995 would have been reduced to the pro
forma amounts indicated below.
1996 1995
------------------- ---------------------
Net Income Earnings Per Net Income Earnings Per
---------- ------------ ---------- ------------
(In thousands) Share (In thousands) Share
-------------- ----- -------------- -----
As
Reported $16,198 $0.55 $12,482 $0.55
Pro
forma $13,337 $0.46 $ 9,707 $0.43
The fair value of each stock option is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: an expected life of 5.5 years, expected volatility of 55%, and a
risk-free interest rate of 6.17%.
Under the Company's plans, the exercise prices of options equal the
market price of the Company's stock on the date of grant and their maximum terms
are generally ten years. Options vest generally over a five-year period or upon
achievement of certain earnings targets. As of December 31, 1996, 122,080 shares
were authorized for grants of options under the Company's plans.
<TABLE>
<CAPTION>
STOCK OPTION WEIGHTED AVERAGE
AMOUNTS EXERCISE PRICES
----------- ---------------
<S> <C> <C>
Outstanding at December 31, 1993 1,107,671 $ 5.27
Granted 1,083,808 $ 5.85
Exercised (180,418) $ 5.92
Canceled (525,354) $10.45
------------
Outstanding at December 31, 1994 1,485,707 $10.90
Granted 2,266,046 $13.78
Exercised (140,111) $ 7.20
Canceled (191,694) $15.04
------------
Outstanding at December 31, 1995 3,419,948 $11.37
Granted 1,214,073 $11.12
Exercised (491,702) $ 7.91
Canceled (472,745) $12.68
============
Outstanding at December 31, 1996 3,669,574 $11.55
============
</TABLE>
At December 31, 1996, the Company had approximately 3,669,574 options
outstanding of which approximately 1,290,285 were exercisable at a weighted
average exercise price of $10.64.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------------
Weighted-Average
Remaining
Range of Number Contractual Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---- -------------- ----------- --------------
<C> <C> <C> <C> <C> <C>
$ 2.00-$10.00 1,535,132 9.0 Years $ 8.01 508,632 $ 6.94
$11.00-$20.00 2,130,873 8.3 Years $14.00 778,084 $12.90
Over $20.00 3,569 2.83 Years $44.49 3,569 $44.49
--------- ---------
3,669,574 1,290,285
========= =========
</TABLE>
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.
12. 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.
56
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.
13. WARRANTS
During 1996, the Company issued warrants to purchase 210,000 shares of
its Common Stock at $11.38 in exchange for an appointment as the preferred
subacute care provider for a national hospital alliance with 1,700 member
hospitals. The Company may receive management fees under the agreement. The
Company recorded a charge of approximately $850,000 related to the issuance of
the warrants. Under this arrangement, the Company
57
will issue up to 1,890,000 additional warrants if the relationship results in
specified gains to the Company. No additional warrants were earned by the
hospital alliance in 1996.
14. 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. Defined contribution expense for
the Company for the years ended December 31, 1994, 1995, and 1996 was $108,000,
$76,000, and $ 54,000 respectively.
The MedRehab, Inc. Tax-Deferred Retirement Savings Plan covers
substantially all former 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 are at the discretion of the board of directors. All assets of the
plan are held by a trustee.
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 effective July 1,
1991 as a result of freezing pension benefits. There was no service cost charge
in 1994, 1995 or 1996 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, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1995 1996
---- ---- ----
(IN THOUSANDS)
--------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested $ 393 $ 438 $ 495
Nonvested 102 116 64
--------- ---------- -----------
Accumulated benefit obligation 495 554 559
--------- ---------- -----------
Projected benefit obligation 495 554 559
Less: plan assets at fair value 318 439 630
--------- ---------- -----------
Projected benefit obligation in excess of (less
than) plan assets 177 115 (71)
Adjustment required to recognize minimum liability 214 208 ---
Unrecognized transition asset 12 10 9
Unrecognized net loss (226) (218) (146)
--------- ---------- -----------
Accrued (prepaid) pension cost $ 177 $ 115 $ (208)
========= ========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
---- ---- ----
(IN THOUSANDS)
--------------
<S> <C> <C> <C>
Interest cost on projected benefit obligation $ 36 $ 36 $ 36
Actual return on plan assets 3 (73) (103)
Net amortization (10) 59 78
-------- --------- ---------
$ 29 $ 22 $ 11
======== ========= =========
Key Assumptions:
Weighted average discount rate of 7.5% 7.5% 7.0%
obligations
Long-term rate of return on assets 7.5% 7.5% 7.5%
</TABLE>
Subsequent to the curtailment date, no increases in compensation were
assumed.
58
15. 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.
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, 1996, long-term operating lease commitments are as
follows:
OPERATING LEASES
(IN THOUSANDS)
1997....................................$ 11,353
1998..................................... 10,234
1999..................................... 8,599
2000..................................... 5,716
2001..................................... 4,297
Thereafter............................... 8,302
--------------------
$ 48,501
====================
Total rental expense under operating leases for 1994, 1995 and 1996 was
$5,841,000, $5,516,000, and $ 10,071,000 respectively.
SELF INSURANCE
Approximately 20% of employees enrolled in Company sponsored health
plans are covered under a self-insured plan. The Company's liability for losses
under this plan is capped at $200,000 per claim and $1,000,000 per person
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 $1,000,000 per person through a contract with an
insurance company. The Company has an outstanding letter of credit of
$3,831,000, 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 reserved, 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.
REGULATORY ENVIRONMENT
The health care industry is subject to numerous laws and regulations of
federal, state, and local governments. Compliance with these laws and
regulations can be subject to future government review and interpretation as
well as regulatory actions unknown or unasserted at this time. Recently,
government activity has increased with respect to investigations and
allegations concerning possible violations by health care providers which
creates a possibility of significant repayments for reimbursement of patient
services previously billed.
16. 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.
59
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, 1995
and 1996.
17. RELATED PARTY TRANSACTIONS
The Company leases 14 facilities under operating and capital leases
from affiliates of the former CSI, in which entity a board member of the Company
has a significant interst. During 1996, the Company made cash payments on such
lease obligations of $7,593,000. Capital lease obligations include $68,798,000
of minimum lease payments due over the remaining lease terms. In addition, the
Company manages three facilities for affiliates of the former CSI. In 1996, the
Company recognized $1,135,000 of management fee reveune related to this
arrangement. In addition , the Company made interest-free loans to partnerships
that owned two facilities purchased by the Company. The loans have principal
balances of $955,521 and $663,256 respectively and mature on May 24, 1999 and
2000, respectively. These loans are guaranteed by a Director and significant
shareholder of the Company.
18. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma condensed statements of operations
for the years ended December 31, 1995 and 1996 give effect to certain
acquisitions as if they had occurred at the beginning of these years. The 1995
pro forma amounts give effect to a 1995 acquisition (Heritage) and acquisitions
consummated in 1996 (CSI, the 1996 Florida Acquisition and Allegis). The 1996
pro forma amounts give effect only to the 1996 transactions as the 1995
acquisitions are included in the results of the Company for the year ended
December 31, 1996. 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 PRO FORMA COMBINED
MARINER, HERITAGE, MARINER, 1996 FLORIDA
CSI,1996 FLORIDA ACQUISITION, ALLEGIS
ACQUISITION, ALLEGIS
1995 1996
---- ----
<S> <C> <C>
Total operating revenue $591,788 $652,732
Net income before extraordinary items $ 12,324 $ 16,127
Net income per share before $ .43 $ .55
extraordinary items
Net income $ 11,186 $ 16,127
Net income per share $ .39 $ .55
</TABLE>
60
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table represents summarized results:
<TABLE>
<CAPTION>
1995 1996
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 $ 79,339 $ 81,753 $83,325 $ 93,218 $132,629 $143,061 $134,699 $168,366
Other revenue 820 1,812 6,484 8, 055 2,550 2,543 3,052 3,909
--------- --------- -------- --------- -------- --------- --------- ---------
Total operating revenue 80,159 83,565 89,809 101,273 135,179 145,604 137,751 172,275
Operating expenses:
Facility operating costs 62,822 64,451 71,672 77,688 104,591 109,323 112,863 132,350
Corporate general and 6,548 16,015 8,690 8,577 17,227 11,294 11,025 12,954
other
Interest expense, net 279 452 896 1,971 4,392 6,578 6,763 8,523
Facility rent expense, net 355 563 528 384 474 738 1,106 1,409
Depreciation and 2,660 2,631 2,612 3,494 5,196 5,132 5,349 5,699
amortization
--------- --------- -------- --------- -------- --------- --------- ---------
Total operating expenses 72,664 84,112 84,398 92,114 131,880 133,065 137,106 160,935
Operating income (loss) 7,495 (547) 5,411 9,159 3,299 12,539 645 11,340
Gain (loss) on sale of --- (11) 3 2 --- --- --- (826)
facilities
--------- --------- -------- --------- -------- --------- --------- ---------
Income (loss) before
income taxes and
extraordinary items 7,495 (558) 5,414 9,161 3,299 12,539 645 10,514
Provision for income tax 2,876 (355) 1,928 3,443 1,254 5,015 324 4,206
--------- --------- -------- --------- -------- --------- --------- ---------
Income (loss) before
extraordinary
items 4,619 (203) 3,486 5,718 2,045 7,524 321 6,308
Extraordinary items --- (1,138) --- --- --- --- --- ---
--------- --------- -------- --------- -------- --------- --------- ---------
Net income (loss) $ 4,619 $(1,341) $ 3,486 $ 5,718 $ 2,045 $ 7,524 $ 321 $ 6,308
========= ========= ======== ========= ======== ========= ========= =========
Net income (loss) per common
and common equivalent
share $ .20 $ (.06) $ 0.15 $ .25 $ .07 $ .26 $ .01 $ .22
========= ========= ======== ========= ======== ========= ========= =========
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
61
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors and compliance by the
Company's directors and executive officers with Section 16(a) of the Securities
Exchange Act of 1934 will be set forth under the captions "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance,"
respectively, in the Company's definitive proxy statement for its annual meeting
of stockholders which is currently expected to be filed with the Securities and
Exchange Commission within 120 days of December 31, 1996, and is incorporated
herein by reference.
Information regarding the Company's executive officers is contained in
Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will appear under the caption
"Executive Compensation" in the Company's definitive proxy statement for its
annual meeting of stockholders which is currently expected to be filed with the
Securities and Exchange Commission within 120 days of December 31, 1996, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item will appear under the caption
"Principal Stockholders of Mariner" in the Company's definitive proxy statement
for its annual meeting of stockholders which is currently expected to be filed
with the Securities and Exchange Commission within 120 days of December 31,
1996, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will appear under the caption
"Certain Transactions" in the Company's definitive proxy statement for its
annual meeting of stockholders which is currently expected to be filed with the
Securities and Exchange Commission within 120 days of December 31, 1996, and is
incorporated herein by reference.
62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) List of Financial Statements
The following audited consolidated financial statements of Mariner Health Group,
Inc. and its subsidiaries, and the accountant's report relating thereto, are
filed as a part of this Report:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1995 and 1996
Consolidated Statements of Operations for the Years Ended December 31,
1994, 1995 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996
Notes to Consolidated Financial Statements
(a)(2) List of Schedules
Included at the end of this Report is the following:
Schedule II. Valuation and Qualifying Accounts
All other schedules to the consolidated financial statements are
omitted as the required information is either inapplicable or presented
in the financial statements or related notes.
(a)(3) List of Exhibits
The Exhibits which are filed with this Report or which are incorporated
by reference herein are set forth in the Exhibit Index which appears at page 65
hereof.
(b) Reports on Form 8-K:
October 3, 1996. Item 2 - Acquisition or Disposition of Assets to
disclose the acquisition by one of the Company's subsidiaries of certain assets
of Allegis Health Services, Inc. and certain of its Affiliates ("Allegis"); Item
5 - Other Events, to disclose a press release addressing uncertainty in the
Medicare industry and describing the Company's adoption of a generally more
conservative approach to accounting for Medicare reimbursement; and Item 7 -
Financial Statements, Pro Forma Financial Information and Exhibits, to disclose
certain financial information relating to Allegis.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, this 31st day of
March, 1997.
MARINER HEALTH GROUP, INC.
By: /s/ David N. Hansen
-------------------------------
David N. Hansen
Executive Vice President, Chief
Financial Officer and Treasurer
We, the undersigned officers and directors of Mariner Health Group,
Inc., hereby severally constitute and appoint Arthur W. Stratton, Jr. and David
N. Hansen, and each of them singly, our true and lawful attorneys, with full
power to them and each of them singly, to sign for us in our names in the
capacities indicated below, amendments to this Report on Form 10-K and to file
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
<S> <C> <C>
/s/ Arthur W. Stratton, Jr. Chairman of the Board of March 31, 1997
- ----------------------------
Arthur W. Stratton, Jr. Directors, Chief Executive
Officer, President and Director
(principal executive officer)
/s/ David N. Hansen Executive Vice President, Chief March 31, 1997
- -------------------
David N. Hansen Financial Officer and Treasurer
(principal financial and
accounting officer)
/s/ David C. Fries Director March 31, 1997
- -------------------
David C. Fries
/s/ Christopher Grant, Jr. Director March 31, 1997
- ---------------------------
Christopher Grant, Jr.
Director
- ---------------------------
Stiles A. Kellett, Jr.
/s/ John F. Robenalt Director March 31, 1997
- ---------------------
John F. Robenalt
</TABLE>
SCHEDULE II
MARINER HEALTH GROUP, INC.
SCHEDULE II --- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Provision Uncollectible Balance at
Beginning for Accounts Other End of
Allowance for Doubtful Accounts of Period Bad Debt Written Off Changes (1) Period
- ------------------------------- --------- -------- ----------- ------- ------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996 $ 10,078,000 $ 2,738,000 $ 6,349,000 $ 5,405,000 $11,872,000
Year ended December 31, 1995 $ 6,379,000 $ 3,698,000 $ 634,000 $ 635,000 $10,078,000
Year ended December 31, 1994 $ 6,040,000 $ 1,338,000 $ 1,281,000 $ 282,000 $ 6,379,000
</TABLE>
(1) Principally represents reserves acquired in purchases of businesses and
facilities.
EXHIBIT INDEX
The following designated exhibits are, as indicated below, either filed
herewith or have heretofore been filed with the Securities and Exchange
Commission and are referred to and incorporated by reference to such filings.
EXHIBIT NO. DESCRIPTION
2.1, 10.1 Participation Agreement dated as of January 9, 1995 by and
among the Company, Blue Corporation, Mariner Supply Services,
Inc., MHC Rehab Corp., Convalescent Services, Inc. ("CSI"),
Convalescent Supply Services, Inc., Meadow Rehab Corp. and
Stiles A. Kellett, Jr., Samuel B. Kellett, Stiles A. Kellett,
Jr., as Trustee of Samuel B. Kellett, Jr. Irrevocable Trust
Dated 11/1/91, Stiles A. Kellett, Jr., as Trustee of
Charlotte Rich Kellett Irrevocable Trust Dated 11/1/91,
Samuel B. Kellett, as Trustee of Stiles A. Kellett III
Irrevocable Trust Dated 11/1/91 and Samuel B. Kellett, as
Trustee of Barbara Katherine Kellett Irrevocable Trust Dated
11/1/91 (Incorporated by reference to Exhibit 2.1, 10.1 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
2.2, 10.2 Asset Purchase Agreement dated as of January 9, 1995 by and
among Mariner Supply Services, Inc. and Convalescent Supply
Services, Inc. ("CSSI") (Incorporated by reference to Exhibit
2.2, 10.2. to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994).
2.3, 10.3 Asset Purchase Agreement dated as of January 9, 1995 by and
among MHC Rehab Corp. and Meadow Rehab Corp. (Incorporated by
reference to Exhibit 2.3, 10.3 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994).
2.4, 10.4 Asset Purchase Agreement dated as of January 9, 1995 by and
among CSI and Stiles A. Kellett, Jr., Samuel B. Kellett,
Stiles A. Kellett, Jr., as Trustee of Samuel B. Kellett, Jr.
Irrevocable Trust Dated 11/1/91, Stiles A. Kellett, Jr., as
Trustee of Charlotte Rich Kellett Irrevocable Trust Dated
11/1/91, Samuel B. Kellett, as Trustee of Stiles A. Kellett
III Irrevocable Trust Dated 11/1/91 and Samuel B. Kellett, as
Trustee of Barbara Katherine Kellett Irrevocable Trust Dated
11/1/91 (Incorporated by reference to Exhibit 2.4, 10.4 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
2.5, 10.5 Agreement and Plan of Merger dated as of January 9, 1995 by
and among the Company, Blue Corporation and CSI (Incorporated
by reference to Exhibit 2.5, 10.5 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994).
2.6, 10.6 Amendment Agreement dated as of May 24, 1995 by and among (i)
the Company; (ii) Blue Corporation; (iii) Mariner Supply
Services, Inc.; (iv) MHC Rehab Corp.; (v) CSI; (vi)
Convalescent Supply Services, Inc.; (vii) Meadow Rehab Corp.;
(viii) Stiles A. Kellett, Jr., Samuel B. Kellett, Stiles A.
Kellett, Jr., as Trustee of Samuel B. Kellett, Jr.
Irrevocable Trust Dated 11/1/91, Stiles A. Kellett, Jr., as
Trustee of Charlotte Rich Kellett Irrevocable Trust Dated
11/1/91, Samuel B. Kellett, as Trustee of Stiles A. Kellett
III Irrevocable Trust Dated 11/1/91 and Samuel B. Kellett, as
Trustee of Barbara Katherine Kellett Irrevocable Trust Dated
11/1/91, (ix) Villa Medical Investors, Ltd. (L.P.) ("VMI");
(x) Arlington Heights Medical Investors, Ltd. (L.P.)
("AHMI"); and (xi) Ft. Worth Medical Investors, Ltd., Sun
City Center Associates, L.P., Houston-Northwest Medical
Investors, Ltd. (L.P.), Dallas Medical Investors, Ltd.
(L.P.), Ft. Bend Medical Investors, Ltd. (L.P.), Northwest
Healthcare, L.P., Belleair East Medical Investors, Ltd.
(L.P.), Denver Medical Investors, Ltd. (L.P.), Tallahassee
Healthcare Associates, Ltd. (L.P.), Port Charlotte Healthcare
Associates, Ltd. (L.P.), South Denver Healthcare Associates,
Ltd. (L.P.), Melbourne Healthcare Associates, (L.P. ) Ltd.,
Pinellas III Healthcare, Ltd. (L.P.), Polk Healthcare, Ltd.
(L.P.), Orange Healthcare, Ltd. (L.P.), and Creek Forest,
Limited, (collectively, the
66
"Lessors") (Incorporated by reference to Exhibit 2.1, 10.1 to
the Company's Form 10-Q for the quarter ended June 30, 1995,
as amended).
2.7, 10.7 Second Amendment Agreement dated as of December 29, 1995 by
and among (i) the Company; (ii) Blue Corporation; (iii)
Mariner Supply Services, Inc., (iv) MHC Rehab Corp; (v)
Convalescent Services, Inc.; (vi) Convalescent Supply
Services, Inc.; (vii) Meadow Rehab Corp., (viii) Samuel B.
Kellett, as agent of Stiles A. Kellett, Jr., Samuel B.
Kellett, William R. Bassett, as Trustee of Samuel B. Kellett,
Jr. Irrevocable Trust Dated 11/1/91, William R. Bassett, as
Trustee of Charlotte Rich Kellett Irrevocable Trust Dated
11/1/91, William R. Bassett, as Trustee of Stiles A. Kellett
III Irrevocable Trust Dated 11/1/91 and William R. Bassett,
as Trustee of Barbara Katherine Kellett Irrevocable Trust
Dated 11/1/91, (ix) VMI; (x) AHMI; and (xi) the Lessors
(Incorporated by reference to Exhibit 2.12, 10.12 to the
Company's Current Report on Form 8-K dated January 2, 1996).
2.8, 10.8 Management Agreement dated as of May 24, 1995 by and among
Mariner and CSI (Incorporated by reference to Exhibit 2.2,
10.2 to the Company's Form 10-Q for the quarter ended June
30, 1995, as amended).
2.9, 10.9 Asset Purchase Agreement dated as of May 24, 1995 by and
among Blue Corporation and AHMI (Incorporated by reference to
Exhibit 2.3, 10.3 to the Company's Form 10-Q for the quarter
ended June 30, 1995, as amended).
2.10, 10.10 Asset Purchase Agreement dated as of May 24, 1995 by and
among Blue Corporation and VMI (Incorporated by reference to
Exhibit 2.4, 10.4 to the Company's Form 10-Q for the quarter
ended June 30, 1995, as amended).
2.11, 10.11 Amended and Restated Option Agreement dated as of May 24,
1995 by and among CSI, Mariner and the Lessors (Incorporated
by reference to Exhibit 2.5, 10.5 to the Company's Form 10-Q
for the quarter ended June 30, 1995, as amended).
2.12, 10.12 Amended and Restated Registration Rights Agreement dated as
of December 29, 1995 by and among Mariner and Stiles A.
Kellett, Jr., Samuel B. Kellett, William R. Bassett, as
Trustee of Samuel B. Kellett, Jr. Irrevocable Trust Dated
11/1/91, William R. Bassett, as Trustee of Charlotte Rich
Kellett Irrevocable Trust Dated 11/1/91, William R. Bassett,
as Trustee of Stiles A. Kellett III Irrevocable Trust Dated
11/1/91 and William R. Bassett, as Trustee of Barbara
Katherine Kellett Irrevocable Trust Dated 11/1/91
(Incorporated by reference to Exhibit 2.13, 10.13 to the
Company's Current Report on Form 8-K dated January 2, 1996,
as amended).
2.13, 10.13 Amendment and Restated Stockholders Agreement dated as of May
24, 1995 by and among Mariner and the Stockholders
(Incorporated by reference to Exhibit 2.6, 10.6 to the
Company's Form 10-Q for the quarter ended June 30, 1995, as
amended).
2.14, 10.14 Asset Purchase Agreement, dated as of July 21, 1995, by and
among Mariner Health Care of Pinellas Point, Inc., Heritage
Health Care Centers of Central Florida, Inc., Heritage Health
Care Center of Baker County, Inc., Inverness Health Care, A
Limited Partnership d/b/a Heritage Health Care Center, Dowell
Enterprises, Inc. and ABCM Corporation (Incorporated by
reference to Exhibit 2, 10 to the Company's Current Report on
Form 8-K dated October 2, 1995, as amended).
2.15, 10.15 Agreement and Plan of Merger dated as of February 27, 1996 by
and among the Company, Mariner Health of Florida, Inc.,
Regency Health Care Centers, Inc., MedTx Corporation, Dennis
J. Ferguson, J. Steven Garthe, Joseph V. Lennartz, Deborah B.
Wilson and Ronald E. Hayes, as trustee of the Ronald E. Hayes
Revocable Trust of 1994 (Incorporated by reference to Exhibit
2.15, 10.15 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995).
2.16, 10.16 Agreement and Plan of Merger dated as of February 9, 1996 by
and among the Company,
67
MRI Acquisition Corp. and MedRehab, Inc. (Incorporated by
reference to Exhibit 2.16, 10.16 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995).
2.17, 10.17 Registration Rights Agreement dated as of February 9, 1996 by
and among the Company and certain former stockholders of
MedRehab, Inc. (Incorporated by reference to Exhibit 2.17,
10.17 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995).
2.18, 10.18 Asset Purchase Agreement dated as of July 31, 1996 by and
among Mariner Health Group, Inc.; Mariner Health of Maryland,
Inc.; Allegis Health Services, Inc.; Technicare, L.L.C.;
Rehab Solutions, L.L.C.; Bay Meadow Nursing and
Rehabilitation Center, L.L.C.; Camden Yards Nursing and
Rehabilitation Center, L.L.C.; Kensington Gardens Nursing and
Rehabilitation Center, L.L.C.; Global Healthcare
Center-Overlea, L.L.C.; Allegis Health and Rehabilitation
Center - Southern Maryland, L.L.C.; Global Healthcare Center
- Bethesda, L.L.C.; Circle Manor Nursing Home, Inc.; Arcola
Nursing and Rehabilitation Center, Inc.; Technicare Pharmacy,
Inc.; Global Health Investment Associates, L.L.C.; Paul J.
Diaz; Marvin H. Rabovsky; Harvey W. Wertlieb; Roger C.
Lipitz; Gary M. Sudhalter and Jay Mutchnik (Incorporated by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K dated October 3, 1996)
2.19, 10.19 Amendment Number 1 to Asset Purchase Agreement dated October
2, 1996 by and among Mariner Health Group, Inc.; Mariner
Health of Maryland, Inc.; Allegis Health Services, Inc.;
Technicare, L.L.C.; Rehab Solutions, L.L.C.; Bay Meadow
Nursing and Rehabilitation Center, L.L.C.; Camden Yards
Nursing and Rehabilitation Center, L.L.C.; Kensington Gardens
Nursing and Rehabilitation Center, L.L.C.; Global Healthcare
Center-Overlea, L.L.C.; Allegis Health and Rehabilitation
Center - Southern Maryland, L.L.C.; Global Healthcare Center
- Bethesda, L.L.C.; Circle Manor Nursing Home, Inc.; Arcola
Nursing and Rehabilitation Center, Inc.; Technicare Pharmacy,
Inc.; Global Health Investment Associates, L.L.C.; Paul J.
Diaz; Marvin H. Rabovsky; Harvey W. Wertlieb; Roger C.
Lipitz; Gary M. Sudhalter and Jay Mutchnik (Incorporated by
reference to Exhibit 2.2, 10.2 to the Company's Current
Report on Form 8-K dated October 3, 1996)
3.1, 4.1 Restated Certificate of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.2, 4.2 to the
Company's Registration Statement No. 33-60736 ("Registration
Statement No. 33-60736")).
3.2, 4.2 Certificate of Amendment to the Company's Restated
Certificate of Incorporation (Incorporated by reference to
Exhibit 4.2 to the Company's Form 10-Q for the quarter ended
March 31, 1994, as amended).
3.3, 4.3 By-laws, as amended and restated, of the Company
(Incorporated by reference to Exhibit 3.2, 4.2 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
4.4 Specimen certificate representing the Common Stock
(Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement No. 33-60736).
4.5 Rights Agreement, dated as of October 31, 1995, between
Mariner Health Group, Inc. and State Street Bank & Trust
Company, which includes as Exhibit A the Form of Certificate
of Designations, as Exhibit B the Form of Rights Certificate,
and as Exhibit C the Summary of Rights to Purchase Preferred
Stock (Incorporated by reference to Exhibit 4 to the
Company's Current Report on Form 8-K dated October 31, 1995).
68
4.6, 10.20 Indenture dated as of April 4, 1996 between Mariner Health
Group, Inc. and State Street Bank and Trust Company, as
trustee, including (i) the form of 9-1/2% Senior Subordinated
Note due 2006, Series A and (ii) the form of 9-1/2% Senior
Subordinated Note due 2006, Series B (Incorporated by
reference to Exhibit 4.1, 10.1 to the Company's Current
Report on Form 8-K dated April 4, 1996).
4.7 Form of 9 1/2% Senior Subordinated Note due 2006, Series B
(Incorporated by reference to Exhibit 4.2 of the Company's
Form S-4 Registration Statement No. 333-4266).
10.21 Credit Agreement dated as of May 18, 1994 by and among
Mariner Health Group, Inc., PNC Bank, National Association
and the other banks party thereto. (Incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q/A for the quarter ended June 30, 1994, as amended).
10.22 Amendment No. 4 to Credit Agreement dated as of July 18, 1995
by and among Mariner Health Group, Inc., PNC Bank, National
Association and the other banks party thereto (Incorporated
by reference to Exhibit 10.24 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995).
10.23 Amendment No. 5 to Credit Agreement dated as of November 3,
1995 by and among Mariner Health Group, Inc., PNC Bank,
National Association and other banks party thereto
(Incorporated by reference to Exhibit 10.25 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1995).
10.24 Amendment No. 6 to Credit Agreement dated as of December 29,
1995 by and among Mariner Health Group, Inc., PNC Bank,
National Association and other banks party thereto
(Incorporated by reference to Exhibit 10.26 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1995).
10.25 Amendment No. 7 to Credit Agreement dated as of February 15,
1996 by and among Mariner Health Group, Inc., PNC Bank,
National Association and other banks party thereto
(Incorporated by reference to Exhibit 10.27 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1995).
10.26 Modification Agreement dated as of March 1, 1995 among
Seventeenth Street Associates Limited Partnership,
NationsBank of Tennessee, N.A., NationsBank of Georgia, N.A.,
TRI-State Health Corp., Inc. and Pinnacle Care Corporation of
Huntington (Incorporated by reference to Exhibit 10.28 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.27 Pledge Agreement dated as of March 1, 1995 among Pinnacle
Care Corporation, Pinnacle Care Corporation of Huntington,
NationsBank of Tennessee, N.A., and NationsBank of Georgia,
N.A. (Incorporated by reference to Exhibit 10.29 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.28 Guaranty Agreement dated as of March 1, 1995 among Mariner
Health Group Inc., NationsBank of Tennessee, N.A., and
NationsBank of Georgia, N.A. (Incorporated by reference to
Exhibit 10.30 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995).
10.29* 1992 Stock Option Plan (Incorporated by reference to Exhibit
10.1 to the Company's Registration Statement No. 33-60736).
10.30* 1993 Employee Stock Purchase Plan, as amended. (Incorporated
by reference to Exhibit 10.2 to the Company's Form S-1
Registration Statement No. 33-71710).
10.31* 1994 Stock Plan, as amended (Incorporated by reference to
Exhibit 4.5 to the Company's Form S-8, filed November 21,
1995).
69
10.32* 1995 Non-Employee Director Stock Option Plan (Incorporated by
reference to Exhibit 4.4 to the Company's Form S-8, filed
November 21, 1995).
10.33* Form of Employment Agreement dated as of January 1, 1995 by
and among the Company and Arthur W. Stratton, Jr., M.D.
(Incorporated by reference to Exhibit 10.29 to the Company's
Annual Report on Form 10-K/A for the year ended December 31,
1994).
10.34+ Defined Care Partner Agreement, dated as of January 5, 1996,
by and among AmHS Purchasing Partners, L.P. ("AmHSPP"),
Mariner Health Care, Inc. and the Company, including: Exhibit
A, Warrant to Purchase 210,000 Shares of the Company's Common
Stock by and among AmHSPP and the Company; and Exhibit B,
Warrant to Purchase 1,890,000 Shares of the Company's Common
Stock by and among AmHSPP and the Company (Incorporated by
reference to Exhibit 10.36 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995).
10.35 Form of Lease by and between CSI and each of the following
lessors: (i) Houston Northwest Med. Inv., (ii) Fort Bend Med.
Inv., (iii) Northwest Healthcare, (iv) Dallas Med. Inv., (v)
Creek Forest Ltd., (vi) Denver Med. Inv., (vii) South Denver
Healthcare Assoc., (viii) Belleair East Med. Inv., (ix)
Tallahassee Healthcare, (x) Port Charlotte Healthcare Assoc.,
(xi) Melbourne Healthcare Assoc., (xii) Pinellas III
Healthcare Assoc., (xiii) Polk Healthcare, and (xiv) Orange
Healthcare (Incorporated by reference to Exhibit 10.37 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.36 Amendment No. 8 to Credit Agreement dated as of March 28,
1996 by and among Mariner Health Group, Inc., PNC Bank,
National Association and other banks party thereto
(Incorporated by reference to Exhibit 10.38 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1995).
10.37 Amendment No. 9 to the Credit Agreement and Waiver dated as
of April 30, 1996 by and among Mariner Health Group, Inc.,
PNC Bank, National Association and other banks party thereto
(Incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K dated April 30, 1996).
10.38 Amendment No. 10 to the Credit Agreement and Waiver dated as
of July 1, 1996 by and among the Company, PNC Bank, National
Association, and the other banks party thereto (Incorporated
by reference to Exhibit 10.1 to the Company's Form 10-Q for
the fiscal quarter ended June 30, 1996).
10.39 Amendment No. 11 to the Credit Agreement and Consent dated as
of July 31, 1996 by and among the Company, PNC Bank, National
Association, and the other banks party thereto (Incorporated
by reference to Exhibit 10.2 to the Company's Form 10-Q for
the fiscal quarter ended June 30, 1996).
10.40 Amendment No. 12 to the Credit Agreement and Waiver dated as
of October 3, 1996 by and among the Company, PNC Bank,
National Association, and the other banks party thereto.
10.41 Amendment No. 13 to the Credit Agreement dated as of March
11, 1997 by and among the Company, PNC Bank, National
Association, and the other banks party thereto.
10.42 Purchase Agreement dated March 29, 1996 among Mariner Health
Group, Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Alex. Brown & Sons Incorporated, CS First
Boston Corporation, Hambrecht & Quist LLC and Salomon
Brothers Inc (Incorporated by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K dated April 4,
1996).
70
10.43 Registration Rights Agreement dated as of April 4, 1996 among
Mariner Health Group, Inc. and Merrill Lynch, Pierce, Fenner
& Smith Incorporated, Alex. Brown & Sons Incorporated, CS
First Boston Corporation, Hambrecht & Quist LLC and Salomon
Brothers Inc (Incorporated by reference to Exhibit 10.3 to
the Company's Current Report on Form 8-K dated April 4,
1996).
10.44* Form of Employment Agreement between the Company and each of
Jeffrey W. Kinell, Lawrence R. Deering, Jennifer Gallagher,
Phyllis Madigan and certain other employees of the Company
(Incorporated by reference to Exhibit 10 to the Company's
Report on Form 10-Q for the fiscal quarter ended March 31,
1996).
10.45* Employment Agreement dated as of August 16, 1996 by and
between the Company and David N. Hansen (Incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q for the
fiscal quarter ended September 30, 1996).
11 Calculation of Shares used in Determining Net Income (Loss)
Per Share.
21 Subsidiaries of the Company.
23 Consent of Coopers & Lybrand L.L.P.
24 Power of Attorney (included on the Signature Page to this
Report).
27 Financial Data Schedule.
- -------------------------
* Indicates a management contract or any compensatory plan, contract or
arrangement.
+ Confidential Treatment Requested.
EXHIBIT 10.40
AMENDMENT NO. 12 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 12 TO CREDIT AGREEMENT (the "Amendment")
dated as of October 3, 1996 by and among Mariner Health Group, Inc., a Delaware
corporation (the "Borrower"), The Chase Manhattan Bank (as successor to Chemical
Bank), CoreStates Bank, N.A., Creditanstalt-Bankverein, First Union National
Bank of North Carolina, Mellon Bank, N.A., NationsBank of Tennessee, N.A., PNC
Bank, National Association and Toronto Dominion (New York), Inc. (collectively,
the "Banks"), and PNC Bank, National Association, in its capacity as agent for
the Banks (the "Agent").
W I T N E S S E T H:
WHEREAS, the parties hereto are parties to that certain Credit
Agreement dated as of May 18, 1994, as amended (the "Credit Agreement"),
pursuant to which the Banks provided a $250,000,000 revolving credit facility to
the Borrower; and
WHEREAS, the Borrower, the Banks and the Agent desire to amend
and restate the Credit Agreement as hereinafter provided.
NOW, THEREFORE, the parties hereto, in consideration of their
mutual covenants and agreements hereinafter set forth and intending to be
legally bound hereby, covenant and agree as follows:
1. Definitions.
(a) Defined terms used herein unless otherwise defined herein
shall have the meanings ascribed to them in the Credit Agreement as amended by
this Amendment.
2. Amendment of Credit Agreement.
(a) Articles I through XI. The parties hereto do hereby amend
and restate the recitals and Articles I through XI to the Credit Agreement as
set forth on Exhibit 1 hereto.
(b) Schedules. Each of the following schedules to the Credit
Agreement is hereby amended and restated to read as set forth on the schedule
attached hereto bearing the same numerical reference as the original schedule
Schedule 6.01(a) and (c) Qualifications to do Business,
Subsidiaries and Excluded Entities
Schedule 6.01(u) Material Contracts
Schedule 6.01(y) Environmental Disclosures
Schedule 8.02(c) Certain Guaranties
Schedule 6.01(cc) Allegis Facilities Indebtedness; Lien
Releases; Intercreditor Agreements;
Non-Disturbance Agreements; Consents to
Leasehold Mortgages and Second Liens
(c) Exhibits. Each of the following exhibits to the Credit
Agreement is hereby amended and restated to read as set forth on the exhibit
attached hereto bearing the same numerical reference as the original exhibit:
Exhibit 2.05 Revolving Credit Loan Request
Exhibit 8.01(m)(i) Acquisition Approval Certificate
Exhibit 8.01(m)(ii) Acquisition Notice Certificate
The following exhibit is hereby added as an
additional, new exhibit to the Credit Agreement:
Exhibit 8.03(d)(3) Compliance Certificate for Quarter
Ending 9/30/96 and Thereafter
3. Conditions of Effectiveness of This Agreement. The effectiveness of
this Amendment is expressly conditioned upon satisfaction of each of the
following conditions precedent:
(a) Representations and Warranties; No Defaults. The
representations and warranties of the Borrower contained in Article VI of the
Credit Agreement shall be true and accurate on the date hereof with the same
effect as though such representations and warranties had been made on and as of
such date (except representations and warranties which relate solely to an
earlier date or time, which representations and warranties shall be true and
correct on and as of the specific dates or times referred to therein), and the
Borrower shall have performed and complied with all covenants and conditions
hereof; no Event of Default or Potential Default under the Credit Agreement
shall have occurred and be continuing or shall exist.
(b) Organization, Authorization and Incumbency. There shall
be delivered to the Agent for the benefit of each Bank a certificate dated as of
the date hereof and signed by the Secretary or an Assistant Secretary of each
Loan Party, certifying as appropriate as to:
(i) all action taken by such Loan Party in connection
with this Amendment and the other Loan Documents;
(ii) the names of the officer or officers authorized to
sign this Amendment and the other documents executed and delivered in connection
herewith and
-2-
described in this Section 3 and the true signatures of such officer or officers
and, in the case of the Borrower, specifying the Authorized Officers permitted
to act on behalf of the Borrower for purposes of the Loan Documents and the true
signatures of such officers, on which the Agent and each Bank may conclusively
rely; and
(iii) copies of its organizational documents, including
its certificate of incorporation and bylaws if it is a corporation and its
certificate of partnership and partnership agreement if it is a partnership, in
each case as in effect on the date hereof, certified by the appropriate state
official where such documents are filed in a state office together with
certificates from the appropriate state officials as to the continued existence
and good standing of each of the Loan Parties in each state where organized;
provided that each of the Loan Parties other than Borrower may, in lieu of
delivering copies of the foregoing organizational documents (excluding good
standing certificates), certify that the organizational documents which it
previously delivered remain in effect and have not been amended.
(c) Opinions of Counsel. There shall be delivered to the
Agent for the benefit of each Bank a written opinion dated the date hereof of
Testa, Hurwitz & Thibeault, counsel for the Loan Parties, in form and substance
satisfactory to the Agent.
(d) Fees and Expenses. The Borrower shall pay or cause to be
paid to the Agent for itself and for the account of the Banks to the extent not
previously paid the fees set forth on Exhibit 2 hereto, and all other fees
accrued through the date hereof and the costs and expenses of the Agent and the
Banks including, without limitation, fees of the Agent's counsel in connection
with this Amendment.
(e) Acknowledgment. Each of the Loan Parties, other than the
Borrower, shall have executed the Confirmation of Guaranty in the form attached
hereto as Exhibit 3 hereto.
(f) Legal Details; Counterparts. All legal details and
proceedings in connection with the transactions contemplated by this Amendment
shall be in form and substance satisfactory to the Agent, and the Agent shall
have received all such other counterpart originals or certified or other copies
of such documents and proceedings in connection with such transactions, in form
and substance satisfactory to the Agent.
4. Completion of Outstanding Items. On or before December 1, 1996, the
Borrower shall have completed the outstanding conditions to the effectiveness of
Amendment Nos. 1 through 12 to the Credit Agreement and delivered to the Agent
for the benefit of the Banks evidence of the same satisfactory to the Agent, in
its sole discretion, it being expressly agreed that satisfaction of such
outstanding conditions has not been waived by the Banks.
5. Amendment to Certain Other Loan Documents.
(a) Schedule 1 to that certain Guaranty Agreement made by
each Subsidiary of the Borrower party thereto, for the benefit of the Banks,
dated as of May 18, 1994, as amended, is hereby amended and restated to read as
set forth on the Schedule attached hereto bearing the same numerical reference
and name.
-3-
(b) Schedule A to the following Pledge Agreement is hereby
amended and restated to read as set forth on the schedule attached hereto
bearing the same name:
(i) SCHEDULE A TO THE PLEDGE AGREEMENT (Borrower) dated
as of May 18, 1994, as amended, by the Borrower, as pledgor in favor of the
Agent
6. Force and Effect. Except as expressly modified by this Amendment,
the Credit Agreement and the other Loan Documents are hereby ratified and
confirmed and shall remain in full force and effect after the date hereof.
7. Governing Law. This Amendment shall be deemed to be a contract under
the laws of the Commonwealth of Pennsylvania and for all purposes shall be
governed by and construed and enforced in accordance with the internal laws of
the Commonwealth of Pennsylvania without regard to its conflict of laws
principles.
[INTENTIONALLY BLANK]
-4-
[SIGNATURE PAGE 1 OF 2 TO AMENDMENT NO. 12]
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
MARINER HEALTH GROUP, INC.
By: /s/ Arthur W. Stratton, Sr.
----------------------------------
Name:
--------------------------------
Title:
--------------------------------
PNC BANK, NATIONAL ASSOCIATION,
individually and as Agent
By: /s/ Scott D. Colcombe
----------------------------------
Name:
--------------------------------
Title:
--------------------------------
THE CHASE MANHATTAN BANK (as successor
to Chemical Bank)
By: /s/ Dawn Lee Lum
----------------------------------
Name:
--------------------------------
Title:
--------------------------------
CORESTATES BANK, N.A.
By: /s/ Geoffrey C. Smith
----------------------------------
Name:
--------------------------------
Title:
--------------------------------
CREDITANSTALT - BANKVEREIN
By: /s/ Gregory F. Mathis
----------------------------------
Name:
--------------------------------
Title:
--------------------------------
By: /s/ Fiona McKone
----------------------------------
Name:
--------------------------------
Title:
--------------------------------
-5-
[SIGNATURE PAGE 2 OF 2 TO AMENDMENT NO. 12]
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA
By: /s/ Ann M. Dodd
----------------------------------
Name:
--------------------------------
Title:
--------------------------------
MELLON BANK, N.A.
By: /s/ Carol Paige
----------------------------------
Name:
--------------------------------
Title:
--------------------------------
NATIONSBANK OF TENNESSEE, N.A.
By: /s/ Michael Sylvester
----------------------------------
Name:
--------------------------------
Title:
--------------------------------
TORONTO DOMINION (NEW YORK), INC.
By: /s/ Jorge Garcia
----------------------------------
Name:
--------------------------------
Title:
--------------------------------
-6-
EXHIBIT 10.41
AMENDMENT NO. 13 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 13 TO CREDIT AGREEMENT (the "Amendment")
dated as of March 11, 1997 by and among Mariner Health Group, Inc., a Delaware
corporation (the "Borrower"), The Chase Manhattan Bank (as successor to Chemical
Bank), CoreStates Bank, N.A., Creditanstalt-Bankverein, First Union National
Bank of North Carolina, Mellon Bank, N.A., NationsBank of Tennessee, N.A., PNC
Bank, National Association and Toronto Dominion (New York), Inc. (collectively,
the "Banks"), and PNC Bank, National Association, in its capacity as agent for
the Banks (the "Agent").
W I T N E S S E T H:
WHEREAS, the parties hereto are parties to that certain Credit
Agreement dated as of May 18, 1994, as amended (the "Credit Agreement"),
pursuant to which the Banks provided a $250,000,000 revolving credit facility to
the Borrower; and
WHEREAS, the Borrower, the Banks and the Agent desire to amend
the Credit Agreement as hereinafter provided.
NOW, THEREFORE, the parties hereto, in consideration of their
mutual covenants and agreements hereinafter set forth and intending to be
legally bound hereby, covenant and agree as follows:
1. Definitions.
(a) Defined terms used herein unless otherwise defined herein
shall have the meanings ascribed to them in the Credit Agreement as amended by
this Amendment.
2. Amendment of Credit Agreement.
(a) Section 1.01 [Certain Definitions.] is hereby amended by
deleting in its entirety the definition of "Adjusted Consolidated Net Income"
and inserting in lieu thereof the following:
"Adjusted Consolidated Net Income shall mean for any
period of determination an amount equal to the net income of the Borrower and
its Subsidiaries for such period determined and consolidated in accordance with
GAAP, plus up to $826,000 of loss determined in accordance with GAAP
attributable to the sale of the approximately 38,700 square foot office building
located in Nashville, Tennessee during the fiscal quarter ending December
30,1996, plus the following expenses to the extent such expenses are deducted in
computing such net income: (i) up to $9,230,000 of extraordinary, nonrecurring
charges incurred by the Loan Parties in connection with the Convalescent Merger
incurred in the following amounts during the following fiscal quarters: $757,000
during the fiscal quarter beginning January 1,
1995 and ending March 31, 1995; $8,410,000 during the fiscal quarter beginning
April 1, 1995 and ending June 30, 1995; $54,000 during the fiscal quarter
beginning July 1, 1995 and ending September 30, 1995; and $9,000 during the
fiscal quarter beginning October 1, 1995 and ending December 31, 1995; (ii) up
to $1,138,000 of extraordinary, nonrecurring deferred financing charges incurred
by the Loan Parties in connection with the Fourth Amendment during the fiscal
quarter beginning April 1, 1995 and ending June 30, 1995; (iii) up to $6,543,000
of extraordinary, nonrecurring charges incurred by the Loan Parties during the
fiscal quarters beginning January 1, 1996 and ending June 30, 1996, in
connection with one or more Permitted Acquisitions consummated during such
period, including without limitation, in connection with the Convalescent
Merger; and (iv) such other extraordinary nonrecurring charges as approved by
the Required Banks pursuant to Section 8.01(m)."
(b) Section 1.01 [Certain Definitions.] is hereby amended by
deleting in its entirety the definition of "Consolidated Net Income" and
inserting in lieu thereof the following:
"Consolidated Net Income shall mean for any period of
determination an amount equal to the net income of the Borrower and its
Restricted Subsidiaries for such period determined in accordance with GAAP, but
without regard to net income attributable to Excluded Entities, plus up to
$826,000 of loss determined in accordance with GAAP attributable to the sale of
the approximately 38,700 square foot office building located in Nashville,
Tennessee during the fiscal quarter ending December 30, 1996, plus the following
expenses to the extent such expenses are deducted in computing such net income:
(i) up to $9,230,000 of extraordinary, nonrecurring charges incurred by the Loan
Parties in connection with the Convalescent Merger incurred in the following
amounts during the following fiscal quarters: $757,000 during the fiscal quarter
beginning January 1, 1995 and ending March 31, 1995; $8,410,000 during the
fiscal quarter beginning April 1, 1995 and ending June 30, 1995; $54,000 during
the fiscal quarter beginning July 1, 1995 and ending September 30, 1995; and
$9,000 during the fiscal quarter beginning October 1, 1995 and ending December
31, 1995; (ii) up to $1,138,000 of extraordinary, nonrecurring deferred
financing charges incurred by the Loan Parties in connection with the Fourth
Amendment during the fiscal quarter beginning April 1, 1995 and ending June 30,
1995; (iii) up to $6,543,000 of extraordinary, nonrecurring charges incurred by
the Loan Parties during the fiscal quarters beginning January 1, 1996 and ending
June 30, 1996, in connection with one or more Permitted Acquisitions consummated
during such period, including without limitation, in connection with the
Convalescent Merger; and (iv) such other extraordinary nonrecurring charges as
approved by the Required Banks pursuant to Section 8.01(m)."
(c) Section 1.01 [Certain Definitions.] is hereby amended by
inserting after the definition of "Subsidiary", the following new definition of
"Thirteenth Amendment Effective Date":
"Thirteenth Amendment Effective Date shall mean March 11,
1997, the effective date of Amendment No. 13 to this Agreement."
-2-
(d) Section 2.01 [Revolving Credit Commitments; Limitation on
Borrowings.] is hereby amended by deleting in its entirety subsection (c)
[Limitation on Borrowings.] thereof and inserting in lieu thereof the following:
"(c) Limitation on Borrowings. Notwithstanding the
provisions of Sections 2.01(a) and 2.01(b) of this Agreement, the outstanding
principal amount of Revolving Credit Loans to the Borrower shall not exceed at
any time an amount such that after giving effect to such borrowings, the ratio
of (i) Total Indebtedness to (ii) Consolidated Cash Flow from Operations
exceeds: (A) 3.75 to 1.0 from and including the Convalescent Merger Effective
Date through but not including the Subordinated Indebtedness Incurrence Date;
(B) 4.5 to 1.0 from the Subordinated Indebtedness Incurrence Date through but
not including the Allegis Acquisition Effective Date; (C) 5.25 to 1.0 from the
Allegis Acquisition Effective Date through and including June 30, 1997; (D) 5.00
to 1.0 from July 1, 1997 through and including December 31, 1997; (E) 4.75 to
1.0 from January 1, 1998 through and including March 31, 1998; and (F) 4.5 to
1.0 from April 1, 1998 and thereafter.
For purposes of such ratio, the amount determined under
clause (i) shall be as of the date of determination and the amount determined
under clause (ii) shall be for the twelve-month period ending on the last day of
the month which precedes such date of determination.
Notwithstanding the provisions of this subsection (c), at
no time shall the outstanding principal amount of proceeds of Revolving Credit
Loans made to the Borrower which are used by the Borrower or any Subsidiary of
the Borrower to, directly or indirectly, make an investment in or loan to
Ansonia, exceed Two Million Dollars ($2,000,000). Notwithstanding the provisions
of this subsection (c), at no time shall proceeds of Revolving Credit Loans be
used by the Borrower or any Subsidiary of the Borrower to, directly or
indirectly, make an investment in or loan to Pinnacle Rehab of Gwinnette or
Pinancle's Kansas Joint Venture. Notwithstanding the provisions of this
subsection (c), until all required governmental licenses and approvals have been
obtained from governmental regulatory authorities for the operation of Regency
Nursing and Rehabilitation Center located in Olathe, Kansas, by Regency Health
Properties VI, Ltd., no proceeds of Revolving Credit Loans shall be used by the
Borrower or any Subsidiary of the Borrower to, directly or indirectly, make an
investment in or loan to Regency Health Properties VI, Ltd."
(e) Section 8.01 [Affirmative Covenants.] is hereby amended
by deleting in its entirety subsection (m) [Approval of Financial Statements in
Permitted Acquisitions; Notice of Permitted Acquisition.] thereof and inserting
in lieu thereof the following:
"(m) Approval of Financial Statements in Permitted
Acquisitions; Notice of Permitted Acquisition.
(i) Approval of Financial Statements. The Borrower
shall deliver to the Banks a certificate in the form of Exhibit 8.01(m)(i)
hereof (the "Acquisition Approval Certificate") before making a Permitted
Acquisition if they desire that the cash flow of the business to be acquired
during periods prior to the acquisition shall be included when they
-3-
compute Cash Flow from Operations under this Agreement. The Borrower shall
attach to such Acquisition Approval Certificate copies of the historical
financial statements of the business to be acquired including the annual and
interim balance sheets and income statements for at least three (3) fiscal years
prior to the Permitted Acquisition and pro forma statements which shall include
a combined balance sheet as of the acquisition date and cash flow statements for
the preceding year. The pro forma statements shall set forth: (1) Consolidated
Cash Flow from Operations of the Loan Parties and the acquired business,
adjusted in accordance with clause (A) of the definition of Consolidated Cash
Flow from Operations, for the Acquisition Income Reporting Period in connection
with such Permitted Acquisition, and (2) Total Indebtedness on the date of the
Permitted Acquisition after giving effect to the acquisition and the Loans to be
made on such date, and (3) the ratio of the amount in clause (2) to the amount
in clause (1), which ratio shall not exceed (A) 3.75 to 1.0 from and including
the Convalescent Merger Effective Date through but not including the
Subordinated Indebtedness Incurrence Date; (B) 4.5 to 1.0 from the Subordinated
Indebtedness Incurrence Date through but not including the Allegis Acquisition
Effective Date; (C) 5.25 to 1.0 from the Allegis Acquisition Effective Date
through and including June 30, 1997; (D) 5.00 to 1.0 from July 1, 1997 through
and including December 31, 1997; (E) 4.75 to 1.0 from January 1, 1998 through
and including March 31, 1998; and (F) 4.5 to 1.0 from April 1, 1998 and
thereafter. The Acquisition Approval Certificate shall confirm the accuracy of
the foregoing computations and that, after giving effect to the Permitted
Acquisition and the Loans made on the date thereof, no Event of Default shall
exist and the Loan Parties shall be in compliance with all of their covenants
hereunder, assuming, for purposes of Borrower's financial covenants, that all
items of income, expense and cash flow are reported for the Acquisition Income
Reporting Period and that all balance sheet items (such as Indebtedness) are
measured on the date of such Permitted Acquisition. The Loan Parties may make
the Permitted Acquisition prior to receiving the Required Banks' approval of
Borrower's Acquisition Approval Certificate with respect thereto; provided that
the Loan Parties may not, until they have received such approval, include the
cash flow of the business to be acquired for periods prior to the acquisition in
their net income when they compute Consolidated Cash Flow from Operations. The
Banks shall use their best efforts to respond to the Borrower's request for
approval of each Acquisition Approval Certificate within two (2) Business Days
following the Banks' receipt of such certificate and shall not unreasonably
withhold or delay such approval. The Borrower may request that extraordinary,
nonrecurring expenses under GAAP incurred in connection with such Permitted
Acquisition be excluded from the Consolidated Net Income of the Loan Parties and
from the net income of the business to be acquired when they compute
Consolidated Cash Flow from Operations pursuant to clause (1) above. Examples of
such expenses include, without limitation, transaction costs, debt prepayments
and similar charges, brokers' fees, attorneys' fees and accountants' fees. The
foregoing expenses shall be excluded from net income in such computations of
Consolidated Cash Flow from Operations if the Required Banks agree in writing to
such request.
(ii) Notice. The Borrower shall deliver to the
Banks a notice in the form of Exhibit 8.01(m)(ii) (the "Acquisition Notice
Certificate") at least two (2) Business Days before making any Permitted
Acquisition except for: (1) a Permitted Acquisition described in Section
8.01(m)(i) with respect to which the Borrower is delivering an Acquisition
Approval Certificate, or (2) a Permitted Acquisition if the Purchase Price in
connection therewith is less
-4-
than $2,500,000. The Acquisition Notice Certificate shall set forth the ratio of
(1) Consolidated Cash Flow From Operations (excluding the cash flow of the
acquired business) for the Acquisition Income Reporting Period in connection
with such Permitted Acquisition, and (2) Total Indebtedness on the date of the
Permitted Acquisition after giving effect to the acquisition and the Loans to be
made on such date, which ratio shall not exceed (A) 3.75 to 1.0 from and
including the Convalescent Merger Effective Date through but not including the
Subordinated Indebtedness Incurrence Date; (B) 4.5 to 1.0 from the Subordinated
Indebtedness Incurrence Date through but not including the Allegis Acquisition
Effective Date; (C) 5.25 to 1.0 from the Allegis Acquisition Effective Date
through and including June 30, 1997; (D) 5.00 to 1.0 from July 1, 1997 through
and including December 31, 1997; (E) 4.75 to 1.0 from January 1, 1998 through
and including March 31, 1998; and (F) 4.5 to 1.0 from April 1, 1998 and
thereafter. The Acquisition Notice Certificate also shall confirm that, after
giving effect to the Permitted Acquisition and the Loans made on the date
thereof, no Event of Default shall exist and the Loan Parties shall be in
compliance with all of their covenants hereunder, assuming, for purposes of
Borrower's financial covenants, that all items of income, expense and cash flow
are reported for the Acquisition Income Reporting Period and that all balance
sheet items (such as Indebtedness) are measured on the date of such Permitted
Acquisition.
(iii) Additional Information. With respect to any
Acquisition Approval Certificate or Acquisition Notice Certificate, the Borrower
shall provide to the Banks, as the Banks may reasonably request detailed
calculations and information supporting the financial calculations therein and
the financial statements attached thereto."
(f) Section 8.01 [Affirmative Covenants.] is hereby amended
by deleting in its entirety subsection (o) [Westbury Associates, Ltd.] thereof
and inserting in lieu thereof the following:
"(o) Westbury Associates, Ltd. Borrower shall, on or
before December 31, 1997, cause Westbury Associates, Ltd. to become a
wholly-owned Subsidiary of Borrower."
(g) Section 8.02 [Negative Covenants.] is hereby amended by
deleting clause (iv) of subsection (d) [Loans and Investments.] thereof and
inserting the following in lieu thereof:
"(iv) Restricted Investments not to exceed in the
aggregate for the Borrower and the other Loan Parties Fifty Million Dollars
($50,000,000) outstanding at any time; provided that (i) the Excluded Entity in
which the Restricted Investment is made is engaged in a business which is
ancillary and related to the business of the Loan Parties; (ii) the Loan Party
making a Restricted Investment is either a shareholder, member or partner of the
Excluded Entity in which a Restricted Investment is made; (iii) the stock,
equity interests in a limited liability company or partnership interests owned
by a Loan Party in the Excluded Entity in which a Restricted Investment is made
are pledged to the Agent on a first priority basis for the benefit of the Banks;
(iv) to the extent that any Excluded Entity incurs Indebtedness payable to any
person other than a Loan Party (the "Third Party Lender") in excess of
$5,000,000, prior to incurring
-5-
such Indebtedness, the Borrower shall cause the Third Party Lender to enter into
an intercreditor agreement with the Agent on behalf of the Banks, in form and
substance satisfactory to the Agent in its sole discretion with respect to the
Indebtedness of such Excluded Entity payable to the Third Party Lender and any
Indebtedness of such Excluded Entity payable to either the Banks or any Loan
Party; and (v) to the extent that any individual Restricted Investment exceeds
$7,500,000 or any series of related Restricted Investments in the aggregate
exceed $7,500,000, prior to making any such Restricted Investment, the Borrower
shall have obtained the written approval of the Required Banks; and"
(h) Section 8.02 [Negative Covenants.] is hereby amended by
deleting subsection (e) [Dividends and Related Distributions.] thereof and
inserting the following in lieu thereof:
"(e) Dividends and Related Distributions. The
Borrower shall not, and shall not permit any of its Subsidiaries to, make or
pay, or agree to become or remain liable to make or pay, any dividend or other
distribution of any nature (whether in cash, property, securities or otherwise)
on account of or in respect of their respective shares of capital stock or
partnership interests, as the case may be, or on account of the purchase,
redemption, retirement or acquisition of their respective shares of capital
stock (or warrants, options or rights therefor) or partnership interests, as the
case may be, except (i) dividends or distributions in respect of a partnership
interest payable by any Subsidiary to the Borrower, (ii) dividends payable by
the Borrower solely in shares of capital stock of the Borrower, and (iii) up to
$500,000 of distributions per year payable in the aggregate by the Subsidiaries
of the Borrower which are limited liability companies or partnerships to non
Affiliate members of such limited liability companies or non Affiliate limited
partners of such partnerships, so long as after giving effect thereto no Event
of Default or Potential Default has occurred and is continuing. Notwithstanding
the foregoing, the Borrower may purchase or redeem its stock up to an aggregate
of $15 million of such stock for the period of the Thirteenth Amendment
Effective Date through June 30, 1997, up to an aggregate of $20 million
(including in such aggregate amount all purchases or redemptions in prior
periods) of such stock for the period of the Thirteenth Amendment Effective Date
through September 30, 1997, and up to an aggregate of $25 million (including in
such aggregate amount all purchases or redemptions in prior periods) of such
stock for the period of the Thirteenth Amendment Effective Date through December
30, 1997, provided that, after giving effect to each such purchase or
redemption, no Potential Default or Event of Default has occurred and is
continuing and, without limiting the generality of the foregoing, that: (x)
after giving effect to each such purchase or redemption the Borrower is in
compliance (and the Borrower demonstrates such compliance to the Agent in detail
satisfactory to the Agent) with the Minimum Net Worth covenant set forth in
Section 8.02(t); and (y) after giving effect to each such purchase or redemption
the ratio of Total Indebtedness to Consolidated Cash Flow from Operations does
not exceed 4.85 to 1.0 (and the Borrower demonstrates such compliance to the
Agent in detail satisfactory to the Agent). For purposes of clause (y) in the
preceding sentence, Total Indebtedness shall be calculated as of each date of
determination (after giving effect to each purchase or redemption of the
Borrower's stock) and Consolidated Cash Flow from Operations shall be calculated
as of each date of determination (after giving effect to each purchase or
redemption of the Borrower's stock) for the four fiscal quarters then ended."
-6-
(i) Section 8.02 [Negative Covenants.] is hereby amended by
deleting the first paragraph of subsection (f) [Liquidations, Mergers,
Consolidations, Acquisitions.] thereof and inserting the following in lieu
thereof:
"(f) Liquidations, Mergers, Consolidations,
Acquisitions. The Borrower shall not, and shall not permit any of the other Loan
Parties to, dissolve, liquidate or wind-up its affairs, or become a party to any
merger or consolidation, or acquire by purchase, lease or otherwise all or
substantially all of the assets or capital stock of any other person, provided
that (i) any wholly-owned Subsidiary may consolidate or merge into the Borrower
or any other wholly-owned Subsidiary; (ii) a Subsidiary that is not a Material
Subsidiary may be dissolved, liquidated or wound up provided that from the date
of this Agreement through the Expiration Date, the total assets of the
non-Material Subsidiaries which so dissolve, liquidate or wind up shall not
exceed $25,000,000 in the aggregate; (iii) the Borrower or a Restricted
Subsidiary of the Borrower may acquire all of the capital stock of another
corporation so long as (u) the Purchase Price for such acquisition shall not
exceed $75,000,000, (v) the aggregate Purchase Price for such acquisition
together with all previous acquisitions permitted under clauses (iii) and (iv)
of this Section 8.02(f) shall not exceed $70,000,000 during the fiscal year
ending December 31, 1995 or $200,000,000 during any fiscal year commencing after
December 31, 1995 (subject to the provisions of this paragraph and the second
paragraph of this Section 8.02(f) below), (w) such acquired corporation,
simultaneous with the acquisition thereof by a Loan Party, executes and delivers
to the Agent for the benefit of the Banks a Guaranty Agreement and a Pledge
Agreement substantially in the form of Exhibits 1.01(G) and 1.01(P),
respectively, and also delivers to the Agent such opinions of counsel and other
documents in connection therewith as the Agent may reasonably request, (x) all
of the issued and outstanding capital stock of such acquired corporation owned
by a Loan Party is pledged to the Agent for the benefit of the Banks pursuant to
a Pledge Agreement substantially in the form of Exhibit 1.01(P) hereto, (y)
after giving effect to such proposed acquisition, no Event of Default shall have
occurred and be continuing, and (z) after giving effect to such proposed
acquisition (and without limiting the generality of the preceding clause
(iii)(y)), the Borrower is in compliance with the Leverage Ratio set forth in
Section 8.02(r) and the Borrower demonstrates such compliance pursuant to
Section 8.01(m) (if Section 8.01(m) requires such demonstration of compliance);
and (iv) the Borrower or any Restricted Subsidiary may merge or consolidate
with, or acquire all or substantially all of the assets of another person so
long as (w) the Purchase Price for such acquisition, merger or consolidation
shall not exceed $75,000,000, (x) the aggregate Purchase Price for such
acquisition together with all previous acquisitions permitted under clauses
(iii) and (iv) of this Section 8.02(f) shall not exceed $70,000,000 during the
fiscal year ending December 31, 1995 or $200,000,000 during any fiscal year
commencing after December 31, 1995 (subject to the provisions of this paragraph
and the second paragraph of this Section 8.02(f) below), (y) after giving effect
to such proposed acquisition, merger or consolidation, no Event of Default shall
have occurred and be continuing, and (z) after giving effect to such proposed
acquisition, merger or consolidation, the Borrower is in compliance with the
Leverage Ratio set forth in Section 8.02(r) and the Borrower demonstrates such
compliance pursuant to Section 8.01(m) (if Section 8.01(m) requires such
demonstration of compliance). The Purchase Price paid in connection with the
Convalescent Merger shall be excluded from the computation of the dollar
limitations on the Purchase Price permitted to be paid in connection with the
-7-
mergers or other acquisitions contained in clauses (iii)(u) and (v) and (iv)(w)
and (x) above. The Purchase Price paid in connection with the MedRehab Merger
shall be excluded from the computation of the dollar limitations on the Purchase
Price permitted to be paid in connection with the mergers or other acquisitions
contained in clauses (iii)(u) and (v) and (iv)(w) and (x) above. The Purchase
Prices paid in connection with the Regency Merger and the Allegis Acquisition
shall be included in the computation of the dollar limitations on the Purchase
Price permitted to be paid in connection with mergers or other acquisitions
contained in clauses (iii)(u) and (v) and (iv)(w) and (x) above. For purposes of
the preceding clauses (iii)(z) and (iv)(z), the Leverage Ratio set forth in
Section 8.02(r) shall be calculated as follows: (i) Total Indebtedness shall be
determined as of the date of the proposed acquisition, after giving effect
thereto, and (ii) Consolidated Cash Flow from Operations shall be calculated for
the twelve-month period ending on the last day of the fiscal quarter of the
Borrower which precedes such date of acquisition."
(j) Section 8.02 [Negative Covenants.] is hereby amended by
deleting subsection (p) [Capital Expenditures and Leases.] thereof in its
entirety and inserting the following in lieu thereof:
"(p) Capital Expenditures and Leases. The Borrower
shall not, and shall not permit any of its Subsidiaries to make any payments on
account of the purchase of any assets which if purchased would constitute fixed
assets or on account of the lease of any assets which if leased would constitute
a capital lease, in the aggregate exceeding: (i) $11,100,000 during the fiscal
year of January 1, 1995 through December 31, 1995; (ii) $30,000,000 during the
fiscal year of January 1, 1996 through December 31, 1996; (iii) $82,000,000
during the fiscal year of January 1, 1997 through December 31, 1997; and (iv)
$50,000,000 in each fiscal year thereafter, and all such purchases of fixed
assets or payments pursuant to such capital leases shall be made under usual and
customary terms and in the ordinary course of business."
(k) Section 8.02 [Negative Covenants.] is hereby amended by
deleting subsection (r) [Maximum Leverage Ratio.] thereof in its entirety and
inserting the following in lieu thereof:
"(r) Maximum Leverage Ratio. The Borrower shall not
at any time permit the ratio of Total Indebtedness to Consolidated Cash Flow
from Operations to exceed (A) 3.0 to 1.0 from the Fourth Amendment Effective
Date through but not including the Convalescent Merger Effective Date; (B) 3.75
to 1.0 from and including the Convalescent Merger Effective Date through but not
including the Subordinated Indebtedness Incurrence Date; (C) 4.5 to 1.0 from the
Subordinated Indebtedness Incurrence Date through but not including the Allegis
Acquisition Effective Date; (D) 5.25 to 1.0 from the Allegis Acquisition
Effective Date through and including June 30, 1997; (E) 5.00 to 1.0 from July 1,
1997 through and including December 31, 1997; (F) 4.75 to 1.0 from January 1,
1998 through and including March 31, 1998; and (G) 4.5 to 1.0 from April 1, 1998
and thereafter. For purposes of this Section 8.02(r), Total Indebtedness shall
be calculated as of each date of determination and Consolidated Cash Flow from
Operations shall be calculated as of each date of determination for the four
fiscal quarters then ended."
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(l) The following schedule to the Credit Agreement is hereby
amended and restated to read as set forth on the schedule attached hereto
bearing the same numerical reference and name as the original schedule:
Schedule 6.01(a) and (c) Qualifications to do Business,
Subsidiaries and Excluded Entities
Schedule 6.01 (bb) Regency Facilities Indebtedness; Lien
Releases; Intercreditor Agreements;
Non-Disturbance Agreements; Consents to
Leasehold Mortgages and Second Liens
Schedule 6.01(cc) Allegis Facilities Indebtedness; Lien
Releases; Intercreditor Agreements;
Non-Disturbance Agreements; Consents to
Leasehold Mortgages and Second Liens
(m) Each of the following exhibits to the Credit Agreement is
hereby amended and restated to read as set forth on the exhibit attached hereto
bearing the same numerical reference as the original exhibit:
Exhibit 2.05 Revolving Credit Loan Request
Exhibit 8.01(m)(i) Acquisition Approval Certificate
Exhibit 8.01(m)(ii) Acquisition Notice Certificate
Exhibit 8.03(d)(3) Compliance Certificate for Quarter
Ending 9/30/96 and Thereafter
3. Conditions of Effectiveness of This Amendment. The effectiveness of
this Amendment is expressly conditioned upon satisfaction of each of the
following conditions precedent:
(a) Representations and Warranties; No Defaults. The
representations and warranties of the Borrower contained in Article VI of the
Credit Agreement shall be true and accurate on the date hereof with the same
effect as though such representations and warranties had been made on and as of
such date (except representations and warranties which relate solely to an
earlier date or time, which representations and warranties shall be true and
correct on and as of the specific dates or times referred to therein), the
Borrower shall have performed and complied with all covenants and conditions
hereof; no Event of Default or Potential Default under the Credit Agreement
shall have occurred and be continuing or shall exist and there shall be
delivered to the Agent for the benefit of each Bank a certificate of an
Authorized Officer of the Borrower dated as of the date hereof certifying as to
each of the foregoing.
(b) Organization, Authorization and Incumbency. There shall
be delivered to the Agent for the benefit of each Bank a certificate dated as of
the date hereof and signed by the Secretary or an Assistant Secretary of each
Loan Party, certifying as appropriate as to:
-9-
(i) all action taken by such Loan Party in
connection with this Amendment and the other Loan Documents;
(ii) the names of the officer or officers
authorized to sign this Amendment and the other documents executed and delivered
in connection herewith and described in this Section 3 and the true signatures
of such officer or officers and, in the case of the Borrower, specifying the
Authorized Officers permitted to act on behalf of the Borrower for purposes of
the Loan Documents and the true signatures of such officers, on which the Agent
and each Bank may conclusively rely; and
(iii) copies of its organizational documents,
including its certificate of incorporation and bylaws if it is a corporation and
its certificate of partnership and partnership agreement if it is a partnership,
in each case as in effect on the date hereof, certified by the appropriate state
official where such documents are filed in a state office together with
certificates from the appropriate state officials as to the continued existence
and good standing of each of the Loan Parties in each state where organized;
provided that each of the Loan Parties may, in lieu of delivering copies of the
foregoing organizational documents, certify that the organizational documents
which it previously delivered remain in effect and have not been amended.
(c) Opinions of Counsel. There shall be delivered to the
Agent for the benefit of each Bank a written opinion dated the date hereof of
Testa, Hurwitz & Thibeault, counsel for the Loan Parties, in form and substance
satisfactory to the Agent.
(d) Fees and Expenses. The Borrower shall pay or cause to be
paid to the Agent for itself and for the account of the Banks to the extent not
previously paid all fees accrued through the date hereof and the costs and
expenses of the Agent and the Banks including, without limitation, fees of the
Agent's counsel in connection with this Amendment.
(e) Acknowledgment. Each of the Loan Parties, other than the
Borrower, shall have executed the Confirmation of Guaranty in the form attached
hereto as Exhibit 1 hereto.
(f) Legal Details; Counterparts. All legal details and
proceedings in connection with the transactions contemplated by this Amendment
shall be in form and substance satisfactory to the Agent, and the Agent shall
have received all such other counterpart originals or certified or other copies
of such documents and proceedings in connection with such transactions, in form
and substance satisfactory to the Agent. Further, the Agent shall have received
counterpart signature pages to this Amendment duly executed by each Loan Party,
the Agent and each Bank.
4. Completion of Outstanding Items. On or before March 31, 1997, the
Borrower shall have completed the outstanding conditions to the effectiveness of
Amendment Nos. 1 through 12 to the Credit Agreement and delivered to the Agent
for the benefit of the Banks evidence of the same satisfactory to the Agent, in
its sole discretion, it being expressly agreed that satisfaction of such
outstanding conditions has not been waived by the Banks.
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5. Amendment to Certain Other Loan Documents.
(a) Schedule 1 to that certain Guaranty Agreement made by
each Subsidiary of the Borrower party thereto, for the benefit of the Banks,
dated as of May 18, 1994, as amended, is hereby amended and restated to read as
set forth on the Schedule attached hereto bearing the same numerical reference
and name.
(b) Schedule A to each of the following Pledge Agreements is
hereby amended and restated to read as set forth on the schedule attached hereto
bearing the same name:
(i) Schedule A to the Pledge Agreement (Borrower),
dated as of May 18, 1994, as amended, by the Borrower, as pledgor, in favor of
the Agent;
(ii) Schedule A to the Pledge Agreement
(Subsidiaries Pledging Stock), dated as of May 18, 1994, as amended, among
certain Subsidiaries of the Borrower, as pledgor, in favor of the Agent;
(iii) Schedule A to the Amended and Restated Pledge
Agreement (Subsidiaries Pledging Partnership Interests) dated as of June 1,
1996, as amended, among certain Subsidiaries of the Borrower, as pledgor, in
favor of the Agent; and
(iv) Schedule A to the Pledge Agreement
(Subsidiaries Pledging Limited Liability Company Interests), dated as of October
3, 1996, among certain Subsidiaries of the Borower, as pledgor, in favor of the
Agent.
6. Force and Effect. Except as expressly modified by this Amendment,
the Credit Agreement and the other Loan Documents are hereby ratified and
confirmed and shall remain in full force and effect after the date hereof.
7. Governing Law. This Amendment shall be deemed to be a contract under
the laws of the Commonwealth of Pennsylvania and for all purposes shall be
governed by and construed and enforced in accordance with the internal laws of
the Commonwealth of Pennsylvania without regard to its conflict of laws
principles.
[INTENTIONALLY BLANK]
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[SIGNATURE PAGE 1 OF 2 TO AMENDMENT NO. 13]
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
MARINER HEALTH GROUP, INC.
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
PNC BANK, NATIONAL ASSOCIATION,
individually and as Agent
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
THE CHASE MANHATTAN BANK (as
successor to Chemical Bank)
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
CORESTATES BANK, N.A.
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
CREDITANSTALT - BANKVEREIN
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
[SIGNATURE PAGE 2 OF 2 TO AMENDMENT NO. 13]
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
MELLON BANK, N.A.
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
NATIONSBANK OF TENNESSEE, N.A.
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
TORONTO DOMINION (NEW YORK), INC.
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
EXHIBIT 1
________________, 1997
To: Mariner Health Group, Inc.
and each of its subsidiaries
Reference is made to that certain Credit Agreement, dated as of May 18, 1994, as
amended (the "Credit Agreement"), by and among Mariner Health Group, Inc., a
Delaware corporation, the Banks party thereto and PNC Bank, National Association
("Agent"). All terms used herein unless otherwise defined herein shall have the
meanings as set forth in the Credit Agreement.
The Borrower, the Banks and the Agent have entered into that certain Amendment
No. 13 to the Credit Agreement, dated as of the date hereof (the "Amendment No.
13"), a copy of which has been delivered to each Loan Party.
This agreement will confirm that each Loan Party has read and understands
Amendment No. 13. Each Loan Party hereby ratifies and confirms each of the Loan
Documents to which it is a party by signing below as indicated, including
without limitation each Guaranty Agreement and each Pledge Agreement to which it
is a party, including, without limitation, all schedules thereto, as amended by
Amendment No. 13.
Very truly yours,
PNC BANK, NATIONAL ASSOCIATION,
as Agent
By:
------------------------------
[SIGNATURE PAGE TO
CONFIRMATION OF GUARANTY
DATED _______________, 1997]
Intending to be legally bound hereby,
the undersigned have accepted and agreed
to the foregoing as of the date and year
first above written.
MARINER HEALTH GROUP, INC. and each
Subsidiary thereof which is a
corporation and which is listed as a
"Company" on Schedule 6.01(c) of the
Credit Agreement both for itself and, if
applicable, as general partner of each
Subsidiary of Mariner Health Group, Inc.
which is a partnership and which is
listed as a "Company" on Schedule
6.01(c).
By:
----------------------------------
Title:
-------------------------------
of each of the foregoing corporations
Exhibit 11
MARINER HEALTH GROUP, INC.
CALULATION OF SHARES (IN THOUSANDS) USED IN DETERMINING
NET INCOME (LOSS) PER SHARE (1)
Year Ended December 31,
-----------------------
1994 1995 1996
---- ---- ----
Weighted Average common shares
outstanding 18,911 22,502 28,721
Dilutive effect of Common Stock
equivilents 340 253 489
------ ------ ------
Total Weight average number of
common and dilutive common
equivilent shares outstanding 19,251 22,755 29,210
====== ====== ======
(1) Fully diluted income (loss) per share has not been seperately presented, as
the amounts would not be materially different from primary net income (loss)
per share.
EXHIBIT 21
Subsidiaries
------------
Name State of Jurisdiction
- ---- ---------------------
MHC of Nashville, Inc. Delaware
Pinnacle Care Corporation Delaware
Mariner Health of Florida, Inc. Delaware
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) and Form S-3 (File No. 333-3314) of our report dated
February 7, 1997 on our audits of the financial statements of Mariner Health
Group, Inc. and Subsidiaries as of December 31, 1995 and 1996 and for each of
the three years in the period ended December 31, 1996, which report is included
in this Annual Report Form 10-K
Boston, Massachusetts /s/ Coopers & Lybrand L.L.P.
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION FROM THE COMPANY'S FINANCIAL
STATEMENTS DATED DECEMBER 31, 1996 AND IS QUALIFID IN ITS ENTIRETY BY REFERENCE
TO SUCH FINACIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 4616
<SECURITIES> 0
<RECEIVABLES> 138810
<ALLOWANCES> 11872
<INVENTORY> 0
<CURRENT-ASSETS> 170354
<PP&E> 418678
<DEPRECIATION> 32253
<TOTAL-ASSETS> 881233
<CURRENT-LIABILITIES> 102200
<BONDS> 0
0
0
<COMMON> 290
<OTHER-SE> 324498
<TOTAL-LIABILITY-AND-EQUITY> 881233
<SALES> 590809
<TOTAL-REVENUES> 590809
<CGS> 0
<TOTAL-COSTS> 562986
<OTHER-EXPENSES> 826
<LOSS-PROVISION> 2738
<INTEREST-EXPENSE> 26246
<INCOME-PRETAX> 26997
<INCOME-TAX> 10799
<INCOME-CONTINUING> 16198
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16198
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
</TABLE>
