SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 1997
-----------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
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 NO. 06-1251310
- ------------------------ ------------------------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
125 EUGENE O'NEILL DRIVE, NEW LONDON, CT 06320
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(860) 701-2000
(TELEPHONE NUMBER, INCLUDING AREA CODE)
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______
29,404,907 SHARES OF COMMON STOCK, $.01 PAR VALUE, WERE OUTSTANDING AT
NOVEMBER 11, 1997
MARINER HEALTH GROUP, INC.
- ------------------------------------------------------------------------------
FORM 10-Q - SEPTEMBER 30, 1997
INDEX
PART I FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 AND
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7-12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
EXHIBIT INDEX 14
SIGNATURES 15
2
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-----------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,616 $ 4,572
Accounts receivable, less allowance for doubtful accounts of $11,872
and $14,251, respectively 126,938 127,922
Estimated settlements due from third-party payors 18,912 24,367
Prepaid expenses and other current assets 8,880 7,140
Deferred income tax benefit 11,008 12,021
-----------------------------------
Total current assets 170,354 176,022
Property, plant and equipment, net 386,425 416,612
Goodwill, net of accumulated amortization of $10,561 and $15,996, respectively 280,803 301,958
Intangible and other assets, net of accumulated amortization of $5,813
and $6,200, respectively 20,991 25,529
Restricted cash and cash equivalents 2,885 3,039
Deferred income tax benefit 19,775 19,278
-----------------------------------
Total assets $ 881,233 $ 942,438
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease obligations $ 8,030 $ 12,722
Accounts payable 31,024 24,667
Accrued payroll 9,944 12,632
Accrued vacation 8,235 9,375
Other accrued expenses 41,141 24,251
Deferred income taxes 25 25
Other liabilities 3,801 3,885
-----------------------------------
Total current liabilities 102,200 87,557
Long-term debt and capital lease obligations,
less current portion 415,236 462,786
Deferred income taxes 18,073 21,449
Deferred gain 1,955 1,840
Other long-term liabilities 18,981 18,799
---------------------------------
Total liabilities 556,445 592,431
Stockholders' equity
Common stock, $.01 par value; 50,000,000 shares authorized; 28,978,225 issued
and outstanding at December 31, 1996 and
29,401,621 shares issued and outstanding at September 30, 1997. 290 294
Additional paid-in capital 312,786 316,541
Unearned compensation (8) (2)
Retained earnings 11,720 33,174
-----------------------------------
Total stockholders' equity 324,788 350,007
-----------------------------------
Total liabilities and stockholders' equity $ 881,233 $ 942,438
===================================
</TABLE>
See accompanying notes
3
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
------------------------ --------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net patient service revenue $ 410,389 $ 511,266 $ 134,699 $ 170,199
Other revenue 8,145 11,827 3,052 3,979
---------------- --------------- ----------------- -----------------
Total operating revenue 418,534 523,093 137,751 174,178
---------------- --------------- ----------------- -----------------
Operating expenses:
Facility operating costs 331,543 396,454 114,035 129,889
Corporate general and administrative 34,780 37,699 9,853 13,209
---------------- --------------- ----------------- -----------------
366,323 434,153 123,888 143,098
---------------- --------------- ----------------- -----------------
Interest Income (477) (277) (275) (70)
Interest Expense 18,210 27,862 7,038 9,754
Facility rent expense, net 2,318 3,274 1,106 1,098
Depreciation and amortization 15,677 19,769 5,349 6,662
---------------- --------------- ----------------- -----------------
Total operating expenses 402,051 484,781 137,106 160,542
---------------- --------------- ----------------- -----------------
Income before income taxes 16,483 38,312 645 13,636
Provision for income taxes 6,593 16,858 324 6,001
---------------- --------------- ----------------- -----------------
Net income $ 9,890 $ 21,454 $ 321 $ 7,635
============= ========= ======= ==========
Net income per common and common
equivalent share:
Weighted average common and common
equivalent shares outstanding 29,384,000 29,720,000 29,573,000 30,214,000
================ =============== ================= =================
.
Net income per common and
common equivalent share $ 0.34 $ 0.72 $ 0.01 $ 0.25
================ =============== ================= =================
</TABLE>
See accompanying notes
4
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30
1996 1997
---------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,890 $ 21,454
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 15,677 19,769
Provision for losses on accounts receivable 2,541 3,665
Amortization of deferred gain (125) (115)
Non-cash charge for warrants issued 850 -
Amortization of deferred financing costs 906 877
Charge for abandonment of assets 1,061 -
Changes in operating assets and liabilities:
Increase in accounts receivable (7,289) (14,458)
(Increase) decrease in estimated settlements from third parties 1,073 (8,455)
(Increase) decrease in prepaid expenses and other current assets (3,851) 1,856
Increase (decrease) in accounts payable 1,084 (6,401)
Decrease in accrued liabilities (3,391) (986)
Increase (decrease) in other current liabilities (1,055) 84
----------------- -----------------
Net Cash Provided by Operating Activities 17,371 17,290
----------------- -----------------
Cash flows used by investing activities:
Purchase of plant, property and equipment (15,385) (25,561)
Cash paid for acquisitions, net of cash acquired (87,679) (43,408)
Working capital deficits acquired 4,220 -
Deposit on sale of facility - 2,236
Increase in intangible and other assets (6,985) (6,974)
----------------- -----------------
Net Cash Used by Investing Activities (105,829) (73,707)
----------------- -----------------
Cash flows from financing activities:
Drawings on line of credit borrowings 94,981 180,225
Proceeds from notes offering 149,666 -
Repayments on line of credit (135,481) (123,725)
Repayments of long term debt and capital lease obligations (18,599) (3,738)
Proceeds from exercise of employee stock options and warrants 3,854 3,262
Shares issued under employee stock purchase plan 310 503
(Increase) decrease in restricted cash 344 (154)
----------------- -----------------
Net Cash Provided by Financing Activities 95,075 56,373
----------------- -----------------
Increase (decrease) in cash and cash equivalents 6,617 (44)
Cash and cash equivalents at beginning of period 4,086 4,616
================= =================
Cash and cash equivalents at end of period $ 10,703 $ 4,572
================= =================
Income Taxes Paid $ 10,277 $ 19,906
Interest Paid $ 10,090 $ 24,063
</TABLE>
See accompanying notes
5
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements as of and for the periods ended
September 30, 1996 and 1997 are unaudited. All adjustments and accruals
have been made which, in the opinion of the management, are necessary
for a fair presentation. In addition to normal, recurring adjustments,
corporate general and administrative expenses for the first nine months
of 1996 included a charge of $6,511,000 composed of $5,661,000 related
to the pooling of interests with MedRehab, Inc. ("MedRehab") and a
charge of $850,000 for warrants issued in connection with a preferred
provider agreement. In the third quarter of 1996, the company increased
its reserve for estimated settlements from third party payors by
$10,000,000. The additional reserves reduced revenue in the period by
$10,000,000. Results of operations for the period ended September 30,
1997 are not necessarily indicative of those expected for any future
period.
In the third quarter of 1997, the Company signed a definitive agreement
to acquire Prism Health Group, Inc. ("Prism"), a diversified health
services company that provides services in 23 states. The Company
increased its revolving credit facility with a syndicate of banks (the
"Credit Facility") to $325,000,000 from $250,000,000 in anticipation of
the Prism Health Group, Inc acquisition consummated on October 3,1997.
The acquisition will be accounted for as a purchase.
2. The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and
the rules and regulations of the Securities and Exchange Commission.
These financial statements have been prepared with the assumption that
users of the interim financial information have either read or have
access to the Company's audited consolidated financial statements for
the year ended December 31, 1996. Accordingly, footnote disclosures
which would substantially duplicate the disclosures contained in the
Company's December 31, 1996 audited consolidated financial statements
have been omitted from these unaudited interim consolidated financial
statements. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such instructions rules and regulations. Although the
Company believes that the disclosures are adequate to make the
information presented not misleading, it is suggested that these
unaudited interim consolidated financial statements be read in
conjunction with the audited consolidated financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K, as
amended, for the year ended December 31, 1996.
Certain 1996 financial statement balances have been reclassified to
conform with current year presentation.
3. 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. This statement is
effective for Financial Statements issued for periods ended after
December 15, 1997, including interim periods; earlier application is
not permitted. Management expects that the adoption of FAS 128 will
have no significant impact on the financial statements for the fiscal
year ending December 31, 1997.
In June 1997 the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income", which establishes standards
for reporting and displaying comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of
general-purposes financial statements. This Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial
statements. This statement is effective for
6
fiscal years beginning after December 15, 1997. Management does not
believe the implementation of this Statement will have any significant
effect on the Company's financial statements.
In June 1997 the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which establishes standards for the way public
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report select
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. This Statement requires that a public business enterprise
report financial and descriptive information about its reportable
operating segments, which are components of an enterprise about which
separate financial information is available that is evaluated regularly
by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. This Statement is effective for
financial statements for periods beginning after December 15, 1997.
Management is evaluating this Statement to determine what information
will be required to be disclosed.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Report contains forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Securities and Exchange Act of
1934, including statements regarding, among other items, plans and objectives of
management, estimates of future financial performance, and anticipated trends in
the Company's business and financial performance. These forward-looking
statements are based largely on the Company's expectations and are subject to a
number of risks and uncertainties, certain of which are beyond the Company's
control. Actual results could differ materially from these forward-looking
statements as a result of the factors described in the section entitled "Risk
Factors" included in the Company's Annual Report on Form 10-K, as amended with
respect to the year ended December 31, 1996 including, among others (i)
dependence on reimbursement from third party payors; (ii) changes in the health
care industry as a result of political, economic or regulatory influences; (iii)
changes in regulations governing the health care industry; (iv) changes in the
competitive marketplace; and (v) the ability of the company to manage growth. 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.
Therefore, actual results could differ materially from expectations.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as
percentages of total operating revenue for the three months and nine months
ended September 30, 1996 and 1997 and the percentage changes in the dollar
amounts of revenues and expenses for the three and nine months ended September
30, 1996 as compared to the three and nine months ended September 30, 1997.
<TABLE>
<CAPTION>
Nine months Percentage Three months Percentage
ended Increase(decrease) ended Increase (decrease)
September 30 Nine months ended September 30 September 30, Three months ended September 30
1996 1997 1997 over 1996 1996 1997 1997 over 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Net patient service revenue 98.1 % 97.7 % (0.4) % 97.8 % 97.7 % (0.1) %
Other revenue 1.9 2.3 21.0 . 2.2 2.3 4.5
------- ------- -------- --------
Total operating revenue 100.0 100.0 100.0 100.0
Operating and administrative
expenses:
Facility operating costs 79.2 75.8 (4.3) 82.7 74.5 (9.9)
Corporate general and 8.3 7.2 (13.3) 7.2 7.6 5.5
administrative
Interest expense 4.2 5.3 26.2 4.9 5.7 16.3
Facility rent expense, net 0.6 0.6 - 0.8 0.6 (25.0)
7
Depreciation and amortization 3.7 3.8 2.7 3.9 3.9 -
------- ------- --- -------- -------- -
Total operating costs and
administrative expense 96.0 92.7 (3.4) 99.5 92.3 (7.2)
------- ------- ----- -------- -------- -----
Income before income tax
4.0 % 7.3 % 82.5 % 0.5 % 7.7 % 1440.0 %
------- ------- -------- -------- ------
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
REVENUE. Total operating revenue increased 26% from $137,751,000 during
the three months ended September 30, 1996 to $174,178,000 during the three
months ended September 30, 1997.
Net patient service revenue increased by approximately $35,500,000 or
26% from the third quarter of 1996 to the third quarter of 1997. Net patient
service revenue includes revenue from basic medical and ancillary services
provided by the Company, including rehabilitation, pharmacy, infusion therapy
services and the provision of medical equipment and supplies. The increase was
the result of the inclusion in 1997 of revenue from 13 facilities acquired after
September 30, 1996, opening of additional home health agencies, and increases in
revenue per rehabilitation contract. The increase in net patient service revenue
without regard to the $10 million reserve in the third quarter of 1996 was
$25,500,000 or 19% from the third quarter of 1996.
Other revenue aggregated $3,979,000 during the quarter ended September
30, 1997. This revenue was generated primarily from the Company's management
activities related to subacute care units and facilities and consulting fees
generated from services provided to certain rehabilitation clients.
FACILITY OPERATING COSTS. Facility operating costs primarily consist of
employee salaries, wages and benefits, food, ancillary supplies, pharmacy
supplies and plant operations. Most clinical staff and rehabilitation therapists
are paid an hourly wage. Various other types of operating expenses, including
medical supplies, pharmacy supplies, nutritional support services and expenses
associated with the provision of ancillary services, vary more directly with
patient census as well as general rates of inflation.
Facility operating costs increased 14% from $114,035,000 in the third
quarter of 1996 to $129,889,000 in the third quarter of 1997. These increases
were principally the result of the inclusion of expenses for 13 facilities and
several home health agencies acquired after September 30, 1996. As a percentage
of total operating revenue, these costs aggregated 83% and 75% for the three
months ended September 30, 1996 and 1997, respectively.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and
administrative expenses include the expenses of the Company's corporate and
regional offices, which provide marketing, financial and management services and
the expenses associated with managing subacute care units and facilities. These
expenses increased 34% from $9,853,000 in the third quarter of 1996 to
$13,209,000 in the third quarter of 1997. The increase is primarily attributable
to the addition of corporate personnel to support the increased number of
facilities and businesses acquired during 1996 and 1997 and investment in
management information systems infrastructure.
As a percentage of total revenue, these expenses were approximately
equal to 7% and 8% for the three months ended September 30, 1996 and 1997,
respectively.
INTEREST EXPENSE Interest expense increased 39% from $7,038,000 in the
third quarter of 1996 to $9,754,000 in the third quarter of 1997. This increase
was the result of interest related to increased borrowings under the Credit
Facility (as defined) used to fund acquisitions of facilities and businesses
acquired after the third quarter of 1996.
RENT EXPENSE, NET. Rent expense decreased 1% from $1,106,000 in the
third quarter of 1996 to $1,098,000 in the third quarter of 1997. This expense
is primarily comprised of rental payments on a facility leased
8
under a sale/leaseback arrangement and facilities leased in connection with the
CSI, 1996 Florida Acquisition and Allegis transactions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 25% from $5,349,000 in the third quarter of 1996 to $6,662,000 in the
third quarter of 1997. This increase is primarily attributable to the facilities
and businesses acquired after the third quarter of 1996.
PROVISION FOR INCOME TAX. The effective tax rate for the third quarter
of 1996 and 1997, was 50% and 44% respectively. During 1996, Mariner's tax rate
reflected the reversal of a valuation allowance on certain deferred tax assets.
The Company currently expects its effective tax rate will be approximately 45%
in 1997 due to certain book-tax differences, primarily non-deductible
amortization of goodwill.
NINE MONTHS ENDED SEPTEMBER 30, 1997
REVENUE. Total operating revenue increased 25% from $418,534,000 during
the first nine months of 1996 to $523,093,000 in the first nine months of 1997.
Net patient service revenue increased by approximately $100,877,000 or
24% from the first nine months of 1996 to the first nine months of 1997. The
increase was primarily the result of the inclusion in 1997 of revenue from 13
facilities acquired since September 1996, as well as increases in revenue per
rehabilitation contract. The increase in net patient service revenue without
regard to the $10 million reserve in the third quarter of 1996 was $90,877,000
or 22% from the first nine months of 1996.
Other revenue aggregated $11,827,000 during the nine months ended
September 30, 1997. This revenue was generated primarily from the Company's
management activities related to subacute care units and facilities and
consulting fees generated from services provided to certain rehabilitation
clients.
FACILITY OPERATING COSTS. Facility operating costs increased 20% from
$331,543,000 in the first nine months of 1996 to $396,454,000 in the first nine
months of 1997. These increases were principally the result of the inclusion of
expenses for 13 facilities acquired after the third quarter of 1996. As a
percentage of total operating revenues, these costs aggregated 79% and 76% in
the first nine months of 1996 and 1997, respectively.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and
administrative expenses increased 8% from $34,780,000 in the first nine months
of 1996 to $37,699,000 in the first nine months of 1997. The increase is
primarily attributable to the addition of corporate personnel to support the
increased number of facilities and businesses acquired during 1996 and 1997 and
investment in management information systems infrastructure.
During the first quarter of 1996, these expenses included a charge of
$6,511,000 composed of $5,661,000 related to the pooling of interests with
MedRehab and a charge of $850,000 for warrants issued in connection with a
preferred provider agreement.
As a percentage of total operating revenues, these expenses were
approximately 8% and 7% in the first nine months of 1996 and 1997, respectively.
INTEREST EXPENSE Interest expense increased 53% from $18,210,000 in the
first nine months of 1996 to $27,862,000 in the first nine months of 1997. This
increase was the result of interest on the Notes issued in April 1996 and
borrowings used primarily to fund acquisitions of facilities and businesses
acquired after the third quarter of 1996.
9
RENT EXPENSE, NET. Rent expense increased 41% from $2,318,000 in the
first nine months of 1996 to $3,274,000 in the first nine months of 1997. This
expense is related to a facility leased under a sale/leaseback arrangement and
facilities leased in connection with the CSI, 1996 Florida Acquisition and
Allegis transactions. The increase is primarily attributable to an increase in
leased facilities related to the Allegis transaction consummated on October 1,
1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 26% from $15,677,000 in the first nine months of 1996 to $19,769,000
in the first nine months of 1997, principally as the result of the addition of
facilities and businesses acquired after the third quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Mariner has financed its operations, acquisitions and capital
expenditures primarily from cash provided by operations and proceeds from
security issuances and borrowings. As of September 30, 1997, working capital and
cash and cash equivalents were $88,465,000 and $4,572,000, respectively.
Mariner has a $325,000,000 senior secured revolving credit facility
with a syndicate of banks (the "Credit Facility"). The credit facility was
increased from $250,000,000 to $325,000,000 in anticipation of the Prism Health
Group, Inc. acquisition consummated on October 3, 1997. As of December 31, 1996
and September 30, 1997, principal balances outstanding under the Credit Facility
were approximately $132,000,000 and $188,500,000 respectively, and letters of
credit outstanding under this facility were $5,499,000 and $6,554,000,
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 uncollateralized senior subordinated
obligations of Mariner and, as such, are subordinated in right of payment to all
existing and future senior indebtedness of Mariner, including indebtedness under
the Credit Facility. From the net proceeds of approximately $144,456,000 from
the sale of the Notes, $131,000,000 was used to repay all then 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 (defined below). 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
10
(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 $126,938,000 and
$127,922,000 at December 31, 1996 and September 30, 1997, respectively.
Estimated settlements due from third party payors aggregated $18,912,000 and
$24,367,000 at December 31, 1996 and September 30, 1997, respectively. The
number of days sales in accounts receivable and estimated settlements due from
third party payors was approximately 78 at December 31, 1996 and 80 days
September 30, 1997. The Company changed its fiscal intermediary during the
second quarter of 1997 and is experiencing processing delays related to its
estimated settlements which offset the overall improved collections experienced
in the first nine months of the year.
In January 1996 Mariner completed the merger (the "CSI Merger") of a
wholly owned subsidiary of the Company with and into Convalescent Services, Inc.
("CSI") and the acquisition of certain related assets. In the CSI Merger, all of
the issued and outstanding shares of capital stock of CSI were converted into
the right to receive an aggregate of 5,853,656 shares of the Company's Common
Stock and $7,000,000 in cash. In connection with the CSI Merger, Mariner
acquired certain assets that are related to CSI's business from affiliates of
CSI's stockholders for an aggregate of approximately $17,694,000 in cash and
loaned an aggregate of $1,619,000 to the partnerships that sold certain assets
to the Company. In addition, the Company acquired options to purchase 12 of the
facilities leased by CSI from affiliates of CSI's stockholders at fair market
value and made nonrefundable deposits of an aggregate of $13,155,000 with the
lessors of the facilities subject to such options. The options are exercisable
during specified periods between 1998 and 2010. The aggregate estimated fair
market value as of the earliest exercise date of the options, 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 its merger (the "MedRehab
Merger") with MedRehab, Inc. ("MedRehab"). Mariner issued an aggregate of
approximately 2,312,500 shares of its Common Stock for all of MedRehab's
outstanding capital stock and options to purchase MedRehab capital stock in a
merger that was accounted for as a pooling of interests. In addition, the
Company prepaid an aggregate principal amount of approximately $14,000,000 of
MedRehab's outstanding indebtedness at the closing of the MedRehab Merger. The
Company repaid this indebtedness with funds it borrowed under the Credit
Facility. Certain former MedRehab stockholders exercised the right to require
the Company to repurchase their shares of Mariner Common Stock for approximately
$1,326,000 on July 31, 1996.
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 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 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 cash portion of the purchase price and to replace
reserves required by the HUD mortgage agreements.
11
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 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.
In February 1997, the Company acquired a 143-bed facility in
Catonsville, Maryland. In June, 1997, the company acquired a Chicago area
Rehabilitation Company. In September 1997, the Company acquired three skilled
nursing facilities with a total of 444 beds in the Baltimore metropolitan area.
The Company borrowed $39.2 million under its Credit Facility related to the
financing of these acquisitions.
Also in September, the Company signed a definitive agreement to acquire
Prism Health Group, Inc., a diversified health services company based in Boston,
MA with locations in twenty-three states. The acquisition was completed on
October 3, 1997. The Company borrowed approximately $92 million under its Credit
Facility to fund this acquisition.
In the first nine months of 1997, the Company also borrowed
approximately $15,000,000 under the Credit Facility to fund working capital
requirements consisting primarily of planned construction activities.
The Company's capital expenditures for the year ended December 31, 1996
and the nine months ended September 30, 1997 were approximately $22,502,000 and
$25,600,000, respectively. The Company's currently planned 1997 capital
expenditures of $40,000,000 include funds for upgrading the Company's
information systems, expansion of existing facilities and the construction of
three new inpatient sites.
The Company intends to expand its clinical programs in strategically
selected metropolitan areas throughout the United States. The Company also
intends to expand its pharmacy, home care, physician practice management and
rehabilitation services. In addition to acquiring individual facilities, Mariner
may acquire businesses that operate multiple facilities or ancillary health care
services businesses. The Company continually identifies and evaluates potential
acquisition candidates and, in many cases, engages in discussions and
negotiations regarding potential acquisitions. There can be no assurance that
any of the Company's discussions or negotiations will result in an acquisition.
Further, if the Company makes any acquisitions, there can be no assurance that
it will be able to operate any acquired facilities or businesses profitably or
otherwise successfully implement its expansion strategy.
Mariner believes that its future capital requirements will depend upon
a number of factors, including cash generated from operations and the rate at
which it acquires additional inpatient facilities or other health care services
businesses and the rate at which it adds rehabilitation programs. Mariner
expects to fund such capital expenditures with borrowings under its Credit
Facility, its existing cash resources and cash from operations. Mariner
currently believes that the cash from operations, its existing cash resources
and borrowings under the Credit Facility will be sufficient to meet its needs
for the foreseeable future.
12
PART II
OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits which are filed with this Report, or are incorporated by
reference into this Report, are set forth on the Exhibit Index which appears on
page 14 of this Report.
(b) Reports on Form 8-K.
None
13
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
11 Computation of shares used in determining net 16
income per share (1) (Dollars in thousands)
27 Financial Data Schedule 17
</TABLE>
14
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED DULY THERETO AUTHORIZED.
MARINER HEALTH GROUP, INC.
DATE Nov. 14, 1997 BY /s/ David N. Hansen
--------------- ------------------------------
David N. Hansen
Executive Vice President,
Treasurer and Chief Financial Officer
(Authorized officer and principal
accounting and financial officer)
15
Exhibit 11: Computation of shares used in determining net income per share (1)
- ----------- (Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
-------------------------------------------------------------
1996 1997 1996 1997
-------------- ------------ ------------------------------
<S> <C> <C> <C> <C>
Net income $ 9,890 $ 21,454 $ 321 $ 7,635
============== ============ ============= =============
Weighted average shares outstanding 28,635,941 29,115,150 28,857,778 29,356,820
Shares issuable based on the treasury stock method:
Options 675,070 560,523 641,844 785,605
Warrants 73,363 44,822 73,005 71,172
============== ============ ============= =============
29,384,374 29,720,495 29,572,627 30,213,597
============== ============ ============= =============
</TABLE>
(1) Fully diluted income per share has not been separately presented, as the
amounts would not be materially different from primary net income per share.
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS DATED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 4,572
<SECURITIES> 0
<RECEIVABLES> 142,173
<ALLOWANCES> 14,251
<INVENTORY> 0
<CURRENT-ASSETS> 176,022
<PP&E> 429,387
<DEPRECIATION> 12,775
<TOTAL-ASSETS> 942,438
<CURRENT-LIABILITIES> 87,557
<BONDS> 0
0
0
<COMMON> 294
<OTHER-SE> 349,713
<TOTAL-LIABILITY-AND-EQUITY> 942,438
<SALES> 511,266
<TOTAL-REVENUES> 523,093
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 453,254
<LOSS-PROVISION> 3,665
<INTEREST-EXPENSE> 27,862
<INCOME-PRETAX> 38,312
<INCOME-TAX> 16,858
<INCOME-CONTINUING> 21,454
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,454
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.72
</TABLE>
