<PAGE> 1
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 MARCH 31, 1998
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.)
1881 WORCESTER ROAD, FRAMINGHAM, MA 01701
-----------------------------------------
(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
--- ---
29,588,155 Shares of Common Stock, par value $.01 per share, were
outstanding at May 11, 1998
<PAGE> 2
MARINER HEALTH GROUP, INC.
- ------------------------------------------------------------------------------
FORM 10-Q - MARCH 31, 1998
INDEX
PART I Financial Information PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 1997 and March 31, 1998 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 1997 and 1998 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1998 5
Notes to Consolidated Financial Statements 6-7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-12
PART II. Other Information
ITEM 2. Changes in Securities and Use of Proceeds 13
ITEM 5. Other Information 13
ITEM 6. Exhibits and Reports on Form 8-K 13
Exhibit Index 14
Signatures 15
2
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MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 1997 (AUDITED) AND MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
(Unaudited)
-----------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,627 $ 4,760
Accounts receivable, less allowance for doubtful accounts of $16,046
and $15,981, respectively 154,162 157,225
Estimated settlements due from third-party payors 34,335 31,502
Prepaid expenses and other current assets 19,268 16,378
Deferred income tax benefit 8,560 9,048
-----------------------------------
Total current assets 219,952 218,913
Property, plant and equipment, net of accumulated depreciation of
$62,109 and $64,090, respectively 415,948 421,825
Goodwill, net of accumulated amortization of $18,170 and $20,824, respectively 382,459 389,438
Intangible and other assets, net of accumulated amortization of $7,315
and $7,872, respectively 24,670 25,256
Restricted cash and cash equivalents 2,888 2,987
Deferred income tax benefit 29,852 26,741
-----------------------------------
Total assets $ 1,075,769 $ 1,085,160
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease obligations $ 13,911 $ 13,600
Accounts payable 26,943 19,277
Accrued payroll 17,454 13,010
Accrued vacation 10,955 12,810
Other accrued expenses 44,874 40,605
Deferred income taxes 43 62
Other liabilities 3,519 3,452
-----------------------------------
Total current liabilities 117,699 102,816
Long-term debt and capital lease obligations 570,483 585,333
Deferred income taxes 17,307 17,551
Deferred gain 1,789 1,752
Other long-term liabilities 27,673 27,912
---------------------------------
Total liabilities 734,951 735,364
Stockholders' equity
Common stock, $.01 par value; 50,000,000 shares authorized;
29,447,614 issued and outstanding at December 31, 1997 and
29,578,704 shares issued and outstanding at March 31, 1998. 295 296
Additional paid-in capital 317,216 318,279
Retained earnings 23,307 31,221
-----------------------------------
Total stockholders' equity 340,818 349,796
-----------------------------------
Total liabilities and stockholders' equity $ 1,075,769 $ 1,085,160
===================================
</TABLE>
See accompanying notes
3
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MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
1997 1998
---- ----
<S> <C> <C>
Net patient service revenue $ 170,824 $ 195,405
Other revenue 3,589 6,971
-------------- -------------
Total operating revenue 174,413 202,376
-------------- -------------
Operating expenses:
Facility operating costs 133,698 152,430
Corporate general and administrative 11,808 14,484
-------------- -------------
145,506 166,914
-------------- -------------
Interest Income (259) (517)
Interest Expense 9,449 12,792
Facility rent expense, net 1,112 1,144
Depreciation and amortization 6,546 7,911
-------------- -------------
Total operating expenses 162,354 188,244
-------------- -------------
Income before income taxes 12,059 14,132
Provision for income taxes 5,306 6,218
============== =============
Net income $ 6,753 $ 7,914
============== =============
Net income per share:
diluted $ 0.23 $ 0.26
============== =============
basic $ 0.23 $ 0.27
============== =============
Weighted average number shares outstanding:
diluted 29,173,580 30,472,660
basic 29,017,699 29,500,495
</TABLE>
See accompanying notes
4
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MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
1997 1998
----------------- -- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,753 $ 7,914
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 6,546 7,911
Provision for losses on accounts receivable 1,229 1,707
Amortization of deferred gain (37) (37)
Amortization of deferred financing costs 328 337
Change in deferred income taxes 956 2,886
Changes in operating assets and liabilities:
Increase in accounts receivable (3,822) (4,770)
Decrease in estimated settlements from third parties 1,306 833
(Increase) decrease in prepaid expenses and other current assets (133) 2,890
Decrease in accounts payable (5,586) (7,666)
Increase (decrease) in accrued liabilities 2,809 (4,879)
Increase (decrease) in other current liabilities 61 (67)
----------------- -----------------
Net cash provided by operating activities 10,410 7,059
----------------- -----------------
Cash flows used in investing activities:
Purchase of plant, property and equipment (6,704) (10,665)
Cash payments related to acquisitions (7,295) (4,499)
Increase in restricted cash (668) (99)
Increase in intangible and other assets (3,615) (1,132)
----------------- -----------------
Net cash used in investing activities (18,282) (16,395)
----------------- -----------------
Cash flows from financing activities:
Drawings on line of credit borrowings 54,000 30,500
Repayments on line of credit (42,500) (20,000)
Repayments of long term debt and capital lease obligations (1,584) (1,095)
Proceeds from exercise of employee stock options 43 780
Shares issued under employee stock purchase plan 239 284
----------------- -----------------
Net cash provided by financing activities 10,198 10,469
----------------- -----------------
Increase in cash and cash equivalents 2,326 1,133
Cash and cash equivalents at beginning of period 4,616 3,627
----------------- -----------------
Cash and cash equivalents at end of period $ 6,942 $ 4,760
================= =================
Supplemental Data:
Cash paid during the period for:
Income taxes $ 1,026 $ 1,708
Interest $ 5,811 $ 9,110
Non-cash investing and financing activities:
The Company entered into a three year note payable
for $5,134,000 related to a 1997 rehabilitation company
acquisition.
</TABLE>
See accompanying notes
5
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MARINER HEALTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements as of and for the periods ended
March 31, 1997 and 1998 are unaudited. All adjustments and accruals
have been made which, in the opinion of the management, are necessary
for a fair presentation. Results of operations for the period ended
March 31, 1998 are not necessarily indicative of those expected for any
future period.
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, 1997. Accordingly, footnote disclosures
which would substantially duplicate the disclosures contained in the
Company's December 31, 1997 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, 1997.
3. The following is a reconciliation of the numerators and denominators of
the basic and diluted EPS computation for "income available to common
stockholders" and other related disclosures required by SFAS 128:
For the three month period ended
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1998
(thousands) (thousands)
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common
shareholders $ 6,753 29,018 $ 0.23 $ 7,914 29,500 $ 0.27
Effect of dilutive securities:
Common stock equivalents 156 973
Diluted EPS:
Income available to common
stockholders and assumed
conversions $ 6,753 29,174 $ 0.23 $ 7,914 30,473 $ 0.26
</TABLE>
Options to purchase 667,929 and 1,491,101 shares of common stock at a
weighted average exercise price of $11.68 and $16.03 were outstanding
during the three month periods ended March 31, 1997 and 1998,
respectively, but were not included in the computation of diluted EPS
because the options' exercise prices were greater than the average
market price of the common shares.
4. Subsequent events - On April 13, 1998, Mariner entered into an
Agreement and Plan of Merger (the "Merger Agreement") with Paragon
Health Network, Inc. ("Paragon") and Paragon Acquisition Sub, Inc.
("Sub") providing for the merger of Sub with and into Mariner (the
"Merger"). As a result of the merger, Mariner will become a wholly
owned subsidiary of Paragon.
Pursuant to the Merger Agreement, each share of the common stock of
Mariner ("Mariner Common Stock") issued and outstanding at the
effective time of the Merger (other than treasury shares) will be
exchanged for one (1) share of common stock of Paragon ("Paragon Common
Stock"). Consummation of the Merger is
6
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subject to approval of the stockholders of both Paragon and Mariner and
various state and Federal regulatory agencies and other customary
conditions.
Holders of approximately 44% of the outstanding Paragon Common Stock
and approximately 21% of the outstanding Mariner Common Stock have
agreed to vote in favor of the transactions contemplated in the Merger
Agreement. In addition, Paragon and Mariner have each granted the other
an option to acquire 19.9% of their common stock, respectively, upon
certain events.
The Merger is expected to close during the third calender quarter of
1998.
5. Impact of the Year 2000 Issue- The Company has made an initial review
of issues related to the Year 2000 and does not expect that it will
have a material impact on the Company's business, operations or
financial condition. However, the Company could be adversely impacted
by the Year 2000 issue if its key suppliers and other third parties do
not address the issue successfully. The Company is addressing these
risks in order to reduce the impact on the Company.
Certain 1997 financial statement items have been reclassified to
conform with current year presentation.
RECENTLY ISSUED PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," was issued in June 1997. This statement
establishes standards for reporting and displaying comprehensive income and its
components in the financial statements. The Company adopted this standard in the
first quarter of 1998. The adoption of this standard had no material impact on
the Company's results of operations, financial position or cash flows.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was also issued in June 1997. This statement requires that public
business enterprises report certain information about operating segments and
related disclosures about products and services, geographic areas and major
customers.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" was issued in February 1998. This statement
standardizes disclosure requirements for pension and other postretirement
benefits, requires additional information on changes in benefit obligations and
fair values of plan assets, and eliminates certain existing disclosure
requirements.
SFAS Nos. 131 and 132 become effective in the Company's fiscal year
ending December 31, 1998. The adoption of these statements is not expected to
have a material impact on the Company's results of operations, financial
position or cash flows and produce no major changes in current disclosures.
The Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," in March 1998. This statement provides guidance as to whether
certain internal-use software costs should be capitalized as a long-lived asset
or expensed when incurred. SOP 98-1 becomes effective in the Company's fiscal
year ending December 31, 1998, but may be adopted earlier. The Company is in the
process of evaluating the requirements of SOP 98-1, but does not expect that it
will materially affect its results of operations, financial position or cash
flows.
7
<PAGE> 8
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, (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 control costs and maintain quality of care; (iv) the
Company's ability to respond to changes in regulations; and (v) the Company's
ability to enter into contracts with managed care organizations and other
payors. These forward-looking statements are based largely on the Company's
expectations and are subject to a number of risks and uncertainties, certain of
which are beyond the Company's control. Actual results could differ materially
from these forward-looking statements as a result of the factors described in
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, 1997
including, among others (i) changes in the health care industry as a result of
political, economic or regulatory influences including the implementation of the
prospective payment system; (ii) changes in regulations governing the health
care industry; (iii) changes in the competitive marketplace; (iv) the ability of
the company to manage growth; (v) dependence on reimbursement from third party
payors; (vi) expansion risk and impact on future operating results; (vii) the
difficulty in integrating recent acquisitions; and (viii) the variability of
quarterly operating results. 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.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as
percentages of total operating revenue for the three months ended March 31, 1997
and 1998 and the percentage changes in the dollar amounts of revenues and
expenses for the three months ended March 31,1998 as compared to the three
months ended March 31,1997.
8
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<TABLE>
<CAPTION>
Three months Percentage
ended Increase
March 31 Three months ended March 31
1997 1998 1998 over 1997
---- ---- ---- ----
<S> <C> <C> <C>
Revenues:
Net patient service revenue 97.9 % 96.6 % 14.4%
Other revenue 2.1 3.4 94.2
------- --------
Total operating revenue 100.0 100.0 16.0
Operating and administrative
expenses:
Facility operating costs 76.7 75.3 14.0
Corporate general and 6.8 7.2 22.7
administrative
Interest expense 5.3 6.1 33.6
Facility rent expense, net 0.6 0.6 2.9
Depreciation and amortization 3.8 3.9 20.9
-------- -------- ----
Total operating costs and
administrative expense 93.1 93.1 16.0
-------- -------- ----
Income before income tax 6.9 6.9 17.2
Income tax 3.0 3.0 17.2
-------- --------
Net Income 3.9 % 3.9 % 17.2%
-------- -------- ----
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
REVENUE. Total operating revenue increased 16% from $174,413,000 during
the three months ended March 31, 1997 to $202,376,000 during the three months
ended March 31, 1998.
Net patient service revenue increased by approximately $24,581,000, or
14.4%, from the first quarter of 1997 to the first quarter of 1998. Net patient
service revenue is derived primarily from providing inpatient health care
services to sub-acute patients, rehabilitation programs in skilled nursing
facilities, outpatient rehabilitation services in freestanding clinics and other
post-acute medical services. The increase was primarily the result of the
inclusion in 1998 of revenue from three facilities acquired after March 31,
1997, opening of additional home health agencies, and increases in the number of
rehabilitation contracts and increases in revenue per rehabilitation contract.
The increase in revenue was partially offset by the sale of two facilities in
the fourth quarter of 1997 and the cancellation or non-renewal of contracts for
certain rehabilitation programs.
Other revenue increased approximately $3,382,000, or 94.2%, during the
quarter ended March 31, 1998. This increase in revenue was primarily due to 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 $133,698,000 in the first
quarter of 1997 to $152,430,000 in the first quarter of 1998. These increases
were principally the result of adding new facilities, providing more ancillary
medical services and adding therapists and aides to service rehabilitation
programs acquired after March 31, 1997. The increase in facility operating costs
was partially offset by the sale of two facilities in the fourth quarter of
1997. As a percentage of total operating revenue, these costs aggregated 76.7%
and 75.3% for the three months ended March 31, 1997 and 1998, 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
certain expenses associated with managing subacute care units and facilities.
These expenses increased 22.7% from $11,808,000 in the first quarter of 1997 to
$14,484,000 in the first quarter of 1998. The increase is primarily attributable
to the addition of corporate personnel to support the increased number of
facilities and businesses acquired during 1997 and investment in management
information systems infrastructure. As a percentage of total revenue, these
expenses were approximately equal to 6.8% and 7.2% for the three months ended
March 31, 1997 and 1998, respectively.
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INTEREST EXPENSE Interest expense increased 33.6% from $9,190,000 in
the first quarter of 1997 to $12,275,000 in the first quarter of 1998. This
increase was the result of interest related to increased borrowings under the
Credit Facility (as defined below) used to fund acquisitions and construction of
facilities after the first quarter of 1997.
RENT EXPENSE, NET. Rent expense increased 2.9% from $1,112,000 in the
first quarter of 1997 to $1,144,000 in the first quarter of 1998. This expense
was primarily comprised of rental payments on a facility leased under a
sale/leaseback arrangement and facilities leased in connection with certain
transactions. The increase was primarily the result of revenue-based incremental
rent increases and increases in base rents.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 20.9% from $6,546,000 in the first quarter of 1997 to $7,911,000 in
the first quarter of 1998. This increase was primarily attributable to the
facilities and businesses acquired after the first quarter of 1997 and increased
amortization of goodwill associated with these acquisitions.
PROVISION FOR INCOME TAX. The effective tax rate for the first quarter
of 1997 and 1998 was 44%. The Company currently expects its effective tax rate
will be approximately 44% in 1998, significantly above the statutory rate,
primarily due to non-deductible amortization of goodwill from certain
transactions.
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, sales of debt securities and borrowings under its Credit
Facility. As of March 31, 1998, working capital and cash and cash equivalents
were $116,097,000 and $4,760,000, respectively.
Mariner has a $460,000,000 senior secured revolving credit facility
with a syndicate of banks (the "Credit Facility"). On October 3, 1997, the
Company entered into an amendment to the Credit Facility to increase borrowing
capacity to $325,000,000 from $250,000,000. As of January 2, 1998 the terms were
amended to increase the size of the Credit Facility to $460,000,000, extend the
maturity of the Credit Facility and reduce certain restrictions that the Credit
Facility imposes on the operations of the business of the Company and its
subsidiaries. As of December 31, 1997 and March 31, 1998, principal balances
outstanding under its Credit Facility were approximately $301,000,000 and
$311,500,000, respectively, and letters of credit outstanding under this
facility were approximately $6,715,000. As of March 31, 1998, the Letters of
Credit under the Credit Facility included $5,624,000 that related to workers'
compensation insurance and $1,091,000 associated with debt and other agreements.
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
collateralized by mortgages on certain inpatient facilities of the Company's,
leasehold mortgages on certain inpatient facilities by the Company, and security
interests in certain other properties and assets of the Company and its
subsidiaries. The Credit Facility matures on January 2, 2003 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 91/2% 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 acquisition of
seven skilled nursing facilities and one assisted living facility in 1996. The
Notes contain certain
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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 $154,162,000 and
$157,225,000 at December 31, 1997 and March 31, 1998, respectively. Estimated
settlements due from third-party payors aggregated $34,335,000 and $31,502,000
at December 31, 1997 and March 31, 1998, respectively. The number of days sales
in accounts receivable and estimated settlements due from third-party payors was
approximately 82 days at December 31, 1997 and 84 days at March 31, 1998. The
increase was primarily due to an increase in accounts receivable on certain
rehabilitation contracts.
During the first quarter of 1998, the Company signed agreements to sell
two nursing facilities. The total sales proceeds from the transactions were
approximately $2,400,000. In 1997 these facilities generated aggregate net
revenues of $8,670,000 and loss from continuing operations of $143,000. Through
March 31, 1998, these facilities generated aggregate net revenues of $2,061,000
and loss from continuing operations of $188,000. In 1997 the Company recorded an
impairment charge on long lived assets of approximately $4,882,000 in connection
with these facilities.
1997 Facility Acquisitions. During 1997, the Company acquired four
skilled nursing facilities with a total of 587 beds in the Baltimore
metropolitan area for a total purchase price of approximately $37,000,000 (the
"1997 Facility Acquisitions"). The Company borrowed approximately $37,000,000
under its Credit Facility to finance these acquisitions.
Goodwill of $22,000,000 was recorded in connection with these acquisitions.
Prism and Related Rehabilitation Transaction. In October 1997, the
Company completed its merger with Prism Health Group, Inc. (the "Prism Merger").
All of the issued and outstanding shares of Prism capital stock were converted
into the right to receive an aggregate of approximately $84,300,000 in cash. In
connection with the Prism Merger the Company also repaid approximately
$9,500,000 in assumed debt and paid expenses of approximately $700,000 prior to
the closing. Goodwill of approximately $91,000,000 was recorded in connection
with this transaction. The Company borrowed approximately $94,500,000 under its
Credit Facility to finance the Prism Merger.
In June, 1997, the Company also acquired another rehabilitation company
for a total purchase price of approximately $15,403,000. The Company made an
initial payment of $2,000,000 and in 1998 paid an additional $3,135,000. These
amounts were funded under the Company's Credit Facility. In addition, the
Company entered into a 3 year, 7% interest bearing note for $5,134,000. The
Company also agreed to pay the remaining $5,134,000 in contingent consideration
over the next three years provided certain financial targets were met. Goodwill
of approximately $10,615,000 was recorded in connection with this acquisition.
Joint Ventures. In 1997, the Company entered into three joint venture
arrangements in connection with three of its facilities located in Maryland and
North Carolina. The Company retained a 50% interest in two of the facilities and
60% in the third facility. The Company received a total of $5,349,000 of capital
contributions from its joint venture partners and recognized a gain of
approximately $1,659,000 from these transactions.
Dispositions. In 1997, the Company executed agreements to sell two
nursing facilities in non-strategic locations. Total sales proceeds were
$4,890,000 and a net pretax loss of $4,579,000 was recorded. In 1997 these
facilities generated aggregate net revenues of $6,849,000 and income from
continuing operations of $550,000.
From April 1, 1998 through May 11, 1998, the Company also borrowed
approximately $12,500,000 under the Credit Facility, primarily to fund working
capital requirements.
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The Company's capital expenditures for the year ended December 31, 1997
and three months ended March 31, 1998 were approximately $37,173,000 and
$10,665,000, respectively. The Company's capital expenditures in 1997 included
approximately $6,000,000 for improvements to the Company's information systems.
The Company has budgeted approximately $45,000,000 for capital expenditures
during 1998. The Company's currently planned capital expenditures include
approximately $9,000,000 for upgrading the Company's information systems,
approximately $21,000,000 for expansion of existing facilities, as well as the
costs of maintaining the Company's inpatient facilities and offices and
approximately $12,000,000 for the completion of three new inpatient sites begun
in 1997.
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 until March 31, 1999.
The Company has made an initial review of issues related to the Year
2000 and does not expect that it will have a material impact on the Company's
business, operations or financial condition. However, the Company could be
adversely impacted by the Year 2000 issue if its key suppliers and other third
parties do not address the issue successfully. The Company is addressing these
risks in order to reduce the impact on the Company.
12
<PAGE> 13
PART II
OTHER INFORMATION
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
The Rights Agreement between the Company and State Street Bank & Trust
Company, as rights agent, regarding the Company's Series A Junior Participating
Preferred Stock was amended on April 13, 1998 (the "Amendment") in connection
with the Company entering into an Agreement and Plan of Merger (the "Merger
Agreement") with Paragon Health Network, Inc. ("Paragon") and Paragon
Acquisition Sub, Inc. ("Sub") providing for the merger of Sub with and into
Mariner (the "Merger"). Under the Amendment neither Paragon nor Sub became an
"Acquiring Person" or an "Adverse Person" and no "Triggering Event," "Stock
Acquisition Date" or "Distribution Date" (as such terms as defined in the Rights
Agreement) occurred or will occur as a result of the approval, execution or
delivery of the Merger Agreement or the occurrence of any of the transactions
related to the Merger as described below.
ITEM 5. - OTHER EVENTS
On April 13, 1998, Mariner entered into the Merger Agreement with
Paragon and Sub providing for the merger of Sub with and into Mariner. As a
result of the merger, Mariner will become a wholly owned subsidiary of Paragon.
Pursuant to the Merger Agreement, each share of the common stock of
Mariner ("Mariner Common Stock") issued and outstanding at the effective time of
the Merger (other than treasury shares) will be exchanged for one (1) share of
common stock of Paragon ("Paragon Common Stock"). Consummation of the Merger is
subject to approval of the stockholders of both Paragon and Mariner and various
state and Federal regulatory agencies and other customary conditions.
Holders of approximately 44% of the outstanding Paragon Common Stock
and approximately 21% of the outstanding Mariner Common Stock have agreed to
vote in favor of the transactions contemplated in the Merger Agreement. In
addition, Paragon and Mariner have each granted the other an option to acquire
19.9% of their common stock, respectively, upon certain events.
The Merger is expected to close during the third calender quarter of
1998.
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.
April 13, 1998. Item 5 - Other Events - To disclose Agreement and Plan
of Merger with Paragon Health Network, Inc. and Paragon Acquisition Sub, Inc.
13
<PAGE> 14
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
4.1 Amendment No. 1 to Rights Agreement 16
27 Financial Data Schedule 19
14
<PAGE> 15
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 MAY 14, 1998 BY /S/ DAVID N. HANSEN
--------------------- ---------------------------
David N. Hansen
Executive Vice President,
Treasurer and Chief Financial Officer
(Authorized officer and principal accounting
and financial officer)
<PAGE> 1
EXHIBIT 4.1
AMENDMENT NO. 1 TO RIGHTS AGREEMENT
AMENDMENT NO. 1, dated as of April 13, 1998 (this "AMENDMENT"), to the
RIGHTS AGREEMENT, dated as of October 31, 1995 (the "RIGHTS AGREEMENT"), between
MARINER HEALTH GROUP, INC., a Delaware corporation (the "COMPANY"), and STATE
STREET BANK & TRUST COMPANY, as Rights Agent. All terms not otherwise defined
herein shall have the meaning given such terms in the Rights Agreement.
W I T N E S S E T H:
WHEREAS, on October 31, 1995, the Board of Directors of the Company
(the "BOARD") authorized the execution of the Rights Agreement pursuant to which
certain rights to purchase one one-hundredth of a share of the Company's Series
A Junior Participating Preferred Stock have been distributed;
WHEREAS, pursuant to Section 27 of the Rights Agreement, the Company
may amend the Rights Agreement at any time prior to the Final Amendment Date, as
defined therein, without the approval of any holders of certificates
representing shares of Common Stock, as defined therein.
WHEREAS, on April 13, 1998 the Board authorized the Amendment of the
Rights Agreement in anticipation of approving (i) a merger (the "MERGEr")
pursuant to an Agreement and Plan of Merger with Paragon Health Network, Inc.
(the "PARENT") and a subsidiary of Parent (the "SUB") and (ii) a Stock Option
Agreement with Parent;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
1. Notwithstanding anything to the contrary in the Rights Agreement,
neither Parent nor Sub will become an "Acquiring Person" or an "Adverse Person"
and no "Triggering Event", "Stock Acquisition Date" or "Distribution Date" (as
such terms are defined in the Rights Agreement) will occur as a result of the
approval, execution or delivery of an Agreement and Plan of Merger (the "MERGER
AGREEMENT") among the Company, Parent and Sub which has been approved by the
Board or a Stock Option Agreement (the "STOCK OPTION AGREEMENT") granted to
Parent by the Company, or the consummation of the Merger pursuant to the Merger
Agreement or the acquisition of shares of Company Common Stock by Parent
pursuant to the Stock Option Agreement.
2. Parent and Sub are third party beneficiaries of this Amendment and
the terms of this Amendment shall not be withdrawn, amended or otherwise
modified without their written consent.
3. Except as amended hereby, the Rights Agreement shall continue in
full force and effect.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1
to the Rights Agreement to be duly executed and their respective corporate seals
to be hereunto affixed and attested, all as of the day and year first above
written.
Attest:
MARINER HEALTH GROUP, INC.
By:_______________________ By /s/ Arthur W. Stratton, Jr., M.D.
Name: ------------------------------------
Title: Name: Arthur W. Stratton, Jr., M.D.
Title: President and Chief
Executive Officer
Attest:
STATE STREET BANK & TRUST COMPANY
By:_______________________ By: /s/ Stephen Cesso
--------------------
Name: Name: Stephen Cesso
Title Title: Vice President and
Associate Counsel
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS DATED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 4,760
<SECURITIES> 0
<RECEIVABLES> 173,206
<ALLOWANCES> 15,931
<INVENTORY> 0
<CURRENT-ASSETS> 218,913
<PP&E> 485,915
<DEPRECIATION> 64,090
<TOTAL-ASSETS> 1,085,160
<CURRENT-LIABILITIES> 102,816
<BONDS> 0
0
0
<COMMON> 296
<OTHER-SE> 349,500
<TOTAL-LIABILITY-AND-EQUITY> 349,796
<SALES> 0
<TOTAL-REVENUES> 202,376
<CGS> 0
<TOTAL-COSTS> 166,914
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,707
<INTEREST-EXPENSE> 12,275
<INCOME-PRETAX> 14,132
<INCOME-TAX> 6,218
<INCOME-CONTINUING> 7,914
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,914
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.26
</TABLE>
