UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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 01-14358
Harborside Healthcare Corporation
Delaware 04-3307188
(State or other jurisdiction of
incorporation or organization) (IRS employer identification no.)
470 Atlantic Avenue, Boston, Massachusetts 02210
(Address of principal executive offices) (Zip Code)
(617) 556-1515
(Registrant's 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
Number of shares of common stock, par value $0.01 per share outstanding as
of November 13, 1996: 8,000,000.
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HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Table of Contents
Page
Part I. Financial Information
Condensed Consolidated Balance Sheets
December 31, 1995 and September 30, 1996 3
Condensed Consolidated Statements of Operations
For the Three Months and Nine Months Ended
September 30, 1995 and 1996 4
Condensed Consolidated Statements of Changes
in Stockholders' Equity
For the Nine Months Ended September 30, 1996 5
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
1995 and 1996 6
Notes to Condensed Consolidated Financial
Statements 7-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-17
Part II Other Information 17
Signatures 18
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Combined prior to June 14, 1996)
(dollars in thousands, except per share amounts)
December 31, September 30,
1995 1996
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 40,157 $ 11,367
Accounts receivable, net of allowances
for doubtful accounts of $1,526 and
$1,952, respectively 9,967 21,093
Prepaid expenses and other 1,790 3,635
Demand note due from limited partnership 1,255 1,341
Facility acquisition deposits 3,000 -
Deferred income taxes - 843
Total current assets 56,169 38,279
Restricted cash 2,755 3,442
Investment in limited partnership 519 192
Property and equipment, net 30,139 94,705
Intangible assets, net 3,050 3,166
Deferred income taxes - 400
Total assets $ 92,632 $ 140,184
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 428 $ 166
Current portion of capital lease
obligation - 3,672
Accounts payable 4,034 5,598
Employee compensation and benefits 4,495 8,939
Other accrued liabilities 959 2,386
Note payable to affiliate 2,000 -
Accrued interest 25 19
Current portion of deferred income - 360
Income taxes payable - 902
Distribution payable to minority interest 33,493 -
Total current liabilities 45,434 22,042
Long-term portion of deferred income - 3,054
Long-term portion of capital lease
obligation - 53,789
Long-term debt 43,068 18,082
Total liabilities 88,502 96,967
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 30,000,000
shares authorized, 4,400,000 and
8,000,000 shares issued and outstanding,
respectively 44 80
Additional paid-in capital 10,328 48,911
Accumulated deficit (6,242) (5,774)
Total stockholders' equity 4,130 43,217
Total liabilities and
stockholders' equity $ 92,632 $ 140,184
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Combined prior to June 14, 1996)
(Unaudited)
(dollars in thousands, except per share amounts)
For the three For the nine
months ended months ended
September 30, September 30,
1995 1996 1995 1996
Total net revenues $ 28,515 $ 45,903 $ 79,029 $117,706
Expenses:
Facility operating 23,273 36,622 65,192 94,548
General and administrative 1,299 1,985 3,584 5,415
Service charges paid to
affiliate 170 161 524 526
Special compensation and other - - - 1,716
Depreciation and amortization 1,114 915 3,222 2,030
Facility rent 536 2,565 1,423 7,663
Total expenses 26,392 42,248 73,945 111,898
Income from operations 2,123 3,655 5,084 5,808
Other:
Interest expense, net 1,246 1,383 3,735 3,193
(Income) loss on investment
in limited partnership 28 (40) (31) 327
Minority interest in net
income of subsidiaries 552 - 1,070 -
Income before income taxes
and extraordinary loss 297 2,312 310 2,288
Income taxes - 902 - 502
Income before extraordinary loss 297 1,410 310 1,786
Extraordinary loss on early
retirement of debt, net
of tax benefits of $843 - - - 1,318
Net income $ 297 $ 1,410 $ 310 $ 468
Net income per share $ 0.18
Pro forma data:
Historical income before
income taxes and
extraordinary loss $ 297 $ 310 $ 2,288
Pro forma income taxes 116 121 492
Pro forma income before
extraordinary loss 181 189 1,796
Extraordinary loss, net - - 1,318
Pro forma net income $ 181 $ 189 $ 478
Pro forma net income per share:
Pro forma income before
extraordinary loss $ 0.04 $ 0.04 $ 0.31
Extraordinary loss, net - - 0.23
Pro forma net income $ 0.04 $ 0.04 $ 0.08
Weighted average number of
common and common equivalent
shares used in per share
computations 4,425,000 8,016,000 4,425,000 5,852,000
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Combined prior to June 14, 1996)
(Unaudited)
(dollars in thousands)
Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
Stockholders' equity,
December 31, 1995 $ 44 $10,328 $(6,242) $ 4,130
Net income for the nine months
ended September 30, 1996 - - 468 468
Purchase of equity interests - 1,028 - 1,028
Distributions - (140) - (140)
Proceeds of initial public
offering, net 36 37,695 - 37,731
Stockholders' equity,
September 30, 1996 $ 80 $48,911 $(5,774) $43,217
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Combined prior to June 14, 1996)
(Unaudited)
(dollars in thousands)
For the nine months ended
September 30,
1995 1996
Operating activities:
Net income $ 310 $ 468
Adjustments to reconcile net income
to net cash provided by operating activities:
Minority interest 1,070 234
Extraordinary loss, net - 1,318
Depreciation of property and equipment 2,875 1,770
Amortization of intangible assets 347 260
Amortization of deferred income - (271)
Loss from investment in limited partnership (31) 327
Amortization of loan costs and fees 82 87
Accretion of interest on capital lease obligation - 710
Deferred interest - (86)
Common stock grant - 225
Other - 1
4,653 5,043
Changes in operating assets and liabilities:
(Increase) in accounts receivable (4,079) (11,126)
(Increase) in prepaid expenses and other (267) (1,845)
(Increase) in deferred income taxes - (400)
Increase in accounts payable 833 1,564
Increase in employee compensation and benefits 1,286 4,444
(Decrease) in accrued interest (233) (6)
Increase in other accrued liabilities 132 1,327
Increase in income taxes payable - 902
Net cash provided (used) by
operating activities 2,325 (97)
Investing activities:
Additions to property and equipment (2,161) (3,711)
Facility acquisition deposits (400) (2,000)
Additions to intangibles (174) (1,009)
Transfers to (from) restricted cash, net 17 (687)
Net cash used by investing activities (2,718) (7,407)
Financing activities:
Payment of long-term debt (266) (25,248)
Principal payments of capital lease obligation - (873)
Debt prepayment penalty - (1,517)
Note payable to an affiliate - (2,000)
Receipt of lease inducement - 3,685
Dividend distribution (88) (140)
Distribution to minority interest (2,727) (33,727)
Purchase of equity interests - 803
Proceeds of initial public offering, net - 37,731
Net cash used by financing activities (3,081) (21,286)
Net (decrease) in cash and cash equivalents (3,474) (28,790)
Cash and cash equivalents, beginning of period 14,013 40,157
Cash and cash equivalents, end of period $ 10,539 $ 11,367
Supplemental Disclosure:
Interest paid $ 4,514 $ 3,173
Noncash investing and financing activities:
Property and equipment additions
by capital lease - $ 57,625
Capital lease obligation incurred - $ 57,625
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Combined prior to June 14, 1996)
(Unaudited)
A. General
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's registration statement on Form
S-1. In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the Company's financial position as
of September 30, 1996 and the results of its operations and its cash flows
for the three-month and nine-month periods ended September 30, 1996 and
1995. The results of operations for the three-month and nine-month
periods ended September 30, 1996 are not necessarily indicative of the
results which may be expected for the full year. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report.
B. Basis of Presentation
The Company was incorporated as a Delaware corporation on March 19, 1996
and was formed as a holding company, in anticipation of an initial public
offering (the "Offering"), to combine under the control of a single
corporation the operations of various business entities (the "Predecessor
Entities") which were all under the majority control of several related
stockholders. Immediately prior to the Offering, the Company executed an
agreement (the "Reorganization Agreement") which resulted in the transfer
of ownership of the Predecessor Entities to the Company prior to completion
of the Offering in exchange for 4,400,000 shares of the Company's common
stock. The presentation of stockholders' equity as of December 31, 1995
has been adjusted to retroactively reflect this exchange of shares. The
company's financial statements for periods prior to the Offering have been
prepared by combining the historical financial statements of the
Predecessor Entities, similar to a pooling of interests presentation. On
June 14, 1996, the Company completed the issuance of 3,600,000 shares of
common stock through the Offering resulting in net proceeds to the Company
(after deducting underwriters' commissions and other offering expenses) of
$37,731,000. A portion of the proceeds was used to repay some of the
Company's long-term debt (see Note F). The consolidated financial
statements include the accounts of Harborside Healthcare Corporation and
its wholly-owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
C. Investment in Limited Partnership
The Company holds a 75% partnership interest in Bowie Center Limited
Partnership (the "Partnership") which the Company accounts for using the
equity method. Although the Company owns a majority interest in the
Partnership, the Company only holds a 50% voting interest in the
Partnership and accordingly, it does not exercise control over the
operations of the Partnership.
The results of operations of the Partnership are summarized below:
For the nine months ended
September 30,
1995 1996
Net operating revenues $5,518,000 $6,047,000
Net operating expenses 5,098,000 5,992,000
Net income (loss) 41,000 (437,000)
The financial position of the Partnership is as follows:
As of September 30, 1996
Current assets $2,622,000
Non-current assets 4,911,000
Current liabilities 2,496,000
Non-current liabilities 4,781,000
Partners' equity 257,000
D. Special Compensation and Other
During the first half of 1996, the Company incurred $1,716,000 of non-
recurring expenses associated with its corporate reorganization and its
initial public offering. Substantially all of these non-recurring
expenses related to special compensation arrangements with key members of
management in connection with the reorganization of the Company's ownership
structure and the completion of its initial public offering.
E. Income Taxes
Prior to the implementation of the Reorganization Agreement, the
Predecessor Entities (primarily partnerships and subchapter S corporations)
operated under common control but were not directly subject to federal or
state income taxes and, accordingly, no provision for income taxes was made
in the Company's historical financial statements prior to the
implementation date of the Reorganization Agreement. A pro forma income
tax expense has been reflected for each period presented prior to the
reorganization date, as if the Company had always owned the Predecessor
Entities. The pro forma income tax expense was computed using an estimated
effective tax rate of 39%. The rate was derived by using the statutory
federal income tax rate of 34% plus an average of the various state
statutory income tax rates (net of federal benefits) where the Company
operates.
With the implementation of the Reorganization Agreement, the Company
inherited the tax basis of the Predecessor Entities and recognized a
deferred tax asset of $400,000. This amount resulted from the expected
future tax consequences of temporary differences between the carrying
amounts of the transferred assets and liabilities used for financial
reporting purposes and the inherited tax bases and was reflected as an
income tax benefit in the three month period ended June 30, 1996.
F. Long Term Debt
Using proceeds from the Offering, on June 14, 1996 the Company repaid
$25,000,000 of its long-term debt, incurring a prepayment penalty of
$1,517,000. Additionally, the Company wrote-off $544,000 of deferred
financing costs related to the retired debt and incurred $100,000 of
additional transaction costs. The loss on early retirement of debt totaled
$2,161,000 and has been presented as an extraordinary loss in the statement
of operations for the nine months ended September 30, 1996 net of the
related estimated income tax benefit of $843,000.
As of September 30, 1996, the reduced future maturities associated with all
of the Company's long-term debt are as follows:
1996 (remainder of year) $ 40,000
1997 169,000
1998 186,000
1999 205,000
2000 225,000
Thereafter 17,423,000
$18,248,000
G. Recent Acquisitions
One of the Predecessor Entities was the general partner of the Krupp Yield
Plus Limited Partnership ("KYP"), which owned seven facilities (the "Seven
Facilities") until December 31, 1995. The Company held a 5% interest in
KYP while the remaining 95% was owned by the limited partners of KYP (the
"Unitholders"). Effective December 31, 1995, KYP sold the Seven Facilities
and a subsidiary of the Company began leasing the facilities from the
buyer. Prior to December 31, 1995 the accounts of KYP were included in the
Company's consolidated financial statements and the interest of the
Unitholders was reflected as minority interest. In March of 1996, a
liquidating distribution was paid to the Unitholders.
Effective January 1, 1996, a subsidiary of the Company entered into an
agreement to lease six long-term care facilities in New Hampshire (the "New
Hampshire Facilities").
As of July 1, 1996, a subsidiary of the Company began leasing four long-term
care facilities in Ohio (the "Ohio Facilities"). This transaction
(the "Ohio Transaction") is accounted for as a capital lease as a result of
a bargain purchase option exercisable at the end of the lease. The initial
term of the lease is five years and during the final six months of the
initial term, the Company may exercise an option to purchase the four
facilities for a total price of $57,125,000. If the Company exercises the
purchase option but is unable to obtain financing for the acquisition, the
lease may be extended for up to two additional years, during which time
the Company must obtain financing and complete the purchase of the
facilities. The annual rent under the agreement is $5,000,000 during the
initial term and $5,500,000 during the extension term. The Company is also
responsible for facility expenses such as taxes, maintenance and repairs.
The Company agreed to pay $8,000,000 for the option to purchase the Ohio
Facilities. Of this amount, $5,000,000 was paid prior to the closing on
July 1, 1996, and the remainder, $3,000,000, is due at the end of the
initial lease term whether or not the Company exercises its purchase
option.
The following unaudited pro forma condensed consolidated statements of
earnings present the condensed results of operations of the Company after
giving effect to the acquisition of the Seven Facilities, the New Hampshire
Facilities and the Ohio Facilities for the nine month periods ended
September 30, 1995 and 1996, as if these acquisitions had occurred as of
January 1, 1995. The pro forma financial results are not necessarily
indicative of the actual results of operations which might have occurred or
of the results of operations which may occur in the future.
For the nine months ended
September 30,
1995 1996
Total net revenues $119,826 $133,998
Income before income taxes
and extraordinary loss 2,154 2,369
Pro forma income before
extraordinary loss 1,314 1,845
Pro forma net income 1,314 527
Pro forma net income per common share
using 4,425,000 and 5,852,000
common and common equivalent
shares, respectively $ 0.30 $ 0.09
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements including those
concerning Management's expectations regarding future financial performance
and future events. These forward-looking statements involve significant
risk and uncertainties, including those described herein and included under
"Special Note Regarding Forward-Looking Statements" below. Actual results
may differ materially from those anticipated by such forward-looking
statements.
OVERVIEW
Harborside Healthcare provides high quality long-term care, subacute care
and other specialty medical services in four principal regions: the
Southeast (Florida), the Midwest (Ohio and Indiana), New England (New
Hampshire) and the Mid-Atlantic (New Jersey and Maryland). The Company
operates 30 facilities (13 owned and 17 leased) with a total of 3,700
licensed beds. The Company provides traditional skilled nursing care, a
wide range of subacute care programs (such as orthopedic, CVA/stroke,
cardiac, pulmonary and wound care), as well as distinct programs for the
provision of care to Alzheimer's and hospice patients. In addition, the
Company provides rehabilitation therapy at Company-operated and
non-affiliated facilities. As of September 30, 1996, the Company provided
rehabilitation therapy services to patients at 38 non-affiliated long-term
care facilities. The Company seeks to position itself as the long-term care
provider of choice to managed care and other private referral sources in
its target markets by achieving a strong regional presence and by providing
a full range of high quality, cost effective nursing and specialty medical
services.
The Company was created in March 1996, in anticipation of an initial public
offering (the "Offering"), in order to combine under its control the
operations of various long-term care facilities and ancillary businesses
(the "Predecessor Entities") which had operated since 1988. The Company
completed the Offering on June 14, 1996 and issued 3,600,000 shares of
common stock at $11.75 per share. The owners of the Predecessor Entities
contributed their interests in such Predecessor Entities to the Company and
received 4,400,000 shares of the Company's common stock.
The Company's financial statements for periods prior to the Offering have
been prepared by combining the historical financial statements of the
Predecessor Entities, similar to a pooling of interests presentation. The
Company's financial statements prior to the date of the Offering do not
include a provision for Federal or state income taxes because the
Predecessor Entities (primarily partnerships and subchapter S corporations)
were not directly subject to Federal or state income taxation. The
Company's consolidated financial statements for periods prior to the date
of the Offering include a pro forma income tax expense for each period
presented, as if the Company had always owned the Predecessor Entities.
See Note E to the financial statements included elsewhere in this report.
One of the Predecessor Entities was the general partner of the Krupp Yield
Plus Limited Partnership ("KYP"), which owned seven facilities (the "Seven
Facilities") until December 31, 1995. The Company held a 5% interest in
KYP while the remaining 95% was owned by the limited partners of KYP (the
"Unitholders"). Effective December 31, 1995, KYP sold the Seven Facilities
and a subsidiary of the Company began leasing the facilities from the
buyer. Prior to December 31, 1995 the accounts of KYP were included in the
Company's consolidated financial statements and the interest of the
Unitholders was reflected as minority interest. In March of 1996, a
liquidating distribution was paid to the Unitholders.
The following table sets forth the number of facilities owned and leased by
the Company and the number of licensed beds operated by the Company:
As of September 30,
1995 1996
Facilities:
Owned (1) 16 13
Leased (2) 4 17
Total 20 30
Licensed beds:
Owned (1) 1,980 1,720
Leased (2) 489 1,980
Total 2,469 3,700
(1) Includes the Larkin Chase Center, which is owned by Bowie Center
Limited Partnership, a joint venture in which the Company has a 75%
ownership interest and a non-affiliated investor has a 25% ownership
interest.
(2) On December 31, 1995, the Seven Facilities were reclassified as
leased following their sale and concurrent leasing by a subsidiary of
the Company.
The following table sets forth certain operating data for the periods
indicated:
For the three months For the nine months
ended September 30, ended September 30,
1995 1996 1995 1996(3)
Patient days:
Private and other 66,142 92,184 192,659 241,634
Medicare 22,543 29,807 67,804 77,024
Medicaid 110,431 181,241 321,005 466,675
Total 199,116 303,232 581,468 785,333
Average Occupancy rate (1) 91.6% 92.0% 91.4% 91.8%
Net patient service
revenue(2):
Private and other 32.0% 30.3% 32.9% 30.9%
Medicare 33.0% 27.8% 32.1% 28.2%
Medicaid 35.0% 41.9% 35.0% 40.9%
Total 100.0% 100.0% 100.0% 100.0%
(1) "Average occupancy rate" is computed by dividing the number of
occupied licensed beds by the total number of available licensed beds
during each of the periods indicated.
(2) Net patient service revenues exclude all rehabilitation therapy
service revenues from non-affiliate contracts.
RESULTS OF OPERATIONS
The Company's total net revenues include net patient service revenues, and
beginning in 1995, rehabilitation therapy service revenues from contracts
with non-affiliated long-term care facilities. Private net patient service
revenues are recorded at established per diem billing rates. Net patient
service revenues to be reimbursed under contracts with third-party payors,
primarily the Medicare and Medicaid programs, are recorded at amounts
estimated to be realized under these contractual arrangements.
The Company's facility operating expenses consist primarily of payroll and
employee benefits related to nursing, housekeeping and dietary services
provided to patients, as well as maintenance and administration of the
facilities. Other significant facility operating expenses include the cost
of rehabilitation therapy services, medical and pharmacy supplies, food,
utilities, insurance and taxes. The Company's facility operating expenses
also include the general and administrative costs associated with the
operation of the Company's rehabilitation therapy business. The Company's
general and administrative expenses include all costs associated with its
regional and corporate operations.
The following table presents certain consolidated financial data of the
Company expressed as a percentage of total net revenues for the periods
presented:
For the three months For the nine months
ended September 30, ended September 30,
1995 1996 1995 1996
Total net revenues 100.0% 100.0% 100.0% 100.0%
Expenses:
Facility operating 81.6 79.8 82.5 80.3
General and administrative 4.5 4.3 4.5 4.6
Service charges paid to
affiliate 0.6 0.3 0.7 0.5
Special compensation and other 0.0 0.0 0.0 1.5
Depreciation and amortization 3.9 2.0 4.1 1.7
Facility rent 1.9 5.6 1.8 6.5
Total expenses 92.5 92.0 93.6 95.1
Income from operations 7.5 8.0 6.4 4.9
Other:
Interest expense, net 4.4 3.0 4.7 2.7
(Income) loss on investment
in limited partnership 0.1 0.0 0.0 0.3
Minority interest in net income
of subsidiaries 2.0 0.0 1.3 0.0
Income before income taxes and
extraordinary loss 1.0 5.0 0.4 1.9
Income taxes 0.0 1.9 0.0 0.4
Income before extraordinary loss 1.0 3.1 0.4 1.5
Extraordinary loss 0.0 0.0 0.0 1.1
Net income 1.0% 3.1% 0.4% 0.4%
Three Months Ended September 30, 1995 Compared to Three Months Ended
September 30, 1996
Total Net Revenues. Total net revenues increased by $17,388,000, or
61.0%, from $28,515,000 in the third quarter of 1995 to $45,903,000 in the
third quarter of 1996. This increase resulted primarily from the
acquisition of six New Hampshire Facilities on January 1, 1996, and four
Ohio Facilities on July 1, 1996, the generation of revenues from
rehabilitation therapy services provided to additional non-affiliated
long-term care facilities, and increased net patient service revenues per
patient day at the Company's "same store" facilities. Of such increase,
$5,906,000, or 34.0% of the increase, resulted from the operation of the
New Hampshire Facilities, and $8,517,000, or 49.0% of the increase,
resulted from the operation of the Ohio Facilities. In 1995 the Company
began providing rehabilitation therapy services at non-affiliated long-term
care facilities. Revenues generated by providing these services increased
by $1,876,000, from $1,173,000 in the third quarter of 1995 to $3,049,000
in the third quarter of 1996. The remaining $1,089,000, or 6.2% of such
increase, is attributable to higher average net patient service revenues
per patient day at the Company's "same store" facilities, primarily
resulting from increased levels of care provided to patients with medically
complex conditions. Average net patient service revenues per patient day
at "same store" facilities increased from $137.03 during the third quarter
of 1995 to $140.92 during the third quarter of 1996. Partially offsetting
this increase was a reduction in occupancy at "same store" facilities
(excluding the Larkin Chase facility, which is accounted for using the
equity method) from 92.1% during the third quarter of 1995 to 91.8% during
the third quarter of 1996. The average occupancy rate at all of the
Company's facilities increased from 91.6% during the third quarter of 1995
to 91.8% during the third quarter of 1996. The Company's quality mix of
private, Medicare and insurance revenues was 58.1% for the three months
ended September 30, 1996 as compared to 65.0% in the similar period of
1995. The decrease in the quality mix percentage was primarily due to the
acquisition of the New Hampshire and the Ohio Facilities. Prior to April
1, 1996, none of the New Hampshire facilities was eligible for
participation in the Medicare program.
Facility Operating Expenses. The increase in the number of facilities
operated by the Company and the expansion of the Company's rehabilitation
therapy services at non-affiliated facilities, as well as the greater
percentage of patients receiving higher levels of care, resulted in an
increase in facility operating expenses of $13,349,000, or 57.4%, from
$23,273,000 in the third quarter of 1995 to $36,622,000, in the third
quarter of 1996. The acquisition of the New Hampshire Facilities accounted
for $4,672,000, or 35.0% of the increase in facility operating expenses
while the Ohio Facilities accounted for $6,632,000 or 49.7% of this
increase. Operating expenses associated with additional non-affiliate
therapy contracts increased from $1,281,000 during the third quarter of
1995 to $2,362,000 during the third quarter of 1996 and accounted for 8.1%
of the increased costs. The remainder of the increase in facility
operating expenses, approximately $964,000, is due to increases in the
costs of labor, medical supplies and rehabilitation therapy services
purchased from third parties at "same store" facilities.
General and Administrative; Service Charges Paid to Affiliate. Expenses
associated with the Company's regional and corporate offices increased by
$686,000, or 52.8%, from $1,299,000 in the third quarter of 1995 to
$1,985,000 during the third quarter of 1996. Approximately $238,000 of
this increase resulted from the acquisition of the New Hampshire Facilities
and $122,000 from the acquisition of the Ohio Facilities. Most of the
remainder was associated with expansion of regional and corporate support,
increases in salaries, and additional travel and consulting expenses
associated with the Company's growth. The Company reimburses an affiliate
for rent and other expenses related to its corporate headquarters, as well
as for certain data processing and administrative services provided to the
Company. During the third quarter of 1995, such reimbursements totaled
$170,000, compared to $161,000 during the third quarter of 1996.
Depreciation and Amortization. Depreciation and amortization decreased
from $1,114,000 during the third quarter of 1995 to $915,000 during the
third quarter of 1996 as a net result of the sale of the Seven Facilities
effective December 31, 1995 (see Note G to the financial statements
included elsewhere in this report) and the acquisition of the Ohio
Facilities.
Facility Rent. Facility rent expense for the third quarter increased by
$2,029,000 from $536,000 in 1995 to $2,565,000 in 1996. The increase in
rent expense is the result of the sale and subsequent leaseback of the
Seven Facilities effective December 31, 1995 and the acquisition of the six
New Hampshire Facilities on January 1, 1996.
Interest Expense, net. Interest expense, net increased from $1,246,000 in
the third quarter of 1995 to $1,383,000 in the third quarter of 1996. This
increase of $137,000 is the net result of the pay down of the KYP Medium-
Term Notes (which occurred in connection with the sale and subsequent
leaseback of the Seven Facilities), the repayment of $25,000,000 of long-
term debt using proceeds from the Offering, and additional interest expense
resulting from the acquisition of the Ohio Facilities.
Loss on Investment in Limited Partnership. The Company accounts for its
investment in the Bowie Center Limited Partnership using the equity method.
The Company recognized a loss of $28,000 in the third quarter of 1995 as
compared to income of $40,000 during the third quarter of 1996 in
connection with this investment.
Minority Interest in Net Income of Subsidiaries. The Company recorded a
minority interest charge of $552,000 during the third quarter of 1995.
This charge reflected the allocation of 95% of the net income of KYP to the
Unitholders. The facilities owned by KYP were sold effective December 31,
1995 and the proceeds of the sale were distributed to the Unitholders in
March 1996.
Income Taxes. Prior to the date of the Offering, the Company's financial
statements do not include a provision for Federal or state income taxes
because the Predecessor Entities were not subject to Federal or state
income taxation. During the third quarter of 1996 the Company recorded a
tax provision of $902,000 based on its anticipated combined effective
Federal and state income tax rate.
Net Income. Net income was $297,000 in the third quarter of 1995 as
compared to net income of $1,410,000 in the third quarter of 1996. The
increase in net income was the net result of an increase in operating
income, the elimination of the minority interest charge, and an increase
in the provision for income taxes.
Nine Months Ended September 30, 1995 Compared to Nine Months Ended
September 30, 1996
Total Net Revenues. Total net revenues increased by $38,677,000 or 48.9%,
from $79,029,000 in the first nine months of 1995 to $117,706,000 in the
first nine months of 1996. This increase resulted primarily from the
acquisition of six New Hampshire Facilities on January 1, 1996 and four
Ohio Facilities on July 1, 1996, the generation of revenues from
rehabilitation therapy services provided to additional non-affiliated
long-term care facilities and increased net patient service revenues per
patient day at the Company's "same store" facilities. Of such increase,
$16,916,000 or 43.7% of the increase, resulted from the operation of the
New Hampshire Facilities, and $8,517,000 or 22.0% of the increase resulted
from the operation of the Ohio Facilities. The Company began providing
rehabilitation therapy services at non-affiliated long-term care facilities
during 1995. Revenues generated by providing these services increased by
$5,700,000, from $2,434,000 in the first nine months of 1995 to $8,134,000
in the first nine months of 1996. The remaining $7,544,000, or 19.5% of
such increase, is attributable to higher average net patient service
revenues per patient day at the Company's "same store" facilities,
primarily resulting from increased levels of care provided to patients with
medically complex conditions. Average net patient service revenues per
patient day at "same store" facilities increased from $131.51 during the
first nine months of 1995 to $139.02 during the first nine months of 1996.
Partially offsetting this increase was a reduction in occupancy at "same
store" facilities from 92.0% during the first nine months of 1995 to 91.6%
during the first nine months of 1996. The average occupancy rate at all of
the Company's facilities increased from 91.4% during the first nine months
of 1995 to 91.8% during the first nine months of 1996. The Company's
quality mix of private, Medicare and insurance revenues was 59.1% for the
nine months ended September 30, 1996 as compared to 65.0% in the similar
period of 1995. The decrease in the quality mix percentage was primarily
due to the leasing of the New Hampshire facilities. Prior to April 1,
1996, none of the New Hampshire facilities were eligible for participation
in the Medicare program.
Facility Operating Expenses. Facility operating expenses increased by
$29,356,000, or 45.0%, from $65,192,000 in the first nine months of 1995 to
$94,548,000 in the first nine months of 1996. The acquisition of the New
Hampshire Facilities accounted for $13,224,000, or 45.0% of the increase in
facility operating expenses while the Ohio Facilities accounted for
$6,632,000, or 22.6% of this increase. Operating expenses associated with
additional non-affiliate therapy contracts increased from $2,652,000 during
the first nine months of 1995 to $6,956,000 during the first nine months of
1996 and accounted for 14.7% of the increased costs. The remainder of the
increase in facility operating expenses, approximately $5,196,000, is due
to increases in the costs of labor, medical supplies and rehabilitation
therapy services purchased from third parties at "same store" facilities.
General and Administrative; Service Charges Paid to Affiliate. General
and administrative expenses increased by $1,831,000, or 51.1%, from
$3,584,000 in the first nine months of 1995 to $5,415,000 in the first nine
months of 1996. Approximately $609,000 of this increase resulted from the
acquisition of the New Hampshire Facilities, and $122,000 for the
acquisition of the Ohio Facilities.. Most of the remainder was associated
with expansion of regional and corporate support, increases in salaries,
and additional travel and consulting expenses associated with the Company's
growth. The Company reimburses an affiliate for rent and other expenses
related to its corporate headquarters as well as for certain data
processing and administrative services provided to the Company. During the
first nine months of 1995, such reimbursements totaled $524,000 as compared
to $526,000 in the first nine months of 1996.
Special Compensation and Other. In connection with the Offering and
corporate reorganization, the Company recorded $1,716,000 of non-recurring
charges in the first nine months of 1996. Of this amount, $1,524,000
consisted of compensation earned by key members of management as a result
of the successful Offering and the corporate restructuring which preceded
the Offering.
Depreciation and Amortization. Depreciation and amortization decreased
from $3,222,000 in the first nine months of 1995 to $2,030,000 in the first
nine months of 1996 as a net result of the sale of the Seven Facilities
effective December 31, 1995 and the acquisition of the Ohio facilities.
Facility Rent. Facility rent expense for the first nine months increased
by $6,240,000 from $1,423,000 in 1995 to $7,663,000 in 1996. The increase
in rent expense is the result of the sale and subsequent leaseback of the
Seven Facilities effective December 31, 1995 and the acquisition of the six
New Hampshire Facilities on January 1, 1996.
Interest Expense, net. Interest expense, net, decreased from $3,735,000
in the first nine months of 1995 to $3,193,000 in the first nine months of
1996. This decrease is due to the net result of the pay down of the KYP
Medium-Term Notes (which occurred in connection with the sale and
subsequent leaseback of the Seven Facilities), the repayment of $25,000,000
of long-term debt using proceeds from the Offering, and additional interest
expense resulting from the acquisition of the Ohio Facilities.
Loss on Investment in Limited Partnership. The Company accounts for its
investment in Bowie Center Limited Partnership using the equity method.
The Company recorded income of $31,000 in the first nine months of 1995 as
compared to a loss of $327,000 during the first nine months of 1996 in
connection with this investment.
Minority Interest in Net Income of Subsidiaries. The Company recorded a
minority interest charge of $1,070,000 during the first nine months of
1995. This charge reflected the allocation of 95% of the net income of KYP
to the Unitholders. The facilities owned by KYP were sold effective
December 31, 1995 and the proceeds of the sale were distributed to the
Unitholders in March 1996.
Extraordinary Loss on Early Retirement of Debt. During the second
quarter of 1996, the Company repaid $25,000,000 of long-term debt using
proceeds from the Offering. In connection with this early repayment, the
Company recorded an extraordinary loss of $2,161,000 ($1,318,000 net of
related tax benefit) as the result of a prepayment penalty paid to the
lender and the write-off of deferred financing costs.
Income Taxes. Prior to the date of the Offering, the Company's financial
statements do not include a provision for Federal or state income taxes
because the Predecessor Entities were not subject to Federal or state
income taxation. Income taxes for the first nine months of 1996 totaled
$502,000 and consisted of income tax expense of $902,000 for the three
months ended September 30, 1996 less a tax benefit of $400,000 recognized
during the second quarter of 1996 resulting from book-tax differences
inherited as part of the Company's corporate reorganization.
Net Income. Net income was $310,000 in the first nine months of 1995 as
compared to income of $468,000 in the first nine months of 1996.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Predecessor Entities historically financed their operations and
acquisitions growth primarily through a combination of mortgage financing,
operating leases, and capital contributed by the Unitholders. As of
December 31, 1995, the Company had cash and cash equivalents totaling
$40,157,000; however, approximately $33,493,000 of this cash was held
pending a liquidating distribution to the Unitholders, which occurred in
March 1996. On June 14, 1996, the Company completed the Offering and
received proceeds (net of underwriters' commissions and offering expenses)
of approximately $37,700,000.
The Company had two mortgage loans outstanding as of December 31, 1995.
One mortgage loan had an outstanding principal balance of $41,877,000 and
bearing interest at an annual rate of 10.65% plus additional interest equal
to 0.3% of the difference between the annual operating revenues of the
mortgaged facilities and actual revenues during the twelve-month base
period commencing October 1, 1995. Such additional interest begins to
accrue on October 1, 1996. In September 1996 the Company used $25,000,000
of the net proceeds of the Offering to prepay a portion of this debt. In
connection with this prepayment, the Company incurred a penalty of
approximately $1,517,000. As of September 30, 1996, the Company's
outstanding principal due at maturity in 2004 in connection with this loan
was $16,645,000. The Company's other mortgage loan, which encumbers a
single facility, had an outstanding principal balance of $1,603,000 as of
September 30, 1996 and bears interest at 14% per annum. This mortgage
matures in the year 2010.
The Company's existing facility leases generally require it to make monthly
lease payments, establish escrow funds to serve as debt service reserve
accounts, and pay all property operating costs. The Company generally
negotiates leases which provide for extensions beyond the initial lease
term and an option to purchase the leased facility. The Company expects
that various forms of leasing arrangements will continue to provide it with
an attractive form of financing to support its growth. The Company is
currently negotiating with several commercial banks to obtain a multi-year
secured revolving line of credit in an amount not to exceed $25,000,000.
Funds available under this line would be used to provide working capital
for existing operations and acquisitions and to finance a portion of future
acquisitions. There can be no assurances that such financings will be
available to the Company on acceptable economic terms, or at all. The
Company has been and will continue to be dependent on third-party financing
to fund its acquisition strategy. The Company expects that cash on hand
and generated through operations, as well as funds expected to be available
under a line of credit will be sufficient to meet its operating
requirements through the remainder of 1996.
From time to time, the Company expects to pursue certain expansion and new
development opportunities associated with existing facilities. In
connection with a Certificate of Need received by its Ocala facility in
March 1996, the Company expects to commence construction of a sixty-bed
addition and a rehabilitation therapy area during 1996 or 1997. The costs
of this project are estimated to be approximately $2,800,000. In addition,
in connection with a Certificate of Need held by its Larkin Chase facility,
the Company expects to commence construction of a sixty-bed addition during
1997. The costs associated with the Larkin Chase project are estimated to
be approximately $2,500,000. The Company intends to seek separate financing
for each of these projects. There can be no assurances that financing of
either project will be available to the Company on acceptable terms.
The Company's operating activities during the first nine months of 1995
generated net cash of $2,325,000 as compared to a net use of cash of
$97,000 in 1996, a decrease of $2,422,000. Most of the reduction in cash
provided by operations was the net result of increases in accounts
receivable, accounts payable, and accruals relating to the facilities
acquired during 1996.
Net cash used by investing activities was $2,718,000 during the first nine
months of 1995 as compared to $7,407,000 in 1996. In each period the
primary use of invested cash related to additions to property and equipment
($2,161,000 in 1995 compared to $3,711,000 in 1996) and additions to
deferred financing costs associated with acquired facilities ($174,000 in
1995 compared to $1,009,000 in 1996). During the first nine months of 1996
the Company paid a $5,000,000 deposit in connection with the acquisition of
the Ohio Facilities. During this period the Company received $3,000,000 in
refunded acquisition deposits (made in 1995) in connection with two groups
of facilities which it was negotiating to acquire. The Company's offer to
lease one group of facilities was rescinded by the Company and it received
its $2,000,000 deposit back in March 1996. The Company borrowed $2,000,000
in 1995 from an affiliate to pay this acquisition deposit and repaid the
affiliate in March 1996. During the first nine months of 1996 the Company
received a $1,000,000 refund of an acquisition deposit at the closing of
the acquisition of the New Hampshire Facilities.
Net cash used by financing activities was $3,081,000 in 1995 as compared to
$21,286,000 in 1996. The early retirement of debt and the incurrence of a
related prepayment penalty required the use of $26,517,000 in 1996. During
the first half of 1996, the Company received approximately $37,700,000 in
net proceeds from the Offering and a cash lease inducement from the
landlord of $3,685,000 in connection with the leasing of the New Hampshire
Facilities. During 1996 the Company also received $803,000 from the sale
of equity interests to an officer and a director of the Company. In March
of 1996 a liquidating distribution of $33,727,000 was paid to the
Unitholders.
SEASONALITY
The Company's earnings generally fluctuate from quarter to quarter. This
seasonality is related to a combination of factors which include the timing
and amount of Medicaid rate increases, seasonal census cycles, and the
number of days in a given fiscal quarter.<PAGE>
INFLATION
The healthcare industry is labor intensive. Wages and other labor related
costs are especially sensitive to inflation. Certain of the Company's other
expense items, such as supplies and real estate costs are also sensitive to
inflationary pressures. Shortages in the labor market or general
inflationary pressure could have a significant effect on the Company. In
addition, suppliers pass along rising costs to the Company in the form of
higher prices. When faced with increases in operating costs, the Company
has sought to increase its charges for services and its requests for
reimbursement from government programs. The Company's private pay customers
and third party reimbursement sources may be less able to absorb increased
prices for the Company's services. The Company's operations could be
adversely affected if it is unable to recover future cost increases or
experiences significant delays in increasing rates of reimbursement of its
labor or other costs from Medicare and Medicaid revenue sources.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q, including information set forth under
the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations", constitute "Forward-Looking Statements" within
the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). The Company desires to take advantage of certain "safe
harbor" provisions of the Reform Act and is including this special note to
enable the Company to do so. Forward-looking statements included in this
Form 10-Q, or hereafter included in other publicly available documents
filed with the Securities and Exchange Commission, reports to the Company's
stockholders and other publicly available statements issued or released by
the Company involve known and unknown risks, uncertainties, and other
factors which could cause the Company's actual results, performance
(financial or operating) or achievements to differ materially from the
future results, performance (financial or operating) or achievements
expressed or implied by such forward-looking statements. The Company
believes the following important factors could cause such a material
difference to occur:
1. The Company's ability to grow through the acquisition and development
of long-term care facilities or the acquisition of ancillary
businesses.
2. The Company's ability to identify suitable acquisition candidates, to
consummate or complete construction projects, or to profitably
operate or successfully integrate enterprises into the Company's
other operations.
3. The occurrence of changes in the mix of payment sources utilized by
the Company's patients to pay for the Company's services.
4. The adoption of cost containment measures by private pay sources such
as commercial insurers and managed care organizations, as well as
efforts by governmental reimbursement sources to impose cost
containment measures.
5. Changes in the United States healthcare system, including changes in
reimbursement levels under Medicaid and Medicare, and other changes
in applicable government regulations that might affect the
profitability of the Company.
6. The Company's continued ability to operate in a heavily regulated
environment and to satisfy regulatory authorities, thereby avoiding a
number of potentially adverse consequences, such as the imposition of
fines, temporary suspension of admission of patients, restrictions on
the ability to acquire new facilities, suspension or decertification
from Medicaid or Medicare programs, and in extreme cases, revocation
of a facility's license or the closure of a facility, including as a
result of unauthorized activities by employees.
7. The Company's ability to secure the capital and the related cost of
such capital necessary to fund its future growth through acquisition
and development, as well as internal growth.
8. Changes in certificate of need laws that might increase competition
in the Company's industry, including, particularly, in the states in
which the Company currently operates or anticipates operating in the
future.
9. The Company's ability to staff its facilities appropriately with
qualified healthcare personnel, including in times of shortages of
such personnel and to maintain a satisfactory relationship with labor
unions.
10. The level of competition in the Company's industry, including without
limitation, increased competition from acute care hospitals,
providers of assisted and independent living and providers of home
healthcare and changes in the regulatory system in the state in which
the Company operates that facilitate such competition.
11. The continued availability of insurance for the inherent risks of
liability in the healthcare industry.
12. Price increases in pharmaceuticals, durable medical equipment and
other items.
13. The Company's reputation for delivering high-quality care and its
ability to attract and retain patients, including patients with
relatively high acuity levels.
14. Changes in general economic conditions, including changes that
pressure governmental reimbursement sources to reduce the amount and
scope of healthcare coverage.
The foregoing review of significant factors should not be construed as
exhaustive or as an admission regarding the adequacy of disclosures
previously made by the Company.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
11.1 Earnings Per Share Calculation
27.1 Financial Data Schedule
(b) Reports on 8-K
None
<PAGE>
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, thereunto duly authorized.
Harborside Healthcare Corporation
By: /s/Stephen L. Guillard
Stephen L. Guillard
Chairman, President, and Chief
Executive Officer
By: /s/William H. Stephan
William H. Stephan
Senior Vice President and Chief
Financial Officer
DATE: November 14, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the balance
sheet and statement of operations and is qualified in its entirety to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 11,367
<SECURITIES> 0
<RECEIVABLES> 21,093
<ALLOWANCES> 0
<INVENTORY> 13,019<F1>
<CURRENT-ASSETS> 38,279
<PP&E> 94,705
<DEPRECIATION> 0
<TOTAL-ASSETS> 140,184
<CURRENT-LIABILITIES> 22,042
<BONDS> 74,925<F2>
0
0
<COMMON> 80
<OTHER-SE> 43,137<F3>
<TOTAL-LIABILITY-AND-EQUITY> 140,184
<SALES> 0
<TOTAL-REVENUES> 117,706
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 111,898
<LOSS-PROVISION> 327<F4>
<INTEREST-EXPENSE> 3,193
<INCOME-PRETAX> 2,288
<INCOME-TAX> 502
<INCOME-CONTINUING> 1,786
<DISCONTINUED> 0
<EXTRAORDINARY> (1,318)
<CHANGES> 0
<NET-INCOME> 468
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
<FN>
<F1>Includes the following assets: prepaid expenses and other of $3,635, demand
note of $1,341, deferred income taxes--current of $843, deferred income
taxes--long-term of $400, restricted cash of $3,442, investment in limited
partnership of $192, and intangible assets, net of $3,166.
<F2>Includes the following long-term liabilities: deferred income of $3,054,
capital lease obligation of $53,789, and long-term debt of $18,082.
<F3>Includes the following equity accounts: additional paid-in capital of
$48,911
and accumulated deficit of $(5,774).
<F4>Includes loss on investment in limited partnership of $327.
</FN>
</TABLE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
COMPARATIVE NET INCOME (LOSS) PER SHARE CALCUALTION
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(dollars in thousands, except per share amounts)
For the three For the six
months ended months ended
September 30, September 30,
1995 1996 1995 1996
Net income $ 1,410
Pro forma income before
extraordinary loss $ 181 $ 189 $ 1,796
Extraordinary loss, net - - (1,318)
Pro forma net income $ 181 $ 189 $ 478
Weighted average number of
common and common equivalent
shares 4,425,000 8,016,000 4,425,000 5,852,000
Primary and Fully Diluted Amounts
Per Share:
Net income $ 0.18
Pro forma net income
before extraordinary loss $ 0.04 $ 0.04 $ 0.31
Extraordinary loss, net - - (0.23)
Pro forma net income $ 0.04 $ 0.04 $ 0.08
Weighted average number of shares
and common stock equivalents:
Weighted average number of
common shares 4,400,000 8,000,000 4,400,000 5,832,000
Additional shares from assumed
exercise of stock options
granted with exercise price
below initial public
offering price 25,000 16,000 25,000 20,000
Total number of shares used to
calculate Primary and Fully
Diluted Net Income per Share 4,425,000 8,016,000 4,425,000 5,852,000
