Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q
______________

0-49813

______________

MARINER HEALTH CARE, INC.

______________

(678) 443-7000

______________

     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  o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).   Yes  x    No  o

     There were 20,000,000 shares of Common Stock of the registrant outstanding as of October 31, 2003.

     Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   Yes  x    No  o

TABLE OF CONTENTS

PART I

ITEM 1. FINANCIAL STATEMENTS

MARINER HEALTH CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

The accompanying notes are an integral part of these condensed consolidated financial statements.

1

MARINER HEALTH CARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

MARINER HEALTH CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1           GENERAL

Nature of Business

Mariner Health Care, Inc. through its operating subsidiaries (collectively, the “Company”) provides post-acute healthcare services, primarily through the operation of skilled nursing facilities (“SNFs”). All references to the “Company” herein are intended to include the operating subsidiaries through which the services described herein are directly provided. At September 30, 2003, the Company’s significant operations consist of 286 owned, leased, or managed SNFs and eight assisted living facilities and apartments, in 23 states with 35,530 licensed beds, including 20 SNFs with 2,502 beds located in the state of Florida that have been identified as held for sale. A significant concentration of these facilities are in Texas, North Carolina, Colorado, California and Florida and several metropolitan markets, which represent the Company’s only reportable operating segment (see Note 6). Included in the total SNFs are seven managed SNFs with 1,066 licensed beds. At September 30, 2003, the Company also operated 12 owned, leased, or managed long-term acute care hospitals (“LTACs”) in four states with 638 licensed beds. Effective October 1, 2003, 19 facilities in the state of Florida were sold (the “Florida Sale”) (see Note 7).

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report for the year ended December 31, 2002 on Form 10-K filed with the SEC. In the opinion of management, the financial information included herein reflects all adjustments considered necessary for a fair presentation of interim results and, except for the items described below in “Emergence from Bankruptcy,” all such adjustments are of a normal and recurring nature. Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year.

Emergence from Bankruptcy

On March 25, 2002, the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) approved the Company’s second amended and restated joint plan of reorganization filed on February 1, 2002 (including all modifications thereof and schedules and exhibits thereto, the “Joint Plan”). On May 13, 2002 (the “Effective Date”), the Company and substantially all of its subsidiaries emerged from proceedings under chapter 11 of title 11 (“Chapter 11”) of the United States Code pursuant to the terms of the Joint Plan. In connection with its emergence from bankruptcy, the Company changed its name to Mariner Health Care, Inc.

The Company emerged from bankruptcy effective May 1, 2002 for financial reporting purposes, at which time it adopted the provisions of fresh-start reporting in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”). Under fresh-start reporting, a new entity is deemed to be created for financial reporting purposes. In adopting the requirements of fresh-start reporting as of May 1, 2002, the provisions of the Company’s Joint Plan were implemented, assets and liabilities were adjusted to their estimated fair values and the accumulated deficit for the Company’s subsidiaries that were part of the Chapter 11 cases was eliminated. The financial statements for all periods prior to May 1, 2002 reflect the financial position, results of operations and cash flows of the Company’s predecessor entity (the “Predecessor Company”). The financial statements for all periods subsequent to May 1, 2002, reflect the consolidated financial position, results of operations and cash flows of the reorganized entity (the “Reorganized Company”). Unless specifically stated as the Predecessor Company or the Reorganized Company, all references to the Company include the operations of both the Predecessor Company and Reorganized Company.

4

MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Since fresh-start reporting materially changed the amounts previously recorded in the consolidated financial statements of the Predecessor Company, a black line signifying the difference in presentation separates the financial data pertaining to periods after the adoption of fresh-start reporting from the financial data pertaining to periods prior to the adoption of fresh-start reporting.

Between filing for protection under the Bankruptcy Code on January 18, 2000 and the Effective Date, the Company operated its business as a debtor-in-possession subject to the jurisdiction of the Bankruptcy Court. Accordingly, the Predecessor Company’s consolidated financial statements presented herein for periods prior to emergence from bankruptcy are presented in conformity with SOP 90-7 and were prepared on a going concern basis, which assumes continuity of operations and realization of assets and settlement of liabilities and commitments in the normal course of business.

In accordance with SOP 90-7, the Company has recorded all transactions directly related to the reorganization of the Company since the filing of the Chapter 11 cases as reorganization items. In connection with the implementation of fresh-start reporting, the Company recorded a gain of approximately $1.2 billion from the restructuring of its debt in accordance with the provisions of the Joint Plan. Other significant adjustments also were recorded to reflect the provisions of the Joint Plan and the fair values of the assets and liabilities of the Reorganized Company. For accounting purposes, these transactions are reflected in the operating results of the Predecessor Company for the four months ended April 30, 2002.

A summary of the principal categories of reorganization items is as follows (in thousands):

The Reorganized Company adopted the accounting policies of the Predecessor Company (see the Company’s Annual Report for the year ended December 31, 2002 on Form 10-K filed with the SEC). In accordance with the fresh-start reporting provisions of SOP 90-7, the Reorganized Company also adopted changes in accounting principles that were required in the consolidated financial statements of the Reorganized Company within the twelve month period subsequent to the Effective Date.

The condensed consolidated pro forma effect of the Joint Plan assuming that the Effective Date occurred on January 1, 2002 is as follows (in thousands, except per share amounts):

5

MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The condensed consolidated pro forma results exclude reorganization items recorded prior to May 1, 2002. The condensed consolidated pro forma results include estimates for depreciation expense, interest expense and the related income tax effect prior to May 1, 2002. The number of shares outstanding has also been adjusted. The condensed consolidated pro forma results are not necessarily indicative of the financial results that might have resulted had the Effective Date of the Joint Plan actually occurred on January 1, 2002.

Discontinued Pharmacy Operations

In October 2001, the Company received the approval of the Bankruptcy Court to sell its institutional pharmacy services business (the “APS Division”), the sale of which was consummated on January 6, 2002. Accordingly, the results of the APS Division have been treated as a discontinued operation in accordance with accounting principles generally accepted in the United States (see Note 3).

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events, they may ultimately differ from actual results.

Comprehensive Income

Comprehensive income includes net income, as well as charges and credits to stockholders’ equity not included in net income. The components of comprehensive income, net of income taxes, consist of the following (in thousands):

Stock-Based Compensation

Reorganized Company. The Reorganized Company maintains two stock-based compensation plans that provide for the granting of stock options to the Company’s employees and outside directors with exercise prices not less than the fair market value of the shares at the date of grant. The Reorganized Company has stock option plans authorizing the grant of stock options to purchase up to 2,153,022 shares of common stock, par value $0.01 per

6

MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

share (the “Common Stock”). At September 30, 2003, there were options to purchase 497,500 shares of common stock outstanding at exercise prices ranging from $2.65 to $6.30, all of which were equal to the fair market value of the common stock on the date of the grant. There were options to purchase 87,500 shares of Common Stock exercisable at September 30, 2003.

Stock Option Exchange Program. In the second quarter of 2003, the Company’s Board of Directors approved a voluntary stock option exchange program whereby the Company offered employees the opportunity to exchange options having an exercise price of $20.12 for an equal number of new options. Non-employee members of the Board of Directors were not eligible to participate in the exchange program.

Under the terms of the program, in order to participate, eligible employees were required to tender all of their options that were granted with an exercise price of $20.12 in exchange for a commitment by the Company to grant new options under the program six-months and one day following the closing date of the offering period (the date of legal cancellation of the tendered options), with an exercise price per share equal to the greater of $8.00 or the fair market value of the Company’s Common Stock at that time, whichever is higher. On June 13, 2003, the Company canceled options to purchase 1,563,560 shares of the Company’s Common Stock. Assuming all employees of the Company on the date hereof remain employed through the grant date of the new options, the Compensation Committee of the Board of Directors will grant new options to purchase 1,458,560 shares of the Company’s Common Stock on the first day that is at least six months and one day following June 13, 2003. These options will vest in three equal annual installments beginning on the first anniversary of the date of grant of the new options, with the exception of the options to be granted to the Company’s Chief Executive Officer, which will vest in accordance with the terms set forth in his employment agreement. The Company does not expect to record any significant compensation expense as a result of the exchange program.

Director Stock Option Exchange Offer. On July 30, 2003, the Compensation Committee of the Board of Directors of the Company approved a program to allow outside directors to surrender their options to purchase shares of Common Stock of the Company with an exercise price per share of $20.12, which were granted on May 16, 2002, in exchange for shares of Common Stock to be granted under the 2003 Outside Directors’ Stock Incentive Plan. The program will allow for a number of shares equal to 30% of the number of options surrendered. The program will allow for each director, other than the Chairman of the Board of Directors, to receive an offer to exchange their options in return for a grant of 7,500 shares of Common Stock and the Chairman of the Board of Directors to receive an offer to exchange his options in return for a grant of 15,000 shares of Common Stock. The shares will vest according to the original vesting schedule of the surrendered options. No offer under the program has been made to date to any director.

Predecessor Company. The Predecessor Company had stock option plans for key employees and outside directors which authorized the granting of incentive stock options and nonqualified options. Upon the Company’s emergence from bankruptcy, all the Predecessor Company stock option plans and options granted were canceled.

7

MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Pro Forma. The Company accounts for stock options in accordance with Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, the Company recognizes no compensation expense for stock option grants. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an Amendment of SFAS No. 123” (“SFAS No. 148”), the Company’s pro forma net income and earnings per share, assuming the election had been made to recognize compensation expense on stock-based awards, are as follows (in thousands, except per share amounts):

Recent Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS No. 150”). SFAS No. 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS No. 150 requires that those instruments be classified as liabilities in statements of financial position. This statement is effective for financial instruments entered into or modified after May 31, 2003. On October 29, 2003, FASB deferred for an indefinite period the application of the guidance in SFAS No. 150. FASB decided to defer the application of SFAS No. 150 until it could consider some of the resulting implementation issues associated with the measurement and recognition issues. The Company has not determined the resulting impact of the adoption of this statement on its consolidated financial position, results of operations or cash flows.

In April 2003, FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS No. 149”), which is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. SFAS No. 149 amends and clarifies accounting and reporting for derivative instruments. In particular, this statement amends certain other pronouncements and clarifies the circumstances under which a contract with an initial net investment meets the characteristics of a derivative and when a derivative contains a financial component. The guideline should be applied prospectively. The adoption of SFAS 149 did not have a material impact on the consolidated financial position, results of operations or cash flows of the Company.

In January 2003, FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 addresses the consolidation of entities whose equity holders have either (a) not provided sufficient equity at risk to allow the entity to finance its own activities or (b) do not possess certain characteristics of a controlling financial interest. FIN 46 sets forth a model to evaluate potential consolidation of these entities, known as variable interest entities (“VIEs”), based on an assessment of which party to the VIE, if any, absorbs a majority of the exposure to its expected losses, receives a majority of its expected residual returns, or both (the “primary beneficiary”). FIN 46 is effective for all new VIEs created or acquired after January 31, 2003 (see Note 7). Originally, for VIEs created or acquired prior to February 1, 2003, the provisions of FIN 46 were to be applied for the first interim or annual period beginning after June 15, 2003. However, on October 8, 2003, FASB deferred the effective date for applying the provisions of FIN 46 until the first reporting period after December 15, 2003 for interests held by public entities in VIEs or potential VIEs created before February 1, 2003. FIN 46 also sets forth certain disclosures regarding interests in VIEs that are deemed significant, even if consolidation is not required. The

8

MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Company is currently evaluating the impact of FIN 46 on its consolidated financial position, results of operation or cash flows for VIEs or potential VIEs created before February 1, 2003.

In December 2002, FASB issued SFAS No. 148, which provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. The provisions of this statement were effective December 31, 2002. Management currently intends to continue to account for stock-based compensation under the intrinsic value method set forth in APB Opinion 25 and related interpretations. For this reason, the transition guidance of SFAS No. 148 did not have a material impact on the consolidated financial position, results of operations or cash flows of the Company. SFAS No. 148 does amend existing guidance with respect to required disclosures, regardless of the method of accounting used. These required disclosures have been presented above.

In November 2002, FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation elaborates on the disclosures to be made by a guarantor in its financial statements under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of this interpretation were effective as of December 31, 2002 and require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor’s obligations under the guarantee. The recognition requirements of this interpretation were effective beginning January 1, 2003. The implementation of this interpretation did not have a material impact on the consolidated financial position, results of operations or cash flows of the Company.

Comparability of Financial Information

The adoption of fresh-start reporting as of May 1, 2002 materially changed the amounts previously recorded in the consolidated financial statements of the Predecessor Company. With respect to reported operating results, management believes that business segment operating income of the Predecessor Company is generally comparable to that of the Reorganized Company, excluding divested facilities. However, capital costs, such as interest, depreciation and amortization, of the Predecessor Company generally are not comparable to those of the Reorganized Company. In addition, the reported financial position and cash flows of the Predecessor Company generally are not comparable to those of the Reorganized Company.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current period financial statement presentation.

NOTE 2      REVENUE

Net revenue is recorded based on estimated amounts due from patients and third-party payors for healthcare services provided, including anticipated settlements under reimbursement agreements with Medicare, Medicaid and other third-party payors, and is recognized in the period in which the services are provided. Revenue is recorded net of provisions for discount arrangements with commercial payors and contractual allowances with third-party payors, primarily Medicare and Medicaid. Net revenue realizable under third-party payor agreements are subject to change due to examination and retroactive adjustment. Estimated third-party payor settlements are recorded in the period the related services are rendered. The methods of making such estimates are reviewed periodically, and differences between the net amounts accrued and subsequent settlements or estimates of expected settlements are reflected in the current period results of operations.

The Medicaid and Medicare programs are highly regulated. The failure of the Company or its customers to comply with applicable reimbursement regulations could adversely affect the Company’s business. It is not possible to quantify fully the effect of potential legislative or regulatory changes, the administration of such legislation or any

9

MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

other governmental initiatives on the Company’s business. Accordingly, there can be no assurance that the impact of these changes or any future healthcare legislation will not further adversely affect the Company’s business. There can be no assurance that payments under governmental and private third party payor programs will be timely, will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. The Company’s financial condition and results of operations may be materially and adversely affected by the reimbursement process, which in the healthcare industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.

The following is a summary of approximate net revenue by payor type for the periods indicated (in thousands):

NOTE 3           DIVESTITURES AND CASUALTY GAIN

Assets Held for Sale

In the normal course of business, the Company evaluates the performance of its operating units in order to make a determination of whether to sell under-performing or non-strategic assets. An increasing trend in malpractice litigation claims, rising costs of litigation, and losses associated with these lawsuits have caused many insurance carriers to raise the cost of insurance premiums or refuse to write insurance policies. These problems are particularly acute in the state of Florida where, because of higher claim amounts, general liability and professional liability costs have become increasingly expensive.

On August 19, 2003, the Company met all six of the requirements set forth in SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), to classify certain assets of 20 of its SNFs located in the state of Florida as held for sale. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long lived assets. Under SFAS No. 144, when a long-lived asset or group of assets (disposal group) meets certain criteria set forth in the Statement, the long lived asset (disposal group) must be classified as held for sale in the consolidated balance sheet. Accordingly, the assets of the above referenced 20 Florida SNFs have been classified as “held for sale” in the accompanying unaudited condensed consolidated balance sheet and are measured at the lower of their carrying value or fair value less costs to sell. Depreciation of the assets ceased on August 19, 2003. Effective October 1, 2003, the Company completed the sale of 19 of the 20 SNFs classified as assets held for sale. The Company expects to complete the sale of the remaining SNF in the disposal group within one year.

The Company has entered into an administrative services agreement with the new operator of the divested SNFs to perform certain back office services. These back office services include accounting support, procurement of business supplies, billing and collections, and information technology services. The Company determined that the sale did not meet the accounting criteria for “discontinued operations” under SFAS No. 144 due to the existence of cash flows generated by the back office service agreement.

10

MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

A summary of the major classes of assets held for sale is as follows (in thousands):

Discontinued Pharmacy Operations

On January 6, 2002, the Company consummated the sale of its APS Division to Omnicare, Inc. and its wholly owned affiliate, APS Acquisition LLC (collectively, “Omnicare”). During the quarter ended December 31, 2001, the Company received the approval of the Bankruptcy Court to sell the APS Division, subject to an auction and overbidding process under the supervision of the Bankruptcy Court. As a result, an auction of the assets comprising the APS Division was held on December 4, 2001, at which time, following competitive bidding at the auction, Omnicare was determined to have made the highest and best bid for the assets of the APS Division. On December 5, 2001, the Bankruptcy Court approved the sale of the APS Division to Omnicare for a cash closing price of $97.0 million and up to $18.0 million in future payments, depending upon certain post-closing operating results of the APS Division (the “Earnout Payments”). During the four months ended April 30, 2002, the Company realized a gain on the sale of the APS Division of $29.1 million. During the three months ended March 31, 2003, the Company earned and received the first Earnout Payment of $6.0 million, at which time it recorded a gain of $3.6 million, net of taxes of $2.4 million. On July 23, 2003, the Company and Omnicare entered into an agreement whereby all conditions for the remaining Earnout Payments were considered to have been met and the Company received the remaining $12.0 million on August 5, 2003, at which time it recorded a gain of $7.2 million, net of taxes of $4.8 million.

Other Divestitures

During the three months and five months ended September 30, 2002, the Company completed the sale or divestiture of three owned or leased SNFs and certain assets. No gain or loss was recorded. These facilities reported net revenue of approximately $0.4 million, $1.8 million and $6.7 million for the three, five and nine months ended September 30, 2002, respectively.

During the four months ended April 30, 2002, the Predecessor Company completed the sale or divestiture of approximately 20 owned or leased SNFs and certain assets, which resulted in a net loss of approximately $10.8 million and is included in net loss on divestitures within reorganization items. These facilities reported net revenue of approximately $13.0 million for the four months ended April 30, 2002.

Casualty Gain

During April 2002, the Predecessor Company recorded a net gain of approximately $1.5 million relating to certain owned and leased facilities that were damaged by floods. The net gain is included in other income and is comprised of a gain of approximately $14.4 million relating to owned and capital leased facilities whose net carrying value was less than the insurance proceeds expected to be received, offset by a loss of approximately $12.9 million relating to operating leased facilities whose estimated costs to repair are in excess of the expected insurance proceeds to be received.

11

MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 4           EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated in accordance with SFAS No. 128, “Earnings per Share” (in thousands, except per share data):