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 JUNE 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_______
29,357,142 SHARES OF COMMON STOCK, $.01 PAR VALUE, WERE OUTSTANDING AT
AUGUST 11, 1997
MARINER HEALTH GROUP, INC.
------------------------------------------------------------------------------
FORM 10-Q - JUNE 30, 1997
INDEX
PART I Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 1996 and June 30, 1997 3
Consolidated Statements of Operations for the
Six Months Ended June 30, 1996 and 1997 and
Three Months Ended June 30, 1996 and 1997 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 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
<TABLE>
<CAPTION>
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
December 31, June 30,
1996 1997
-----------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,616 $ 2,569
Accounts receivable, less allowance for doubtful accounts of $11,872
and $12,947, respectively 126,938 126,622
Estimated settlements due from third-party payors 18,912 20,244
Prepaid expenses and other current assets 8,880 8,183
Deferred income tax benefit 11,008 11,683
-----------------------------------
Total current assets 170,354 169,301
Property, plant and equipment, net 386,425 398,857
Goodwill, net of accumulated amortization of $10,561 and $14,109, respectively 280,803 284,371
Intangible and other assets, net of accumulated amortization of $5,813
and $6,925, respectively 20,991 24,899
Restricted cash and cash equivalents 2,885 2,931
Deferred income tax benefit 19,775 19,443
-----------------------------------
Total assets $ 881,233 $ 899,802
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease obligations $ 8,030 $ 8,345
Accounts payable 31,024 24,827
Accrued payroll 9,944 9,806
Accrued vacation 8,235 9,453
Other accrued expenses 41,141 32,189
Deferred income taxes 25 25
Other liabilities 3,801 3,534
-----------------------------------
Total current liabilities 102,200 88,179
Long-term debt and capital lease obligations,
less current portion 415,236 429,478
Deferred income taxes 18,073 20,328
Deferred gain 1,955 1,872
Other long-term liabilities 18,981 17,913
---------------------------------
Total liabilities 556,445 557,770
Stockholders' equity
Common stock, $.01 par value; 50,000,000 shares authorized; 28,978,225 issued
and outstanding at December 31, 1996 and
29,356,754 shares issued and outstanding at June 30, 1997. 290 294
Additional paid-in capital 312,786 316,203
Unearned compensation (8) (4)
Retained earnings 11,720 25,539
-----------------------------------
Total stockholders' equity 324,788 342,032
-----------------------------------
Total liabilities and stockholders' equity $ 881,233 $ 899,802
===================================
</TABLE>
See accompanying notes
3
<TABLE>
<CAPTION>
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share and per share data)
(unaudited)
Six months ended Three months ended
June 30, June 30,
-------- --------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net patient service revenue $ 275,690 $ 341,067 $ 143,061 $ 170,243
Other revenue 5,093 7,848 2,543 4,259
---------------- --------------- ----------------- -----------------
Total operating revenue 280,783 348,915 145,604 174,502
---------------- --------------- ----------------- -----------------
Operating expenses:
Facility operating costs 217,528 266,565 111,359 132,867
Corporate general and administrative 24,907 24,490 9,258 12,682
---------------- --------------- ----------------- -----------------
242,435 291,055 120,617 145,549
---------------- --------------- ----------------- -----------------
Interest Income (202) (207) (145) (74)
Interest Expense 11,172 18,108 6,723 8,785
Facility rent expense, net 1,212 2,176 738 1,064
Depreciation and amortization 10,328 13,107 5,132 6,561
---------------- --------------- ----------------- -----------------
Total operating expenses 264,945 324,239 133,065 161,885
---------------- --------------- ----------------- -----------------
Income before income taxes 15,838 24,676 12.539 12,617
Provision for income taxes 6,269 10,857 5,015 5,551
---------------- --------------- ----------------- -----------------
Net income $ 9,569 $ 13,819 $ 7,524 $ 7,066
============= =========== ========== ==========
Net income per common and common equivalent share:
Weighted average common and common
equivalent shares outstanding 29,261,000 29,357,000 29,404,000 29,523,000
================ =============== ================= =================
Net income per common and
common equivalent share $ 0.33 $ 0.47 $ 0.26 $ 0.24
================ =============== ================= =================
</TABLE>
See accompanying notes
4
MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30
1996 1997
----------------- -- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income
$ 9,569 $ 13,819
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 10,328 13,107
Provision for losses on accounts receivable 1,606 2,383
Amortization of deferred gain (66) (83)
Non-cash charge for warrants issued 850 ---
Amortization of deferred financing costs 409 324
Charge for abandonment of assets 1,061 ---
Changes in operating assets and liabilities:
Increase in accounts receivable (6,350) (2,840)
Increase in estimated settlements from third parties (13,311) (1,332)
(Increase) decrease in prepaid expenses and other current assets (6,254) 736
Increase (decrease) in accounts payable 4,381 (6,241)
Increase (decrease) in accrued liabilities 3,110 (6,076)
Decrease in other current liabilities (203) (267)
----------------- -----------------
Net Cash Provided by Operating Activities 5,130 13,530
----------------- -----------------
Cash flows used by investing activities:
Purchase of plant, property and equipment (11,078) (16,123)
Cash paid for acquisitions, net of cash acquired (87,679) (9,530)
Working capital deficits acquired 4,220 ---
Increase in intangible and other assets (4,322) (7,815)
----------------- -----------------
Net Cash Used by Investing Activities (98,859) (33,468)
----------------- -----------------
Cash flows from financing activities:
Drawings on line of credit borrowings 92,981 127,500
Proceeds from notes offering 149,666 ---
Repayments on line of credit (133,481) (110,000)
Repayments of long term debt and capital lease obligations (17,376) (2,988)
Proceeds from exercise of employee stock options and warrants 2,506 3,182
Shares issued under employee stock purchase plan 159 243
Increase in restricted cash (211) (46)
----------------- -----------------
Net Cash Provided by Financing Activities 94,244 17,891
----------------- -----------------
Increase (decrease) in cash and cash equivalents 515 (2,047)
Cash and cash equivalents at beginning of period 4,086 4,616
================= =================
Cash and cash equivalents at end of period $ 4,601 $ 2,569
================= =================
Income Taxes Paid $ 7,885 $ 8,942
Interest Paid $ 7,163 $ 17,642
</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
June 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 six 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. Results of operations for the period ended June
30, 1997 are not necessarily indicative of those expected for any
future period.
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 ending after
December 15, 1997, including interim periods; earlier application is
not permitted. Management has not yet determined the impact that
adoption of FAS 128 will have 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 display of 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 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.
Certain 1996 financial statement balances have been reclassified to
conform with current year presentation.
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.
6
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 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 Amendment No. 1 on Form 10-K/A to the Company's Annual
Report on Form 10-K filed on April 30, 1997 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 six months ended
June 30, 1996 and 1997 and the percentage changes in the dollar amounts of
revenues and expenses for the three and six months ended June 30, 1996 as
compared to the three and six months ended June 30, 1997.
<TABLE>
<CAPTION>
Six months Percentage Three months Percentage
ended Increase (decrease) ended Increase (decrease)
June 30, Six months ended June 30 June 30, Three months endedJune 30
1996 1997 1997 over 1996 1996 1997 1997 over 1996
----- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Net patient service revenue 98.2% 97.7% (0.5%) 98.3% 97.6% (0.7%)
Other revenue 1.8 2.3 27.8 1.7 2.4 41.2
-------- -------- ------- --------
Total operating revenue 100.0 100.0 100.0 100.0
Operating and administrative
expenses:
Facility operating costs 77.5 76.4 (1.4) 76.5 76.2 (0.4)
Corporate general and 8.9 7.0 (21.3) 6.4 7.3 14.1
administrative
Interest expense 3.9 5.1 30.8 4.5 5.0 11.1
Facility rent expense, net 0.4 0.6 50.0 0.5 0.6 20.0
Depreciation and amortization 3.7 3.8 2.7 3.5 3.8 8.6
-------- -------- --- -------- -------- -----
Total operating costs and
administrative expense 94.4 92.9 (1.6) 91.4 92.9 1.6
-------- -------- ----- -------- -------- -------
Income before income tax
5.6% 7.1% 26.8% 8.6% 7.1% (17.4%)
-------- -------- ----- -------- -------- -------
</TABLE>
7
THREE MONTHS ENDED JUNE 30, 1996 AND 1997
REVENUE. Total operating revenue increased 20% from $145,604,000 during
the three months ended June 30, 1996 to $174,502,000 during the three months
ended June 30, 1997.
Net patient service revenue increased by approximately $27,182,000 or
19% from the second quarter of 1996 to the second quarter of 1997. Net patient
service revenue includes revenue from basic medical and ancillary services
provided by the Company, including rehabilitation, pharmacy and infusion therapy
services and the provision of medical equipment and supplies. The increase was
the result of the inclusion in 1997 of revenue from 10 facilities acquired after
June 30, 1996, the opening of additional home health agencies after June 30,
1996, and increases in revenue per rehabilitation contract.
Other revenue aggregated $4,259,000 during the quarter ended June 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 19% from $111,359,000 in the second
quarter of 1996 to $132,867,000 in the second quarter of 1997. These increases
were principally the result of the inclusion of expenses for 10 facilities and
several home health agencies acquired after June 30, 1996. As a percentage of
total operating revenue, these costs aggregated 76.5% and 76.2% for the three
months ended June 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 37% from $9,258,000 in the second quarter of 1996 to
$12,682,000 in the second quarter of 1997. The increase was 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 informations systems infrastructure.
As a percentage of total revenue, these expenses were approximately
6.4% and 7.3% for the three months ended June 30, 1996 and 1997, respectively.
INTEREST EXPENSE Interest expense increased 31% from $6,723,000 in the
second quarter of 1996 to $8,785,000 in the second quarter of 1997. This
increase was the result of interest related to the Company's 9-1/2% Senior
Subordinated Notes due 2006 (the "Notes") issued in April 1996 and increased
borrowings under the Credit Facility used to fund acquisitions of facilities and
businesses acquired after the second quarter of 1996.
RENT EXPENSE, NET. Rent expense increased 44% from $738,000 in the
second quarter of 1996 to $1,064,000 in the second quarter of 1997. This expense
is related to a facility leased under a sale/leaseback arrangement and
facilities leased in connection with the CSI, Regency and Allegis transactions.
The increase is primarily attributable to an increase in leased facilities
related to the Allegis Transaction.
8
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 28% from $5,132,000 in the second quarter of 1996 to $6,561,000 in the
second quarter of 1997. This increase was primarily attributable to the
facilities and businesses acquired after the second quarter of 1996.
PROVISION FOR INCOME TAX. The effective tax rates for the second
quarter of 1996 and 1997, were 40% 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 44% in 1997 due to certain book-tax differences, primarily
non-deductible amortization of goodwill.
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
REVENUE. Total operating revenue increased 24% from $280,783,000 during
the first six months of 1996 to $348,915,000 in the first six months of 1997.
Net patient service revenue increased by approximately $65,377,000 or
24% from the first six months of 1996 to the first six months of 1997. The
increase was the result of the inclusion in 1997 of revenue from 10 facilities
acquired since June 1996, as well as increases in revenue per rehabilitation
contract.
Other revenue aggregated $7,848,000 during the six months ended June
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 23% from
$217,528,000 in the first six months of 1996 to $266,565,000 in the first six
months of 1997. These increases were principally the result of the inclusion of
expenses for 10 facilities acquired after the second quarter of 1996. As a
percentage of total operating revenues, these costs aggregated 77.5% and 76.4%
in the first six months of 1996 and 1997, respectively.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and
administrative expenses decreased 2% from $24,907,000 in the first six months of
1996 to $24,490,000 in the first six months of 1997.
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 8.9% and 7.0% in the first six months of 1996 and 1997,
respectively.
INTEREST EXPENSE Interest expense increased 62% from $11,172,000 in the
first six months of 1996 to $18,108,000 in the first six 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 second quarter of 1996.
RENT EXPENSE, NET. Rent expense increased 80% from $1,212,000 in the
first half of 1996 to $2,176,000 in the first half of 1997. This expense is
related to a facility leased under a sale/leaseback arrangement and facilities
leased in connection with the CSI, Regency and Allegis transactions. The
increase is primarily attributable to an increase in leased facilities related
to the Allegis Transaction.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 27% from $10,328,000 in the first six months of 1996 to $13,107,000 in
the first six months of 1997, principally as the result of the addition of
facilities and businesses acquired after the second quarter of 1996.
9
LIQUIDITY AND CAPITAL RESOURCES
Mariner has financed its operations, acquisitions and capital
expenditures primarily from cash provided by operations and proceeds from
security issuances, borrowings and exchanges of stock. As of June 30, 1997,
working capital and cash and cash equivalents were $81,122,000 and $2,569,000,
respectively.
Mariner has a $250,000,000 senior secured revolving credit facility
with a syndicate of banks (the "Credit Facility"). As of December 31, 1996 and
June 30, 1997, principal balances outstanding under the Credit Facility were
approximately $132,000,000 and $149,500,000, respectively, and letters of credit
outstanding under this facility were $5,499,000 and $7,101,000, 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 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 (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
$126,622,000 at December 31, 1996 and June 30, 1997, respectively. Estimated
settlements due from third party payors aggregated $18,912,000 and $20,244,000
at December 31, 1996 and June 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 77 days June 30, 1997. The Company
changed its fiscal intermediary during the second quarter of 1997 which offset,
in part, the overall improved collections experienced in the first half 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
10
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.
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. The Company borrowed $9.2 million under its Credit
Facility related to these acquisitions. In July 1997, The Company signed an
agreement to acquire certain health care assets for a purchase price of $30
million. The Company expects such acquisition to close in September 1997.
In the first six months of 1997, the Company also borrowed
approximately $10,000,000 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 six months ended June 30, 1997 were approximately $22,502,000 and
$16,123,000, respectively. The Company's currently planned 1997
11
capital expenditures of $45,000,000 include funds for upgrading the Company's
information systems, expansion of existing facilities and the construction of
three new inpatient facilities.
The Company intends to expand its clinical programs in strategically
selected metropolitan areas throughout the United States. The Company also
intends to expand its pharmacy, home care, physician practice management and
rehabilitation services. In addition to acquiring individual facilities, Mariner
may acquire businesses that operate multiple facilities or ancillary health care
services businesses. The Company 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
through at least December 31, 1997.
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
EXHIBIT NO. DESCRIPTION PAGE
11 Computation of shares used in determining net 16
income per share (Dollars in thousands)
27 Financial Data Schedule 17
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: August 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>
Six months ended Three months ended
June 30, June 30,
-------------------------------------------------------------
1996 1997 1996 1997
-------------- ------------ ------------------------------
<S> <C> <C> <C> <C>
Net income $ 9,569 $ 13,819 $ 7,524 $ 7,066
============== ============ ============= =============
Weighted average shares outstanding 28,523,796 29,039,332 28,681,350 29,061,638
Shares issuable based on the treasury stock method:
Options 663,843 317,422 648,456 461,700
Warrants 73,539 73,724
============== ============ ============= =============
29,261,178 29,356,754 29,403,530 29,523,338
============== ============ ============= =============
</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 JUNE 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,569
<SECURITIES> 0
<RECEIVABLES> 139,569
<ALLOWANCES> 12,947
<INVENTORY> 0
<CURRENT-ASSETS> 169,301
<PP&E> 455,218
<DEPRECIATION> 56,361
<TOTAL-ASSETS> 899,802
<CURRENT-LIABILITIES> 88,179
<BONDS> 0
0
0
<COMMON> 294
<OTHER-SE> 341,738
<TOTAL-LIABILITY-AND-EQUITY> 899,802
<SALES> 341,067
<TOTAL-REVENUES> 348,915
<CGS> 0
<TOTAL-COSTS> 291,055
<OTHER-EXPENSES> 15,283
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,901
<INCOME-PRETAX> 24,676
<INCOME-TAX> 10,857
<INCOME-CONTINUING> 13,819
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,819
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
</TABLE>
