<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 24, 1996
PROSPECTUS
3,600,000 SHARES
[LOGO]
COMMON STOCK
-----------
All of the shares of Common Stock, par value $.01 per share (the "Common
Stock"), offered hereby are being sold by Harborside Healthcare Corporation
(the "Company"). Prior to this Offering (the "Offering"), there has been no
public market for the Common Stock. It is currently estimated that the initial
public offering price per share will be between $11.50 and $13.50. See
"Underwriting" for a discussion of the factors that will be considered in
determining the initial public offering price. It is anticipated that
approximately 500,000 shares of Common Stock will be offered outside the United
States to non-United States citizens or residents. At the request of the
Company, up to 180,000 shares of Common Stock offered hereby have been reserved
for sale to certain individuals, including directors and employees of the
Company and members of their families, at the initial public offering price set
forth above. The Common Stock has been approved for listing, subject to
official notice of issuance, on the New York Stock Exchange under the symbol
"HBR."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................... $ $ $
- --------------------------------------------------------------------------------
Total(3).................... $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $850,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 540,000 shares of Common Stock on the same terms and
conditions as set forth above, solely to cover over-allotments, if any. If
the option is exercised in full, the "Price to Public," "Underwriting
Discounts and Commissions" and "Proceeds to Company" will be $ , $
and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the Underwriters when, as and if
delivered to and accepted by the Underwriters, and subject to various prior
conditions, including the right to withdraw, cancel or modify the Offering and
to reject any order in whole or in part. It is expected that delivery of share
certificates will be made in New York, New York, on or about , 1996.
NATWEST SECURITIES LIMITED DEAN WITTER REYNOLDS INC.
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
[MAP]
FOR UNITED KINGDOM PURCHASERS: The shares of Common Stock offered hereby may
not be offered or sold in the United Kingdom other than to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing
of investments, whether as principal or agent (except in circumstances that do
not constitute an offer to the public within the meaning of the Public Offers
of Securities Regulations 1995 or the Financial Services Act 1986) and this
Prospectus may only be issued or passed on to any person in the United Kingdom
if that person is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or a
person to whom this Prospectus may otherwise lawfully be passed on.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by reference to, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. Prospective investors should carefully consider the information set
forth under the heading "Risk Factors." Unless otherwise indicated, the
information in this Prospectus assumes (i) the consummation of the transactions
relating to the formation of the Company described herein under the heading
"The Reorganization" (such transactions are hereinafter referred to as the
"Reorganization") and (ii) that the Underwriters' over-allotment option is not
exercised. References in this Prospectus to the "Company" or "Harborside
Healthcare" refer to Harborside Healthcare Corporation, its combined affiliates
and partnerships and their predecessors, or any of them, depending on the
context.
THE COMPANY
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). Within these regions, the Company
operates 26 licensed long-term care facilities (9 owned and 17 leased) with a
total of approximately 3,000 licensed beds. After giving effect to the pending
acquisition of four facilities in Ohio (the "Ohio Facilities"), the Company
will operate 30 long-term care 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, cerebrovascular
accident ("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 certain rehabilitation therapy and
behavioral health services both at Company-operated and non-affiliated
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.
Since commencing operations in 1988, the Company has experienced significant
growth through strategic acquisitions in states it believes possess favorable
demographic and regulatory environments, as well as through the expansion of
subacute care and other specialty medical services provided at its long-term
care facilities. Since 1993 and after giving effect to the recent and pending
transactions, the Company increased its overall patient capacity by
approximately 1,550 licensed beds, or 72.2%. During the same period, the
Company also improved its overall quality mix (defined as net patient service
revenues derived from Medicare, commercial insurance and other private payors)
from 61.1% to 65.4% of net patient service revenues for the years ended
December 31, 1993 and 1995, respectively, primarily as a result of the
Company's rapid expansion of its subacute care and other specialty medical
services. For the three months ended March 31, 1996, during which the Company
began leasing six additional long-term care facilities in New Hampshire with
approximately 540 beds (the "New Hampshire Facilities"), the Company's quality
mix was 60.1% (31.8% private and other and 28.3% Medicare) and its average
occupancy rate was 91.3%. The Company believes that its quality mix and its
average occupancy rate have consistently been among the highest in the long-
term care industry.
The Company intends to continue to grow by (i) selectively acquiring
additional long-term care facilities in its existing and in new geographic
regions, (ii) expanding the range of subacute care provided, including the
addition of distinct COMPASS (COMprehensive Patient Active Subacute Systems)
subacute care units, (iii) expanding its existing rehabilitation therapy and
behavioral healthcare businesses, (iv) developing and acquiring new ancillary
service operations, such as institutional pharmacy, home healthcare and
infusion therapy and (v) expanding its Alzheimer's and hospice care programs.
In keeping with its growth strategy, starting in January 1996, the Company
began leasing the New Hampshire Facilities. Subsequently, the Company also
entered into an agreement to acquire the four Ohio Facilities with
approximately 700 licensed beds pursuant to a capital lease transaction (the
"Ohio Transaction"), thereby further strengthening its existing Midwest
regional presence.
3
<PAGE>
Collectively, the New Hampshire and Ohio transactions represented
approximately $54.3 million in combined total net revenues for the year ended
December 31, 1995. Since 1994, the Company has also successfully implemented
subacute care programs at 24 of its long-term care facilities, added
approximately 170 distinct COMPASS beds, expanded the number of distinct
Alzheimer's and hospice care beds to 132 and expanded its rehabilitation
therapy business to include 35 contracts with non-affiliated long-term care
facilities. The Company believes that its strategy of concentrating its
operations in selected geographic markets and complementing its long-term care
platform with a wide range of specialty medical and other ancillary services
will enable it to benefit from economies of scale and improve its ability to
penetrate regional managed care markets. Although the Company is continuously
discussing with third parties the possible acquisition of additional long-term
care facilities, the Company does not at this time have any firm commitments to
make any material acquisitions of long-term care facilities other than the Ohio
Transaction, nor has it identified any material, specific ancillary business
acquisitions.
The Company believes that it is favorably positioned to benefit from trends
impacting the healthcare industry, including favorable demographic shifts,
advances in medical technology and continuing public and private pressures to
contain growing healthcare costs. At the same time, government restrictions and
high construction and start-up costs are expected to continue to constrain the
supply of long-term care and subacute facilities. The Company further believes
that an increasingly complex operating environment is motivating smaller, less
efficient long-term care facility operators to combine with or sell to
established operators. Harborside Healthcare expects that such recent trends
toward industry consolidation will continue and will provide it with future
acquisition opportunities.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.............. 3,600,000 shares
Common Stock to be outstanding
after the Offering(1)............ 8,000,000 shares
Use of Proceeds................... The Company will use the net proceeds from
the Offering as follows: (i) approximately
$26.7 million to repay mortgage
indebtedness, including a related
prepayment penalty (the "Debt Repayment");
(ii) up to $4.4 million to partially fund
an option to purchase the Ohio Facilities
at the end of the capital lease term; (iii)
approximately $960,000 for payments to
certain of the Company's key employees
under existing plans and arrangements; and
(iv) the remainder for general corporate
purposes, including working capital and
acquisitions. See "Use of Proceeds," and
"Management--Employment Agreements and
Change of Control Arrangements."
New York Stock Exchange Symbol.... "HBR"
</TABLE>
- --------
(1) Excludes 800,000 shares of Common Stock reserved for issuance pursuant to
the Company's stock and stock option plans, under which, upon consummation
of the Offering, options to purchase 420,000 shares at an exercise price
equal to the initial public offering price will be granted and options to
purchase 80,000 shares at an exercise price of $8.15 per share will be
granted in substitution for previously granted options to purchase
interests in one of the Company's predecessors. See "Management--Stock
Option Plans" and "Description of Capital Stock."
4
<PAGE>
SUMMARY COMBINED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND OTHER DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------- -----------------------------------------------
1995 PRO FORMA AS ADJUSTED 1996 PRO FORMA AS ADJUSTED
----------------------------- -----------------------------
BEFORE OHIO INCLUDING OHIO BEFORE OHIO INCLUDING OHIO
1993 1994 1995 TRANSACTION(2) TRANSACTION(3) 1995 1996 TRANSACTION(4) TRANSACTION(5)
------- ------- -------- -------------- -------------- ------- ------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS
DATA(1):
Total net
revenues(6)...... $75,101 $86,376 $109,425 $ 131,381 $ 163,698 $23,777 $34,931 $ 34,931 $ 43,203
------- ------- -------- --------- --------- ------- ------- --------- ---------
Expenses:
Facility
operating........ 57,412 68,951 89,378 106,584 131,244 19,734 28,120 28,120 34,463
General and
administrative... 3,092 3,859 5,076 5,958 6,638 1,141 2,235 2,235 2,405
Service charges
paid to
affiliate........ 746 759 700 700 700 177 185 185 185
Depreciation and
amortization..... 4,304 4,311 4,385 2,155 3,350 1,043 539 539 838
Facility rent.... 525 1,037 1,907 9,882 9,882 392 2,545 2,545 2,545
------- ------- -------- --------- --------- ------- ------- --------- ---------
Total expenses.. 66,079 78,917 101,446 125,279 151,814 22,487 33,624 33,624 40,436
------- ------- -------- --------- --------- ------- ------- --------- ---------
Income from
operations....... 9,022 7,459 7,979 6,102 11,884 1,290 1,307 1,307 2,767
Interest expense,
net.............. (4,740) (4,609) (5,107) (1,343) (5,692) (1,264) (975) (295) (1,382)
Loss on
investment in
limited
partnership(7)... -- (448) (114) (114) (114) (81) (127) (127) (127)
Other, net....... (2,297) (2,028) (1,524) -- -- (185) -- -- --
------- ------- -------- --------- --------- ------- ------- --------- ---------
Net income
(loss)........... 1,985 374 1,234 4,645 6,078 (240) 205 885 1,258
Pro forma data:
Pro forma income
taxes(8)......... 774 146 481 1,812 2,371 (94) 80 345 491
------- ------- -------- --------- --------- ------- ------- --------- ---------
Pro forma net
income
(loss)(8)........ $ 1,211 $ 228 $ 753 $ 2,833 $ 3,707 $ (146) $ 125 $ 540 $ 767
======= ======= ======== ========= ========= ======= ======= ========= =========
Pro forma net
income per
share(8)......... $ 0.35 $ 0.46 $ 0.07 $ 0.10
Pro forma
weighted average
shares
outstanding(9)... 8,052,160 8,052,160 8,052,160 8,052,160
OTHER DATA(1):
Facilities (as of
end of period):
Owned(10)(11).... 15 16 9 9 13 9 9 9 13
Leased(11)....... 2 3 11 17 17 10 17 17 17
------- ------- -------- --------- --------- ------- ------- --------- ---------
Total............ 17 19 20 26 30 19 26 26 30
Licensed beds (as
of end of
period):
Owned(10)(11).... 1,860 1,976 1,028 1,028 1,720 1,022 1,028 1,028 1,720
Leased(11)....... 289 389 1,443 1,980 1,980 1,343 1,980 1,980 1,980
------- ------- -------- --------- --------- ------- ------- --------- ---------
Total............ 2,149 2,365 2,471 3,008 3,700 2,365 3,008 3,008 3,700
Average occupancy
rate(12)......... 92.5% 91.5% 91.5% 91.9% 92.2% 90.9% 91.3% 91.3% 91.8%
Sources of net
patient service
revenues(13):
Private and
other(14)........ 39.9% 37.1% 32.3% 33.0% 32.9% 34.2% 31.8% 31.8% 31.8%
Medicare......... 21.2% 24.9% 33.1% 27.4% 27.0% 30.6% 28.3% 28.3% 27.3%
Medicaid......... 38.9% 38.0% 34.6% 39.6% 40.1% 35.2% 39.9% 39.9% 40.9%
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
---------------------------------------
1996 PRO FORMA AS ADJUSTED
-------------------------------
BEFORE OHIO INCLUDING OHIO
1996 TRANSACTION(15) TRANSACTION(16)
------- --------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash and cash equivalents............... $10,000 $23,340 $17,840
Working capital......................... 12,395 26,516 17,414
Total assets............................ 63,378 76,646 134,185
Total debt.............................. 43,422 18,422 75,961
Stockholders' equity.................... 5,001 43,269 43,269
</TABLE>
- ------
(1) Harborside Healthcare has been created in anticipation of the Offering in
order to combine under its control the operations of the long-term care
facilities and ancillary businesses that are currently under the control
of The Berkshire Companies Limited Partnership ("Berkshire") and its
affiliates. See "The Reorganization." The Company's financial and
operating data above combine the historical results of these business
entities.
5
<PAGE>
(2) Gives effect to the consummation of (i) the lease of the New Hampshire
Facilities by the Company on January 1, 1996 (the "New Hampshire
Transaction"); (ii) the sale by Krupp Yield Plus Limited Partnership
("KYP") of seven long-term care facilities (the "Seven Facilities") to
Meditrust, a real estate investment trust ("Meditrust"), on December 31,
1995 and the subsequent distribution of $33,493,000 payable to the limited
partners of KYP (the "KYP Unitholders") as of December 31, 1995 in
connection with the liquidation of that partnership (the "Distribution");
(iii) the lease of the Seven Facilities by the Company on December 31,
1995 (the "1995 REIT Lease"); and (iv) the Offering and the application of
the net proceeds therefrom (assuming an initial public offering price of
$12.50 per share), as if such transactions had occurred on January 1,
1995.
(3) Gives effect to the transactions described in Note (2) above and the
pending Ohio Transaction as if such transactions had occurred on January
1, 1995. The Ohio Transaction will be accounted for as a capital lease as
a result of the bargain purchase option granted at the end of the lease
term. This accounting treatment will result in an increase in depreciation
and amortization expense of $1,195,000 and an increase in interest
expense, net, of $4,349,000. The Company expects to complete the Ohio
Transaction in the third quarter of 1996, subject to the satisfaction of
certain customary conditions, including the satisfactory completion of the
Company's due diligence review and receipt of regulatory and other
approvals.
(4) Gives effect to the consummation of the Offering and the application of
the net proceeds therefrom (assuming an initial public offering price of
$12.50 per share), as if the Offering had occurred on January 1, 1996.
(5) Gives effect to (i) the consummation of the Offering and the application
of the net proceeds therefrom (assuming an initial public offering price
of $12.50 per share), and (ii) the pending Ohio Transaction, as if the
transactions had occurred on January 1, 1996. The Ohio Transaction will
result in an increase in depreciation and amortization expense for the
period of $299,000 and an increase in interest expense, net, for the
period of $1,087,000.
(6) Total net revenues include net patient service revenues from the Company's
facilities and revenues from ancillary services provided at non-affiliated
long-term care facilities. Total net revenues exclude net patient service
revenues from the Larkin Chase Nursing and Restorative Center (the "Larkin
Chase Center"), but include management fees and rehabilitation therapy
service revenues from such facility. See "Business--Properties" and Note F
to the Company's audited combined financial statements included elsewhere
in this Prospectus.
(7) Represents the Company's allocation of operating results for the Larkin
Chase Center which the Company accounts for using the equity method. See
"Business--Properties" and Note F to the Company's audited combined
financial statements included elsewhere in this Prospectus.
(8) Prior to the Reorganization, the Company's predecessors operated under
common control but were not subject to Federal or state income taxation
and, accordingly, no provision for income taxes has been made in the
Company's audited combined financial statements. Following the
Reorganization, these predecessors will be subject to Federal and state
income taxes. Pro forma net income (loss) and pro forma net income per
share reflect the combined income tax expense that the Company's
predecessors would have incurred had they been subject to such taxation
during each of the periods indicated.
(9) Pro forma weighted average shares outstanding include 52,160 dilutive
common equivalent shares (stock options issued within one year prior to
the Offering calculated using the treasury stock method and an assumed
initial public offering price of $12.50 per share) as if they were
outstanding for all periods presented.
(10) Includes the Larkin Chase Center commencing in 1994.
(11) On December 31, 1995, the Seven Facilities were reclassified as "leased"
following the sale and concurrent 1995 REIT Lease. See Note (2) above. The
Ohio Facilities are classified as "owned" reflecting the treatment of the
Ohio Transaction as a capital lease.
(12) "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.
(13) Net patient service revenues exclude all management fees and all
rehabilitation therapy service revenues and the net patient service
revenues of the Larkin Chase Center. See "Business--Properties."
(14) Consists primarily of revenues derived from private pay individuals,
managed care organizations, HMOs, hospice programs and commercial
insurers.
(15) Gives effect to the consummation of the transactions described in Note (4)
above and a bonus payment in the form of Common Stock valued at $225,000
to Damian Dell'Anno, the Company's Executive Vice President of Operations,
under an existing plan which will be incurred as a result of the Offering
(the "Bonus Payment"), as if such transactions had occurred on March 31,
1996.
(16) Gives effect to the transactions described in Note (15) above and the Ohio
Transaction as if such transactions had occurred on March 31, 1996. The
Ohio Transaction will be accounted for as a capital lease. See Note (3)
above. This accounting treatment will result in an increase in total debt
of $57,539,000.
6
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves various
risks. Prior to investing in the Common Stock being offered hereby,
prospective investors should carefully consider the risk factors set forth
below, together with the other information set forth in this Prospectus.
RISK OF ADVERSE EFFECT OF HEALTHCARE REFORM
The Company is subject to extensive governmental healthcare regulation. In
addition, there are numerous legislative and executive initiatives at the
Federal and state levels for comprehensive reforms affecting the payment for
and availability of healthcare services. It is not clear at this time what
proposals, if any, will be adopted or, if adopted, what effect such proposals
would have on the Company's business. Aspects of certain of these proposals,
such as reductions in funding or payment rates of the Medicare and Medicaid
programs, potential changes in reimbursement regulations for rehabilitation
therapy services, interim measures to contain healthcare costs such as a
short-term freeze on prices charged by healthcare providers or changes in the
administration of Medicaid at the state level, could materially adversely
affect the Company. There can be no assurance that currently proposed or
future healthcare legislation or other changes in the administration or
interpretation of governmental healthcare programs will not have a material
adverse effect on the Company. In particular, changes to the Medicare
reimbursement program that have recently been proposed could materially
adversely affect the Company's revenues derived from ancillary services.
Concern about the potential effects of proposed and unanticipated future
reform measures has contributed to the volatility of securities prices of
companies in healthcare and related industries and may similarly affect the
price of the Common Stock. See "Business--Sources of Revenues" and "--
Governmental Regulation."
REIMBURSEMENT BY THIRD-PARTY PAYORS
The Company received approximately 32.9%, 27.0% and 40.1% of its net patient
revenues from private and other, Medicare and Medicaid patients, respectively,
for the year ended December 31, 1995, on a pro forma basis after giving effect
to the New Hampshire Transaction and the Ohio Transaction (31.8%, 27.3% and
40.9%, respectively, for the three months ended March 31, 1996, on a pro forma
basis after giving effect to the Ohio Transaction). The Company typically
receives higher payment rates for services to private pay and Medicare
patients than for equivalent services provided to patients eligible for
Medicaid. Any decline in the number of private or Medicare patients or
increases in the number of Medicaid patients could materially adversely affect
the Company.
Both governmental and other third-party payors, such as commercial insurers,
managed care organizations, HMOs and PPOs, have instituted cost containment
measures designed to limit payments made to long-term care providers. These
measures include the adoption of initial and continuing recipient eligibility
criteria, the adoption of coverage criteria and the establishment of payment
ceilings. Furthermore, governmental reimbursement programs are subject to
statutory and regulatory changes, retroactive rate adjustments, administrative
rulings and government funding restrictions. There can be no assurance that
payments under state or Federal governmental programs will remain at levels
comparable to present levels or will be sufficient to cover the costs
allocable to patients eligible for reimbursement pursuant to such programs. In
addition, there can be no assurance that the Company's facilities or the
services provided by the Company will continue to meet the requirements for
participation in such programs or that the states in which the Company
operates will continue to meet their Medicaid reimbursement obligations on a
timely basis, if at all. Any of the foregoing could materially adversely
affect the Company.
The Company is subject to periodic audits by the Medicare and Medicaid
programs, and the paying agencies for these programs have various rights and
remedies against the Company if they assert that the Company has overcharged
the programs or failed to comply with program requirements. Such paying
agencies could seek to require the Company to repay any overcharges or amounts
billed in violation of program requirements, or could make deductions from
future amounts due to the Company. Such agencies could also impose fines,
criminal penalties or program exclusions. Any such action could materially
adversely affect the Company. See "Business--Sources of Revenues" and "--
Government Regulation."
7
<PAGE>
ACQUISITIONS AND DEVELOPMENTS; DIFFICULTIES OF MANAGING RAPID EXPANSION
The Company has pursued an aggressive facility acquisition program and
expects that a significant portion of any future growth will result from the
acquisition of additional long-term care facilities. The Company's success
will depend in large part on its ability to identify suitable acquisition
opportunities and its ability to pursue and finance such opportunities, obtain
governmental licenses and approvals, consummate such acquisitions, implement
operating enhancements and effectively assimilate newly acquired facilities
into its operations. The Company may also seek to acquire ancillary service
businesses. There can be no assurance that the Company will be successful in
making such acquisitions or that such facilities or businesses will be
profitable following their acquisition. In addition, growth through
acquisition entails certain risks because the acquired facilities or
businesses could be subject to unanticipated business uncertainties or legal
liabilities.
The Company recently entered into an agreement to acquire the four Ohio
Facilities pursuant to a capital lease. The Ohio Transaction is anticipated to
close in the third quarter of 1996 and is subject to the satisfaction of
customary closing conditions, including the receipt of regulatory and other
approvals. However, there can be no assurance that such conditions will be met
or that the Ohio Transaction will be successfully completed during the third
quarter of 1996, if at all, or if completed, that the Ohio Facilities will be
successfully integrated into the Company's operations. The consummation of the
Offering is not conditioned on the closing of the Ohio Transaction.
The Company also intends to grow through the expansion of existing
facilities and the development of new facilities. Facility expansion and
development projects are subject to a number of contingencies that are common
to construction projects but over which the Company may have little control
and which may adversely affect project cost and completion time. These may
include shortages of supplies and materials, the inability of contractors and
subcontractors to perform under their contracts and changes in building,
zoning and other applicable laws and regulations or the interpretation of such
laws and regulations. The Company may also experience start-up costs and
delays during the period between the completion of a newly developed or
expanded facility and the full utilization of the facility's capacity, all of
which could adversely affect the Company's operating results.
The Company's rapid growth has placed a significant burden on the Company's
management and operating personnel. The Company's ability to manage its growth
effectively and assimilate the operations of acquired facilities or
businesses, or newly expanded or developed facilities, will require it to
continue to attract, train, motivate, manage and retain key employees. If the
Company is unable to manage its growth effectively, it could be materially
adversely affected. See "Use of Proceeds," "Business--Growth Strategy," "--The
Ohio Transaction," and "--Selected Expansion Projects."
GEOGRAPHIC CONCENTRATION
The Company's operations are located in Florida, Ohio, Indiana, New
Hampshire, New Jersey and Maryland. A substantial portion of the Company's net
revenues are derived from its operations in Florida, Ohio and New Hampshire.
After giving effect to the New Hampshire Transaction, the Company derived
41.2%, 20.9% and 17.3%, respectively, of its net revenues from these three
states, for the year ended December 31, 1995 (32.9%, 36.9% and 13.8%,
respectively, after giving effect to the New Hampshire Transaction and the
Ohio Transaction). Downturns in local and regional economies could have a
material adverse effect on the Company. Any adverse changes in the regulatory
environment or to the reimbursement rates paid in the states in which the
Company operates, particularly in Florida, Ohio and New Hampshire, could also
have a material adverse effect on the Company. The state of New Hampshire
recently adopted legislation which froze Medicaid reimbursement rates and
called for a redesign of its Medicaid program which has had, and may continue
to have, an adverse effect on reimbursements paid under that state's Medicaid
program. For the year ended December 31, 1995, 63.6% of the net revenues from
the New Hampshire Facilities were derived from the New Hampshire Medicaid
program. See "Business--Sources of Revenues."
SIGNIFICANT DEBT AND LEASE OBLIGATIONS; ACCUMULATED DEFICIT
After giving effect to the Offering, the Debt Repayment and the Ohio
Transaction, which will be accounted for as a capital lease, the Company's
total combined indebtedness (including total short-term and long-term debt)
8
<PAGE>
as of March 31, 1996 would have been approximately $75.9 million, accounting
for approximately 63.7% of its total capitalization. After giving effect to
the Debt Repayment and the Ohio Transaction, the Company's total annual debt
service obligations in 1995 would have been approximately $7.2 million. All
nine of the facilities owned by the Company are currently subject to
mortgages, seven of which are subject to mortgages in favor of Meditrust for a
single loan. A default under this loan could therefore result in a loss to the
Company of all of its facilities mortgaged to Meditrust.
The Company is also the lessee under 17 long-term operating leases for long-
term care facilities with aggregate minimum annual base rent payments of $9.1
million in 1996 and which generally provide for annual rent increases and
payment by the Company of taxes, insurance and other obligations. Fourteen of
the Company's facilities are leased from Meditrust. Because these leases
contain cross-default and cross-collateralization provisions, a default by the
Company under one of these leases could adversely affect all 14 of the
facilities leased from Meditrust and result in a loss to the Company of such
facilities.
The degree to which the Company will be leveraged and subject to significant
lease obligations could have important consequences to the Company, including
limiting the Company's ability to obtain additional financing in the future
for working capital, capital expenditures, facility acquisitions, expansions
or developments or the refinancing of existing debt. In addition, a
substantial portion of the Company's cash flows from operations may be
dedicated to the payment of principal and interest on its indebtedness and
rent expense, thereby reducing the funds available to the Company for its
operations and to support its growth. Certain of the Company's current, and
possibly future, debt agreements and leases contain cross-collateral and
cross-default provisions and financial and other restrictive covenants,
including restrictions on the incurrence of additional indebtedness, the
creation of liens, the payment of dividends and the sale of assets. In
addition, certain of the Company's leases do not contain non-disturbance
provisions which could result in the loss of such facilities if the lessor
defaults on its mortgage. There can be no assurance that the Company's
operating results will be sufficient to support the payment of the Company's
indebtedness and rent expense. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Business--Growth Strategy" and "--Properties."
As of December 31, 1995, and as of March 31, 1996, the Company had an
accumulated deficit of $6.2 million and $6.0 million, respectively, and a
stockholders' equity of $4.1 million and $5.0 million, respectively. See the
historical and pro forma combined financial statements and notes thereto
appearing elsewhere in this Prospectus.
GOVERNMENTAL REGULATION
The Federal government and all the states in which the Company operates
regulate various aspects of the Company's business. In addition to the
regulation of Medicare and Medicaid reimbursement rates, the development and
operation of long-term care facilities and the provision of long-term care
services are subject to Federal, state and local licensure and certification
laws that regulate, among other matters, the number of licensed beds, the
provision of services, the distribution of pharmaceuticals, equipment,
staffing (including professional licensing), operating policies and
procedures, fire prevention measures, environmental matters and compliance
with building and safety codes. The failure to maintain or renew any required
regulatory approvals or licenses could materially adversely affect the
Company's ability to provide its services and receive reimbursement of its
expenses. There can be no assurance that Federal, state or local governments
will not impose additional restrictions on the Company's activities which
could materially adversely affect the Company.
Long-term care facilities are subject to periodic inspection by governmental
authorities to assure compliance with the standards established for continued
licensing under state law and for certification under the Medicare or Medicaid
programs, including a review of billing practices and policies. Failure to
comply with these standards could result in the denial of reimbursement, the
imposition of fines, temporary suspension of admission of new patients,
suspension or decertification from the Medicare or Medicaid programs,
restrictions on the ability to
9
<PAGE>
acquire new facilities or expand existing facilities and, in extreme cases,
the revocation of a facility's license or closure of a facility. There can be
no assurance that the facilities currently owned or leased by the Company will
continue to meet the requirements for participation in the Medicare or
Medicaid programs nor can there be any assurance that the facilities acquired
or developed by the Company in the future will initially meet or continue to
meet these requirements.
Many states, including each state in which the Company currently operates,
control the supply of licensed long-term care beds through certificate of need
("CON") programs. Presently, state approval is required for the construction
of new long-term care facilities, the addition of licensed beds and certain
capital expenditures at such facilities. To the extent that a CON or other
similar approval is required for the acquisition or construction of new
facilities or the expansion of the number of licensed beds, services or
existing facilities, the Company could be adversely affected by the failure or
inability to obtain such approval, changes in the standards applicable for
such approval and possible delays and expenses associated with obtaining such
approval. In addition, in most states the reduction of the number of licensed
beds or the closure of a facility requires the approval of the appropriate
state regulatory agency and, if the Company were to seek to reduce the number
of licensed beds at, or to close, a facility, the Company could be adversely
affected by a failure to obtain or a delay in obtaining such approval. Ohio
has imposed a moratorium until June 30, 1997 on the issuance of CONs for the
construction of new long-term care facilities and the addition of beds to
existing facilities. Until recently, New Hampshire permitted long-term care
facilities to add up to 10 licensed beds without obtaining a CON (referred to
as "leeway beds") every two years as a matter of right. Recent legislation in
New Hampshire has eliminated the right to leeway beds on existing CONs. These
actions will restrict the Company's ability to expand its facilities in Ohio
and New Hampshire.
The Company is also subject to Federal and state laws that govern financial
and other arrangements between healthcare providers. Federal laws, as well as
the laws of certain states, prohibit direct or indirect payments or fee
splitting arrangements between healthcare providers that are designed to
induce or encourage the referral of patients to, or the recommendation of, a
particular provider for medical products and services. These laws include the
Federal "anti-kickback law" which prohibits, among other things, the offer,
payment, solicitation or receipt of any form of remuneration in return for the
referral of Medicare and Medicaid patients. A wide array of relationships and
arrangements, including ownership interests in a company by persons in a
position to refer patients and personal service agreements have, under certain
circumstances, been alleged to violate these provisions. A violation of the
Federal anti-kickback law could result in the loss of eligibility to
participate in Medicare or Medicaid, or in civil or criminal penalties for
individuals or entities. Violation of state anti-kickback laws could lead to
loss of licensure, significant fines and other penalties for individuals or
entities. See "Business--Sources of Revenues" and "--Governmental Regulation."
ENVIRONMENTAL AND OCCUPATIONAL HEALTH AND SAFETY MATTERS
The Company is subject to a wide variety of Federal, state and local
environmental and occupational health and safety laws and regulations. Among
the types of regulatory requirements faced by healthcare providers such as the
Company are: air and water quality control requirements, occupational health
and safety requirements, waste management requirements, specific regulatory
requirements applicable to asbestos, polychlorinated biphenyls and radioactive
substances, requirements for providing notice to employees and members of the
public about hazardous materials and wastes and certain other requirements. In
its role as owner and/or operator of properties or facilities, the Company may
be subject to liability for investigating and remediating any hazardous
substances that have come to be located on the property, or such substances
that may have migrated off of, or been emitted, discharged, leaked, escaped or
transported from, the property. The Company's operations may involve the
handling, use, storage, transportation, disposal and/or discharge of
hazardous, infectious, toxic, radioactive, flammable and other hazardous
materials, wastes, pollutants or contaminants. Such activities may harm
individuals, property or the environment; may interrupt operations and/or
increase their costs; may result in legal liability, damages, injunctions or
fines; may result in investigations, administrative proceedings, penalties or
other governmental agency actions; and may not be covered by insurance. The
cost of any required remediation or removal of hazardous or toxic substances
could be substantial and the liability of an owner or operator for any
property is generally not limited under applicable laws and could exceed the
property's value.
10
<PAGE>
Although the Company is not aware of any material liability under any
environmental or occupational health and safety laws, there can be no
assurance that the Company will not encounter such liabilities in the future,
which could have a material adverse effect on the Company. See "Business--
Governmental Regulation."
COMPETITION
The long-term care industry is highly competitive. The Company competes with
other providers of long-term care on the basis of the scope and quality of
services offered, the rate of positive medical outcomes, cost-effectiveness
and the reputation and appearance of its long-term care facilities. The
Company also competes in recruiting qualified healthcare personnel, in
acquiring and developing additional facilities and in obtaining CONs. The
Company's current and potential competitors include national, regional and
local long-term care providers, some of whom have substantially greater
financial and other resources and may be more established in their communities
than the Company. The Company also faces competition from assisted living
facility operators as well as providers of home healthcare. In addition,
certain competitors are operated by not-for-profit organizations and similar
businesses which can finance capital expenditures and acquisitions on a tax-
exempt basis or receive charitable contributions unavailable to the Company.
The Company expects competition for the acquisition and development of long-
term care facilities to increase in the future as the demand for long-term
care increases. Construction of new (or the expansion of existing) long-term
care facilities near the Company's facilities could adversely affect the
Company's business. State regulations generally require a CON before a new
long-term care facility can be constructed or additional licensed beds can be
added to existing facilities. CON legislation is in place in all states in
which the Company operates or expects to operate. The Company believes that
these regulations reduce the possibility of overbuilding and promote higher
utilization of existing facilities. However, a relaxation of CON requirements
could lead to an increase in competition. In addition, as cost containment
measures have reduced occupancy rates at acute care hospitals, a number of
these hospitals have converted portions of their facilities into subacute
units. Competition from acute care hospitals could adversely affect the
Company. The New Jersey legislature is currently considering legislation that
would permit acute care hospitals to offer subacute care services under
existing CONs issued to those providers. Ohio has imposed a moratorium on the
conversion of acute care hospital beds into long-term care beds. See
"Business--Governmental Regulation."
STAFFING AND LABOR COSTS
Staffing and labor costs represent the Company's largest expense. Labor
costs accounted for 59.9%, 56.4% and 52.0% of the Company's total facility
operating expenses in 1993, 1994 and 1995, respectively. The Company competes
with other healthcare providers in attracting and retaining qualified or
skilled personnel. The long-term care industry has, at times, experienced
shortages of qualified personnel. A shortage of nurses or other trained
personnel or general economic inflationary pressures may require the Company
to enhance its wage and benefits package in order to compete with other
employers. There can be no assurance that the Company's labor costs will not
increase or, if they do, that they can be matched by corresponding increases
in private-payor revenues or governmental reimbursement. Failure by the
Company to attract and retain qualified employees, to control its labor costs
or to match increases in its labor expenses with corresponding increases in
revenues could have a material adverse effect on the Company. Approximately
180 employees at two of the Company's facilities are covered by collective
bargaining agreements. Although the Company believes that it maintains good
working relationships with its employees and the unions that represent certain
of its employees, it cannot predict the impact of continued or increased union
representation or organizational activities on its future operations. See
"Business--Employees."
LIABILITY AND INSURANCE
The Company's business entails an inherent risk of liability. In recent
years, participants in the long-term care industry have been subject to
lawsuits alleging malpractice or related legal theories, many of which involve
large claims and significant legal costs. The Company expects that from time
to time it will be subject to such suits as a result of the nature of its
business. The Company currently maintains insurance policies in amounts and
with coverage and deductibles as it deems appropriate, based on the nature and
risks of its business, historical
11
<PAGE>
experience and industry standards. There can be no assurance, however, that
claims in excess of the Company's insurance coverage or claims not covered by
insurance will not arise. A successful claim against the Company not covered
by, or in excess of, its insurance coverage could have a material adverse
effect on the Company. Claims against the Company, regardless of their merit
or eventual outcome, may also have a material adverse effect on the Company's
business and reputation, may lead to increased insurance premiums and may
require the Company's management to devote time and attention to matters
unrelated to the Company's business. The Company is self-insured (subject to
contributions by covered employees) with respect to most of the healthcare
benefits and workers' compensation benefits available to its employees. The
Company believes that it has adequate resources to cover any self-insured
claims and the Company maintains excess liability coverage to protect it
against unusual claims in these areas. However, there can be no assurance that
the Company will continue to have such resources available to it or that
substantial claims will not be made against the Company. See "Business--
Insurance."
CONCENTRATION OF OWNERSHIP
After giving effect to the Offering, Douglas Krupp, George Krupp and
Laurence Gerber (collectively, the "Principal Stockholders") will have
combined beneficial ownership of 50.9% (47.7% if the Underwriters' over-
allotment option is exercised in full) of the outstanding Common Stock. These
individuals, together with the Company's other Directors and Executive
Officers, will have combined beneficial ownership of 55.0% (51.5% if the
underwriters' over-allotment option is exercised in full) of the outstanding
Common Stock after giving effect to the Offering. Consequently, the Principal
Stockholders will be able to control the business, policies and affairs of the
Company, including the election of directors and major corporate transactions.
The concentration of beneficial ownership of the Company may have the effect
of delaying, deterring or preventing a change in control of the Company, may
discourage bids for the Common Stock at a premium over the market price of the
Common Stock or may otherwise adversely affect the market price of the Common
Stock. See "Stock Ownership of Directors, Executive Officers and Principal
Holders."
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Certificate of Incorporation and By-laws of the
Company, as well as Delaware corporate law, contain provisions that may be
deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a stockholder of the Company might
consider in its best interest, including an attempt that might result in the
receipt of a premium over the then current market price for the shares held by
stockholders. Certain of these provisions allow the Company to issue, without
stockholder approval, preferred stock having rights senior to those of the
Common Stock. Other provisions impose various procedural and other
requirements that could make it more difficult for stockholders to effect
certain corporate actions. In addition, the Company's Board of Directors is
divided into three classes, each of which serves for a staggered three-year
term, which may make it more difficult for a third party to gain control of
the Board of Directors. In addition, the Company is subject to Section 203 of
the Delaware General Corporation Law which under certain circumstances can
make it more difficult for a third party to gain control of the Company
without approval of the Board of Directors. See "Description of Capital
Stock--Certain Provisions of the Company's Certificate of Incorporation and
By-laws," "--Classification of Directors" and "--Section 203 of the Delaware
Law."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after the
Offering under Rule 144 ("Rule 144") of the Securities Act of 1933, as amended
(the "Securities Act") or otherwise or the perception that such sales could
occur may adversely affect prevailing market prices of the Common Stock. The
Company and all persons who were stockholders of the Company prior to the
Offering have agreed, for a period of 180 days after the date of this
Prospectus, not to sell, offer to sell, contract to sell, grant any option to
purchase or otherwise dispose of any shares of Common Stock or any securities
which are convertible into, or exchangeable or exercisable for, shares of
Common Stock, without the prior written consent of NatWest Securities Limited,
except for grants by the Company of options to purchase shares of Common Stock
described in this Prospectus, the exercise of such options and the issuance of
shares in connection with the Reorganization. See "The Reorganization" and
"Shares Eligible for Future Sale."
12
<PAGE>
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution of $7.51 per share in pro forma net tangible book value
per share of Common Stock from the public offering price. See "Dilution."
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop or be
sustained following the Offering. There can be no assurance that market prices
for the Common Stock after the Offering will equal or exceed the initial
public offering price per share set forth on the cover page of this
Prospectus. The initial public offering price per share will be determined by
negotiation between the Company and the Underwriters based upon several
factors and may not be indicative of the market price for the Common Stock
following the Offering. The market price of the Common Stock could be subject
to significant fluctuations in response to various factors and events,
including the liquidity of the market for shares of Common Stock, changes in
the Company's historical and anticipated operating results, new statutes or
regulations or changes in interpretations of existing statutes and regulations
affecting the healthcare industry in general and the long-term care industry
in particular. In addition, the stock market in recent years has experienced
broad price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of individual companies. These
fluctuations, as well as general economic and market conditions, may adversely
affect the market price of the Common Stock. See "Underwriting."
13
<PAGE>
THE COMPANY
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). Within these regions, the Company
operates 26 licensed long-term care facilities (9 owned and 17 leased) with a
total of approximately 3,000 licensed beds. After giving effect to the pending
Ohio Transaction, the Company will operate 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 certain rehabilitation therapy and
behavioral health services both at Company-operated and non-affiliated
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.
Harborside Healthcare was organized as a Delaware corporation in March 1996.
The predecessors of the Company have operated long-term care facilities since
1988. The Company's principal executive offices are located at 470 Atlantic
Avenue, Boston, Massachusetts 02210. Its telephone number is (617) 556-1515.
THE REORGANIZATION
The Company's operations have historically been conducted by various
corporations and limited partnerships controlled by Berkshire, certain of its
direct and indirect subsidiaries and affiliates, trusts for the benefit of the
families of George and Douglas Krupp, and Messrs. Guillard, Dell'Anno and
Gerber (collectively, the "Contributors"). The Company has entered into a
reorganization agreement (the "Reorganization Agreement") with the
Contributors, pursuant to which the Contributors will contribute their equity
interests in such entities to the Company in exchange for an aggregate of
4,400,000 shares of Common Stock immediately prior to completion of the
Offering (the "Reorganization"). Except as described herein under the caption
"Certain Transactions," the equity interests transferred to the Company by the
Contributors in connection with the Reorganization constitute all of the
equity interests relating to the business of the Company that were previously
owned directly or indirectly by the Contributors. Following the
Reorganization, the Company will operate as a holding company and conduct all
of its business through its wholly owned subsidiary corporations and limited
partnerships. The representations and warranties made by the Contributors in
the Reorganization Agreement are limited to their ownership of the equity
interests being conveyed, their personal tax liabilities and their
qualifications as accredited investors. In addition, upon consummation of the
Reorganization, the Company will indemnify the Contributors against all
obligations and liabilities of the Company's predecessors arising after such
consummation. In connection with the Reorganization Agreement, the Company has
agreed that if any of the Contributors pledge the shares of Common Stock
received in connection with the Reorganization to a financial institution, the
Company will enter into a registration rights agreement which provides the
pledgee with a demand registration right, subject to certain limitations and
at the Company's expense, in the event that it forecloses on the pledged
shares.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering, assuming an initial
public offering price of $12.50 per share (the midpoint of the range set forth
on the cover page of this Prospectus) and after deducting the estimated
Offering expenses, including underwriting discounts and commissions, are
estimated to be $41,000,000 ($47,277,500 if the Underwriters' over-allotment
option is exercised in full). See "Underwriting." The Company will use the net
proceeds of the Offering as follows: (i) approximately $26.7 million to repay
mortgage indebtedness, including a related prepayment penalty of approximately
$1.7 million, (ii) up to $4.4 million to partially fund an option to purchase
the Ohio Facilities at the end of the capital lease term, (iii) approximately
$960,000 for payments to certain of the Company's key employees under existing
plans and arrangements and (iv) the remainder for general corporate purposes,
including working capital and acquisitions. See "Management--Employment
Agreements and Change of Control Arrangements." Although the Company is
continuously discussing with third parties the possible acquisition of
additional long-term care facilities, the Company does not at this time have
any firm commitments to make any material acquisitions of long-term care
facilities other than the Ohio Transaction, nor has it identified any
material, specific ancillary business acquisitions. Pending their use, the net
proceeds from the Offering will be invested principally in short-term,
investment grade, interest-bearing securities.
The repayment of indebtedness will reduce the principal amount outstanding
under a mortgage loan in favor of Meditrust, of which $41.7 million aggregate
principal amount was outstanding as of April 30, 1996. The loan matures on
October 1, 2004 and bears 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 on October 1, 1995. Such additional interest begins to
accrue on October 1, 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
DIVIDEND POLICY
Since its formation in 1996, the Company has never declared or paid any
dividends on its Common Stock. The Company does not anticipate paying cash
dividends on its Common Stock for the foreseeable future and intends to retain
all of its earnings for reinvestment in the operations and activities of the
Company. Any future decision as to the payment of dividends will be at the
discretion of the Company's Board of Directors. The Company's ability to pay
dividends is also limited by the terms of current (and possibly future) lease
and financing arrangements that restrict, among other things, the ability of
the Company's combined affiliates to distribute funds to the Company.
15
<PAGE>
DILUTION
At March 31, 1996, the pro forma net tangible book value of the Company
after giving effect to the Reorganization, but prior to the Offering would
have been approximately $1.1 million, or $0.25 per share. Pro forma net
tangible book value per share of Common Stock is determined by dividing the
number of shares of Common Stock outstanding after giving effect to the
Reorganization into the pro forma net tangible book value of the Company
(total tangible assets less total liabilities) but without giving effect to
the possible exercise of stock options which have been or will be granted by
the Company prior to the consummation of the Offering under its stock option
plans. After giving effect to the Offering at an assumed initial public
offering price of $12.50 per share (the midpoint of the range set forth on the
cover page of this Prospectus) the pro forma net tangible book value at such
date would have been $39.9 million, or $4.99 per share, representing an
immediate increase in pro forma net tangible book value of $4.74 per share to
existing stockholders. Accordingly, purchasers of the Common Stock in the
Offering would sustain an immediate and substantial dilution of $7.51 per
share.
The following table illustrates such per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price............................. $12.50
Pro forma net tangible book value as of March 31, 1996.......... $0.25
Increase in pro forma net tangible book value attributable to
the Offering(1)................................................ 4.74
-----
Pro forma net tangible book value after the Offering(2)........... 4.99
------
Dilution to new investors in the Offering(2)(3)................... $ 7.51
======
</TABLE>
- --------
(1) After deduction of underwriting discounts and commissions and estimated
Offering expenses.
(2) If the Underwriters' over-allotment option were exercised in full, the pro
forma net tangible book value per share after the Offering would be $5.41
and the dilution per share to new public investors would be $7.09.
(3) Dilution is determined by subtracting the pro forma net tangible book
value per share after completion of the Offering from the assumed initial
public offering price per share of the Common Stock.
The following table summarizes, on a pro forma basis as of March 31, 1996,
after giving effect to the Reorganization and the Offering, the differences
between the holders of Common Stock prior to the Offering, as a group, and the
new investors in the Common Stock offered hereby, with respect to the number
of shares purchased, the total consideration paid and the average price paid
per share, based upon an assumed initial public offering price of $12.50 per
share:
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
---------------------------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockhold-
ers(2)................. 4,400,000 55.0% $11,263,000(/3/) 20.0% $ 2.56
New investors........... 3,600,000 45.0 45,000,000 80.0 $12.50
----------- ------- ----------- -----
Total................. 8,000,000 100.0% $56,263,000 100.0%
=========== ======= =========== =====
</TABLE>
- --------
(1) If the Underwriters' over-allotment option is exercised in full, the
number of shares of Common Stock held by existing stockholders would be
reduced to 51.5% of the total number of shares to be outstanding after the
Offering and the number of shares of Common Stock held by new investors
would be increased to 4,140,000 or 48.5% of the total number of shares of
Common Stock to be outstanding after the Offering.
(2) Excludes 800,000 shares of Common Stock reserved for issuance pursuant to
the Company's stock and stock option plans, under which, upon consummation
of the Offering, options to purchase 420,000 shares at an exercise price
equal to the initial public offering price will be granted and options to
purchase 80,000 shares at an exercise price of $8.15 per share will be
granted in substitution for previously granted options to purchase
interests in one of the Company's predecessors (See Note M to the Combined
Financial Statements). See "Management--Stock Option Plans," "--Directors
Retainer Fee Plan" and "Description of Capital Stock."
(3) Total consideration paid by existing stockholders is equal to the sum of
(i) cash paid for common stock of and partnership interests in the
Company's predecessors , net of dividends and distributions paid back to
these stockholders and (ii) the Bonus Payment of $225,000. See Note (15)
to the Summary Combined Financial and Operating Data.
16
<PAGE>
CAPITALIZATION
The following table sets forth at March 31, 1996 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the
Company after giving effect to the Bonus Payment as adjusted to reflect the
Offering at an assumed initial public offering price of $12.50 per share (the
midpoint of the range set forth on the cover page of this Prospectus) and the
application of the net proceeds therefrom and (iii) the pro forma
capitalization of the Company as further adjusted after giving effect to the
Ohio Transaction. This table should be read in conjunction with "Use of
Proceeds" and the historical and pro forma combined financial statements and
notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
----------------------------------------
PRO FORMA AS ADJUSTED
------------------------------
BEFORE OHIO INCLUDING OHIO
ACTUAL(1) TRANSACTION TRANSACTION(2)
--------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, less current por-
tion............................. $42,974 $18,255 $ 72,192
------- ------- --------
Stockholders' equity:
Preferred Stock, par value $.01
per share:
1,000,000 shares authorized; no
shares issued or outstanding ac-
tual, pro forma as adjusted be-
fore Ohio Transaction or pro
forma as adjusted including Ohio
Transaction..................... -- -- --
Common Stock, par value $.01 per
share:
30,000,000 shares authorized;
4,400,000 shares issued and
outstanding actual; 8,000,000
shares issued and outstanding
pro forma as adjusted before
Ohio Transaction and pro forma
as adjusted including Ohio
Transaction(3).................. 44 80 80
Additional paid-in capital........ 10,994 52,183 (/4/) 52,183 (/4/)
Accumulated deficit............... (6,037) (8,994)(/5/) (8,994)(/5/)
------- ------- --------
Total stockholders' equity........ 5,001 43,269 43,269
------- ------- --------
Total capitalization.............. $47,975 $61,524 $115,461
======= ======= ========
</TABLE>
- --------
(1) Gives effect to the Reorganization.
(2) The Ohio Facilities will be acquired pursuant to a lease financing
accounted for as a capital lease. The capitalization of the Company has
increased by $53,937,000 to record this transaction.
(3) Excludes 800,000 shares of Common Stock reserved for issuance pursuant to
the Company's stock and stock option plans, under which, upon consummation
of the Offering, options to purchase 420,000 shares at an exercise price
equal to the initial public offering price will be granted and options to
purchase 80,000 shares at an exercise price of $8.15 per share will be
granted in substitution for previously granted options to purchase
interests in one of the Company's predecessors. See "Management--Stock
Option Plans" and "Description of Capital Stock."
(4) Gives effect to the Offering and the Bonus Payment. See Note (15) to the
Summary Combined Financial and Operating Data.
(5) Gives effect to payment of a $1.7 million debt prepayment penalty,
$1,185,000 in bonus payments to certain key employees in connection with
the Offering (of which $225,000 was paid in the form of Common Stock
pursuant to the Bonus Payment), the write-off of $572,000 of deferred
financing costs and the recognition of a deferred tax asset of $500,000.
See "Management--Employment Agreements and Change of Control Arrangements"
and "Certain Transactions."
17
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined balance sheet of the Company at
March 31, 1996 has been prepared to reflect (i) in the case of the "Pro Forma
As Adjusted Before Ohio Transaction" column, the consummation of the Offering
and the application of the net proceeds therefrom and (ii) in the case of the
"Pro Forma As Adjusted Including Ohio Transaction" column, the consummation of
the Offering and the application of the net proceeds therefrom and the
consummation of the Ohio Transaction. The Ohio Transaction is anticipated to
be completed in the third quarter of 1996, although there can be no assurance
that the Ohio Transaction will be completed during such time, if at all. See
"The Ohio Transaction." The unaudited pro forma combined balance sheet
reflects the pro forma transactions as if they had occurred on March 31, 1996.
The following unaudited pro forma combined statement of operations for the
year ended December 31, 1995 has been prepared to reflect (i) in the case of
the "Pro Forma Before Ohio Transaction" column, the consummation of the New
Hampshire Transaction, the sale by KYP of the Seven Facilities on December 31,
1995, the Distribution and the 1995 REIT Lease, (ii) in the case of the "Pro
Forma As Adjusted Before Ohio Transaction" column, the consummation of the New
Hampshire Transaction, the sale by KYP of the Seven Facilities, the
Distribution, the 1995 REIT Lease, and the Offering and the application of the
net proceeds therefrom and (iii) in the case of the "Pro Forma As Adjusted
Including Ohio Transaction" column, the consummation of the New Hampshire
Transaction, the sale by KYP of the Seven Facilities, the Distribution, the
1995 REIT Lease, the Offering and the application of the net proceeds
therefrom and the Ohio Transaction. Non-recurring charges that result directly
from (i) the Offering, (ii) the subscription by Stephen Guillard, the
Company's Chairman and Chief Executive Officer, on December 31, 1995, for the
purchase of an equity interest in certain of the Company's predecessors for a
purchase price of $438,000 (the "Executive Equity Purchase") and (iii) the
purchase of equity interests in certain of the Company's predecessors by
Laurence Gerber, one of the Company's Directors, on December 31, 1995, for an
aggregate purchase price of $365,000 (the "Director Equity Purchase") are not
included in the unaudited pro forma combined statement of operations. The
unaudited pro forma combined statement of operations for the year ended
December 31, 1995 reflects the pro forma transactions as if they had occurred
on January 1, 1995.
The following unaudited pro forma combined statement of operations for the
three months ended March 31, 1996 has been prepared to reflect (i) in the case
of the "Pro Forma As Adjusted Before Ohio Transaction" column, the
consummation of the Offering and the application of the net proceeds therefrom
and (ii) in the case of the "Pro Forma As Adjusted Including Ohio Transaction"
column, the consummation of the Offering and the application of the net
proceeds therefrom and the Ohio Transaction. The unaudited pro forma combined
statement of operations for the three months ended March 31, 1996 reflects the
pro forma transactions as if they had occurred on January 1, 1996.
The following unaudited pro forma combined financial statements have been
prepared by the Company based on the historical financial statements of the
Company, the New Hampshire Facilities and the Ohio Facilities included
elsewhere in this Prospectus, giving effect to these transactions and the
assumptions and adjustments described in the accompanying notes.
The following unaudited pro forma combined financial statements are not
indicative of the actual results that would have been achieved if the pro
forma transactions had actually been completed as of the dates indicated, or
which may be realized in the future. The unaudited pro forma combined
financial statements should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical combined financial statements of the Company, the prior owner
of the New Hampshire Facilities and the owners of the Ohio Facilities and the
related notes thereto included elsewhere in this Prospectus.
18
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HARBORSIDE AS ADJUSTED AS ADJUSTED
HEALTHCARE OFFERING BEFORE OHIO OHIO INCLUDING
CORPORATION ADJUSTMENTS OHIO FACILITIES TRANSACTION OHIO
(A) (B) TRANSACTION (C) ADJUSTMENTS TRANSACTION
----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash
equivalents............ $10,000 $13,340 $23,340 $ 8,187 $ (8,187)(D) $ 17,840
(5,500)(E)
Accounts receivable,
net.................... 11,354 11,354 1,679 (1,679)(D) 11,354
Prepaid expenses and
other.................. 1,935 1,935 190 (190)(D) 1,935
Demand note due from
limited partnership.... 1,284 1,284 -- 1,284
Deferred income taxes... -- 500 500 -- 500
------- ------- ------- -------- -------- ---------
Total current assets... 24,573 13,840 38,413 10,056 (15,556) 32,913
Restricted cash......... 4,331 4,331 1,112 (1,112)(D) 4,331
Investment in limited
partnership............ 395 395 -- 395
Property and equipment,
net.................... 30,185 30,185 15,331 (15,331)(D) 93,224
63,039 (E)
Intangible assets, net.. 3,894 (572) 3,322 554 (554)(D) 3,322
------- ------- ------- -------- -------- ---------
Total assets........... $63,378 $13,268 $76,646 $ 27,053 $ 30,486 $ 134,185
======= ======= ======= ======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term debt......... $ 448 $ (281) $ 167 $ 317 $ (317)(D) $ 3,769
3,602 (E)
Accounts payable........ 3,762 3,762 1,556 (1,556)(D) 3,762
Employee compensation
and benefits........... 6,640 6,640 1,277 (1,277)(D) 6,640
Other accrued
liabilities............ 892 892 510 (510)(D) 892
Advances from
affiliates............. -- -- 1,227 (1,227)(D) --
Accrued interest........ 67 67 131 (131)(D) 67
Current portion of
deferred income........ 369 369 -- 369
------- ------- ------- -------- -------- ---------
Total current
liabilities........... 12,178 (281) 11,897 5,018 (1,416) 15,499
Long-term portion of
deferred income........ 3,225 3,225 3,225
Loan payable--
affiliate.............. -- -- 407 (407)(D) --
Long-term debt.......... 42,974 (24,719) 18,255 18,172 (18,172)(D) 72,192
53,937 (E)
------- ------- ------- -------- -------- ---------
Total liabilities...... 58,377 (25,000) 33,377 23,597 33,942 90,916
------- ------- ------- -------- -------- ---------
Stockholders' equity:
Common stock............ 44 36 80 -- 80
Additional paid-in
capital................ 10,994 41,189 52,183 -- 52,183
Accumulated deficit..... (6,037) (2,957) (8,994) -- (8,994)
Partners' equity........ -- -- 3,456 (3,456)(D) --
------- ------- ------- -------- -------- ---------
Total stockholders'
equity................ 5,001 38,268 43,269 3,456 (3,456) 43,269
------- ------- ------- -------- -------- ---------
Total liabilities and
stockholders'
equity.............. $63,378 $13,268 $76,646 $ 27,053 $ 30,486 $ 134,185
======= ======= ======= ======== ======== =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Balance Sheet as of
March 31, 1996
19
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1996
A. Historical combined balance sheet of the Company as of March 31, 1996 after
giving effect to the Reorganization.
B. To record the effects of the sale of 3,600,000 shares of Common Stock sold
by the Company hereby and the receipt of the estimated net proceeds of
$41,000,000, based on an assumed initial public offering price of $12.50
per share and estimated underwriting discounts and commissions and Offering
expenses of $4,000,000. Proceeds from the sale in the amount of $25,000,000
will be used to repay long-term debt and $1,700,000 will be used to pay a
related prepayment penalty. The prepayment penalty, the write-off of
$572,000 of deferred financing costs associated with the retired debt, the
establishment of a deferred tax asset of $500,000 and bonus payments
totaling approximately $1,185,000 (of which $225,000 was paid in the form
of Common Stock pursuant to the Bonus Payment) to a group of key employees
of the Company and incurred as a result of the Offering have been reflected
as an aggregate adjustment of $2,957,000 to the Company's accumulated
deficit.
C. Historical combined balance sheet of the Ohio Facilities as of March 31,
1996. The Company anticipates that the Ohio Transaction will be consummated
in the third quarter of 1996 and has categorized the completion of this
acquisition as probable.
D. Represents the elimination of all the historical combined balances of the
Ohio Facilities as of March 31, 1996. The Company has recorded the lease of
the Ohio Facilities as a capital lease as a result of the bargain purchase
option at the end of the lease term. However, the Company will not purchase
the eliminated assets or assume the eliminated liabilities in connection
with such lease.
E. Represents the recording of the Ohio Facilities as a capital lease with a
capitalized asset value of $63,039,000, including closing costs of
$2,100,000. The lease agreement requires an up-front payment of $5,000,000
for an option to purchase the Ohio Facilities at the end of the lease term.
Of such $5,000,000, $600,000 was previously paid and up to $4,400,000 will
be paid from the proceeds of the Offering. See "Use of Proceeds." The
capital lease obligation has been apportioned between current liabilities
of $3,602,000 and long-term debt of $53,937,000. The $5,000,000 purchase
option price and closing costs of $500,000 have been recorded as a
reduction of cash and cash equivalents.
20
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HARBORSIDE NEW NEW HAMPSHIRE PRO FORMA PRO FORMA AS
HEALTHCARE HAMPSHIRE AND OTHER BEFORE OFFERING ADJUSTED OHIO OHIO
CORPORATION FACILITIES PRO FORMA OHIO ADJUSTMENTS BEFORE OHIO FACILITIES TRANSACTION
(A) (B) ADJUSTMENTS TRANSACTION (C) TRANSACTION (D) ADJUSTMENTS
----------- ---------- ------------- ----------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total net
revenues........ $109,425 $21,956 $131,381 $ 131,381 $32,317
-------- ------- -------- --------- -------
Expenses:
Facility
operating...... 89,378 16,871 $ 311 (E) 106,584 106,584 24,660
277 (E)
(253)(F)
General and
administrative.. 5,076 -- 882 (G) 5,958 5,958 -- $ 680 (O)
Management
fees........... -- 1,832 (1,832)(H) -- -- 2,664 (2,664)(P)
Service charges
paid to
affiliate...... 700 -- 700 700 --
Depreciation and
amortization... 4,385 273 (273)(H) 2,155 2,155 882 (882)(P)
106 (I) 1,195 (Q)
(2,430)(F)
94 (J)
Facility rent... 1,907 2,382 (2,382)(H) 9,882 9,882 --
5,114 (J)
2,861 (K)
-------- ------- ------ -------- --------- ------- -------
Total expenses... 101,446 21,358 2,475 125,279 125,279 28,206 (1,671)
-------- ------- ------ -------- --------- ------- -------
Income from
operations...... 7,979 598 (2,475) 6,102 6,102 4,111 1,671
Other:
Interest
expense, net... (5,107) (160) 998 (F) (4,070) $2,727 (1,343) (1,186) 1,626 (P)
199 (H) (4,349)(Q)
(440)(R)
Loss on
investment in
limited
partnership.... (114) -- (114) (114) --
Gain on sale of
facilities,
net............ 4,869 -- (4,869)(L) -- -- --
Minority
interest in net
income of
combined
affiliates..... (6,393) -- 6,393 (L) -- -- --
-------- ------- ------ -------- ------ --------- ------- -------
Income before
income taxes.... 1,234 438 246 1,918 2,727 4,645 2,925 (1,492)
Income taxes..... -- 27 (27)(M) -- -- --
Pro forma income
taxes........... 481 -- 267 (N) 748 1,064(N) 1,812 -- 559 (N)
-------- ------- ------ -------- ------ --------- ------- -------
Pro forma net
income.......... $ 753 $ 411 $ 6 $ 1,170 $1,663 $ 2,833 $ 2,925 $(2,051)
======== ======= ====== ======== ====== ========= ======= =======
Pro forma net
income per
common share.... $ 0.35
Pro forma
weighted average
number of shares
outstanding(S).. 8,052,160
<CAPTION>
PRO FORMA
AS ADJUSTED
INCLUDING OHIO
TRANSACTION
--------------
<S> <C>
Total net
revenues........ $ 163,698
--------------
Expenses:
Facility
operating...... 131,244
General and
administrative.. 6,638
Management
fees........... --
Service charges
paid to
affiliate...... 700
Depreciation and
amortization... 3,350
Facility rent... 9,882
--------------
Total expenses... 151,814
--------------
Income from
operations...... 11,884
Other:
Interest
expense, net... (5,692)
Loss on
investment in
limited
partnership.... (114)
Gain on sale of
facilities,
net............ --
Minority
interest in net
income of
combined
affiliates..... --
--------------
Income before
income taxes.... 6,078
Income taxes..... --
Pro forma income
taxes........... 2,371
--------------
Pro forma net
income.......... $ 3,707
==============
Pro forma net
income per
common share.... $ 0.46
Pro forma
weighted average
number of shares
outstanding(S).. 8,052,160
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Statement of
Operationsfor the year ended December 31, 1995
21
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
A. Historical audited combined statement of operations of the Company for the
year ended December 31, 1995.
B. Historical audited combined statement of operations of the New Hampshire
Facilities for the year ended December 31, 1995.
C. To record the effects of the sale of 3,600,000 shares of Common Stock sold
by the Company hereby and the receipt of the estimated net proceeds of
$41,000,000, based on an assumed initial public offering price of $12.50
per share and estimated underwriting discounts and commissions and Offering
expenses of $4,000,000. Proceeds from the sale in the amount of $25,000,000
will be used to repay long-term debt and $1,700,000 will be used to pay a
related prepayment penalty. If the proposed debt repayment had occurred on
January 1, 1995, the Company's interest expense, including amortization of
deferred financing costs, would have been reduced by $2,727,000. See "Use
of Proceeds."
The following are non-recurring charges resulting from the Offering and are
therefore not reflected in the pro forma combined statement of operations:
the prepayment penalty of $1,700,000, the write-off of $572,000 of deferred
financing costs associated with the retired debt, the establishment of a
deferred tax asset of $500,000 and the making of bonus payments totaling
approximately $1,185,000 (of which $225,000 was paid in the form of Common
Stock pursuant to the Bonus Payment) to a group of key employees of the
Company and incurred as a result of the Offering. The related tax effect of
these non-recurring charges at an effective rate of 39% would have been a
reduction of income tax expense of $1,348,000.
D. Historical audited combined statement of operations of the Ohio Facilities
for the year ended December 31, 1995. The Company anticipates that the Ohio
Transaction will be consummated in the third quarter of 1996 and has
categorized the completion of this acquisition as probable.
E. Represents $311,000 in real estate taxes and $277,000 of purchased services
relating to the New Hampshire Facilities which would have been recorded by
the Company if the New Hampshire Transaction had occurred on January 1,
1995.
F. Represents the elimination of historical amounts recorded with respect to
the Seven Facilities for letter of credit fees of $253,000, depreciation
and amortization expense of $2,430,000, and interest expense of $998,000 as
if the sale of the Seven Facilities and the subsequent Distribution had
occurred on January 1, 1995.
G. Represents $882,000 of historical general and administrative expenses
associated with the operation of the New Hampshire Facilities as if the New
Hampshire Transaction had occurred on January 1, 1995. These costs are
provided in lieu of management fees paid to the seller which included
predecessor owner's compensation and profit.
H. Represents the elimination of the historical combined amounts recorded by
the New Hampshire Facilities for management fee expenses of $1,832,000,
depreciation and amortization expenses of $273,000, rent expense of
$2,382,000 and interest expense of $199,000.
I. Represents the amortization of deferred financing costs in the amount of
$106,000 relating to the New Hampshire Transaction.
J. Represents the amortization of deferred financing costs in the amount of
$94,000 and rent expense of $5,114,000 (recorded on a straight-line basis
over the initial lease term of ten years) which the Company would have
recorded if the sale of the Seven Facilities and the subsequent
Distribution had occurred on January 1, 1995.
K. Represents rent expense of $2,861,000 (recorded on a straight-line basis
over the initial lease term of ten years), net of amortization of deferred
income, that the Company would have incurred if the New Hampshire
Transaction had occurred on January 1, 1995.
22
<PAGE>
L. Represents the elimination of the "gain on sale of facilities, net" of
$4,869,000, and "minority interest in net income of combined affiliates" of
$6,393,000 as if the sale of the Seven Facilities and the subsequent
Distribution had occurred on January 1, 1995.
M. Represents the elimination of the historical combined amount recorded by
the New Hampshire Facilities for state income taxes of $27,000.
N. Represents adjustments to the Federal and state provision for income taxes
which the Company would have recorded if the Company had historically been
subject to taxation, based on an effective income tax rate of 39.0%.
O. Represents $680,000 of historical general and administrative expenses
associated with the operation of the Ohio Facilities as if the Ohio
Transaction had occurred on January 1, 1995. These costs are provided in
lieu of management fees paid to the seller which included predecessor
owners' compensation, related costs and profit.
P. Represents the elimination of the historical combined amounts recorded by
the Ohio Facilities for management fee expenses of $2,664,000, depreciation
and amortization of $882,000, and interest expense of $1,626,000.
Q. Represents depreciation and amortization expense of $1,195,000 (recorded on
a straight-line basis over the estimated useful life of 40 years) and
interest expense of $4,349,000 (recorded at an interest rate of 8%) which
the Company would have recorded if the Ohio Transaction had occurred on
January 1, 1995.
R. Represent the elimination of the historical combined amount recorded by the
Ohio Facilities for interest income of $440,000.
S. Pro forma weighted average shares outstanding include 52,160 dilutive
common equivalent shares (stock options issued within one year prior to the
Offering calculated using the treasury stock method and an assumed initial
public offering price of $12.50 per share) as if they were outstanding for
all periods presented.
23
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HARBORSIDE PRO FORMA AS PRO FORMA
HEALTHCARE OFFERING ADJUSTED OHIO OHIO AS ADJUSTED
CORPORATION ADJUSTMENTS BEFORE OHIO FACILITIES TRANSACTION INCLUDING OHIO
(A) (B) TRANSACTION (C) ADJUSTMENTS TRANSACTION
----------- ----------- ------------ ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Total net revenues...... $34,931 $ 34,931 $8,272 $ 43,203
------- --------- ------ ---------
Expenses:
Facility operating..... 28,120 28,120 6,343 34,463
General and
administrative........ 2,235 2,235 -- $ 170 (E) 2,405
Management fees........ -- -- 742 (742)(F) --
Service charges paid to
affiliate............. 185 185 -- 185
Depreciation and 539 539 203 (203)(F) 838
amortization.......... 299 (G)
Facility rent.......... 2,545 2,545 -- 2,545
------- --------- ------ ------- ---------
Total expenses.......... 33,624 33,624 7,288 (476) 40,436
------- --------- ------ ------- ---------
Income from operations.. 1,307 1,307 984 476 2,767
Other:
Interest expense, net.. (975) $680 (295) (289) 289 (F) (1,382)
(1,087)(G)
Loss on investment in
limited partnership... (127) (127) -- (127)
------- ---- --------- ------ ------- ---------
Income before income
taxes.................. 205 680 885 695 (322) 1,258
Pro forma income taxes.. 80(D) 265(D) 345 -- 146 (D) 491
------- ---- --------- ------ ------- ---------
Pro forma net income.... $ 125 $415 $ 540 $ 695 $ (468) $ 767
======= ==== ========= ====== ======= =========
Pro forma net income per
common share........... $ 0.07 $ 0.10
Pro forma weighted
average number of
shares outstanding(H).. 8,052,160 8,052,160
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Statement of Operations
for the three months ended March 31, 1996
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
A. Historical unaudited combined statement of operations of the Company for
the three months ended March 31, 1996.
B. To record the effects of the sale of 3,600,000 shares of Common Stock sold
by the Company hereby and the receipt of the estimated net proceeds of
$41,000,000, based on an assumed initial public offering price of $12.50
per share and estimated underwriting discounts and commissions and Offering
expenses of $4,000,000. Proceeds from the sale in the amount of $25,000,000
will be used to repay long-term debt and $1,700,000 will be used to pay a
related prepayment penalty. If the proposed debt repayment had occurred on
January 1, 1996, the Company's interest expense, including amortization of
deferred financing costs, would have been reduced by $680,000. See "Use of
Proceeds."
The following are non-recurring charges resulting from the Offering and are
therefore not reflected in the pro forma combined statement of operations:
the prepayment penalty of $1,700,000, the write-off of $572,000 of deferred
financing costs associated with the retired debt, the establishment of a
deferred tax asset of $500,000 and the making of bonus payments totaling
approximately $1,185,000 (of which $225,000 was paid in the form of Common
Stock pursuant to the Bonus Payment) to a group of key employees of the
Company and incurred as a result of the Offering. The related tax effect of
these non-recurring charges at an effective rate of 39% would have been a
reduction of income tax expense of $1,348,000.
C. Historical unaudited combined statement of operations of the Ohio
Facilities for the three months ended March 31, 1996. The Company
anticipates that the Ohio Transaction will be consummated in the third
quarter of 1996 and has categorized the completion of this acquisition as
probable.
D. Represents adjustments to the Federal and state provision for income taxes
which the Company would have recorded if the Company had historically been
subject to taxation, based on an effective tax rate of 39.0%.
E. Represents $170,000 of historical general and administrative expenses
associated with the operation of the Ohio Facilities as if the Ohio
Transaction had occurred on January 1, 1996. These costs are provided in
lieu of management fees paid to the seller which included predecessor
owners' compensation, related costs and profit.
F. Represents the elimination of historical combined amounts recorded by the
Ohio facilities for management fee expenses of $742,000, depreciation and
amortization expense of $203,000, and interest expense, net, of $289,000.
G. Represents depreciation and amortization expense of $299,000 (recorded on a
straight-line basis over the estimated useful life of 40 years) and
interest expense of $1,087,000 (recorded at an interest rate of 8%) which
the Company would have recorded if the Ohio Transaction had occurred on
January 1, 1996.
H. Pro forma weighted average shares outstanding include 52,160 dilutive
common equivalent shares (stock options issued within one year prior to the
Offering calculated using the treasury stock method and an assumed initial
public offering price of $12.50 per share) as if they were outstanding for
all periods presented.
25
<PAGE>
SELECTED COMBINED FINANCIAL
AND OPERATING DATA
The following table sets forth selected historical combined financial data
and selected pro forma combined financial data for the Company. The selected
historical combined financial data for each of the years in the five year
period ended December 31, 1995 have been derived from the Company's combined
financial statements, which have been audited by Coopers & Lybrand L.L.P.,
independent accountants. The selected historical combined financial data as of
March 31, 1996 and for the three-month periods ended March 31, 1995 and 1996
were derived from unaudited combined financial statements of the Company. In
the opinion of management, the unaudited combined financial statements reflect
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the financial position and results of operations for the
unaudited periods. The results of operations for the interim periods are not
necessarily indicative of results that may be expected for the full year.
The pro forma data are derived from the Company's unaudited pro forma
combined financial information and the notes thereto contained elsewhere in
this Prospectus. The pro forma data are not necessarily indicative of the
financial condition or results of operations that would have occurred or that
will occur in the future had the transactions occurred on the dates indicated
in the unaudited pro forma combined financial information. The financial data
set forth below should be read in conjunction with the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Pro Forma Combined Financial Information" and the audited
combined financial statements of the Company, the predecessor owner of the New
Hampshire Facilities and the owners of the Ohio Facilities and the related
notes thereto included elsewhere in this Prospectus.
26
<PAGE>
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND OTHER DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1995 PRO FORMA AS ADJUSTED
-----------------------------
BEFORE OHIO INCLUDING OHIO
1991 1992 1993 1994 1995 TRANSACTION(2) TRANSACTION(3)
------- ------- ------- ------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OP-
ERATIONS DA-
TA(1):
Total net reve-
nues(6)......... $56,879 $62,623 $75,101 $86,376 $109,425 $ 131,381 $ 163,698
------- ------- ------- ------- -------- --------- ---------
Expenses:
Facility operat-
ing............. 43,299 48,413 57,412 68,951 89,378 106,584 131,244
General and ad-
ministrative.... 3,019 3,079 3,092 3,859 5,076 5,958 6,638
Service charges
paid to affili-
ate............. 1,040 637 746 759 700 700 700
Depreciation and
amortization.... 5,278 4,655 4,304 4,311 4,385 2,155 3,350
Facility rent.... -- -- 525 1,037 1,907 9,882 9,882
------- ------- ------- ------- -------- --------- ---------
Total expenses.. 52,636 56,784 66,079 78,917 101,446 125,279 151,814
------- ------- ------- ------- -------- --------- ---------
Income from oper-
ations.......... 4,243 5,839 9,022 7,459 7,979 6,102 11,884
Other:
Interest expense,
net............. (4,527) (4,690) (4,740) (4,609) (5,107) (1,343) (5,692)
Loss on
investment in
limited
partnership(7).. -- -- -- (448) (114) (114) (114)
Gain on sale of
facilities,
net............. -- -- -- -- 4,869 -- --
Loss on refinanc-
ing of debt..... -- -- -- (453) -- -- --
Minority interest
in net income of
combined
affiliates...... (1,709) (1,472) (2,297) (1,575) (6,393) -- --
------- ------- ------- ------- -------- --------- ---------
Net income....... $(1,993) $ (323) $ 1,985 $ 374 $ 1,234 $ 4,645 $ 6,078
======= ======= ======= ======= ======== ========= =========
Pro forma data:
Historical net
income(8)....... $(1,993) $ (323) $ 1,985 $ 374 $ 1,234 $ 4,645 $ 6,078
Pro forma income
taxes(8)........ -- -- 774 146 481 1,812 2,371
------- ------- ------- ------- -------- --------- ---------
Pro forma net in-
come (loss)(8).. $(1,993) $ (323) $ 1,211 $ 228 $ 753 $ 2,833 $ 3,707
======= ======= ======= ======= ======== ========= =========
Pro forma net in-
come per
share(8)........ $ 0.35 $ 0.46
Pro forma
weighted average
shares outstand-
ing(9).......... 8,052,160 8,052,160
OTHER DATA(1):
Facilities (as of
end of period)
Owned(10)(11).... 15 15 15 16 9 9 13
Leased(11)....... -- -- 2 3 11 17 17
------- ------- ------- ------- -------- --------- ---------
Total........... 15 15 17 19 20 26 30
Licensed beds (as
of end of peri-
od)
Owned(10)(11).... 1,860 1,860 1,860 1,976 1,028 1,028 1,720
Leased(11)....... -- -- 289 389 1,443 1,980 1,980
------- ------- ------- ------- -------- --------- ---------
Total........... 1,860 1,860 2,149 2,365 2,471 3,008 3,700
Average occupancy
rate(12)........ 93.9% 93.5% 92.5% 91.5% 91.5% 91.9% 92.2%
Sources of net
patient service
revenues(13):
Private and oth-
er(14).......... 43.9% 43.0% 39.9% 37.1% 32.3% 33.0% 32.9%
Medicare......... 14.7% 16.2% 21.2% 24.9% 33.1% 27.4% 27.0%
Medicaid......... 41.4% 40.8% 38.9% 38.0% 34.6% 39.6% 40.1%
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------
1991 1992 1993 1994 1995
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DA-
TA(1):
Cash and cash
equivalents..... $ 7,290 $ 5,935 $10,214 $14,013 $ 40,157
Working capital.. 6,069 6,734 6,511 13,915 10,735
Total assets..... 87,923 84,865 85,472 93,876 92,632
Total debt....... 39,673 40,580 40,708 53,296 45,496
Stockholders' eq-
uity............ 4,119 3,631 4,918 2,866 4,130
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------
1996 PRO FORMA AS ADJUSTED
-------------------------------
BEFORE OHIO INCLUDING OHIO
1995 1996 TRANSACTION(4) TRANSACTION(5)
-------- -------- --------------- ---------------
<S> <C> <C> <C> <C>
STATEMENT OF OP-
ERATIONS DA-
TA(1):
Total net reve-
nues(6)......... $23,777 $34,931 $ 34,931 $43,203
-------- -------- --------------- ---------------
Expenses:
Facility operat-
ing............. 19,734 28,120 28,120 34,463
General and ad-
ministrative.... 1,141 2,235 2,235 2,405
Service charges
paid to affili-
ate............. 177 185 185 185
Depreciation and
amortization.... 1,043 539 539 838
Facility rent.... 392 2,545 2,545 2,545
-------- -------- --------------- ---------------
Total expenses.. 22,487 33,624 33,624 40,436
-------- -------- --------------- ---------------
Income from oper-
ations.......... 1,290 1,307 1,307 2,767
Other:
Interest expense,
net............. (1,264) (975) (295) (1,382)
Loss on
investment in
limited
partnership(7).. (81) (127) (127) (127)
Gain on sale of
facilities,
net............. -- -- -- --
Loss on refinanc-
ing of debt..... -- -- -- --
Minority interest
in net income of
combined
affiliates...... (185) -- -- --
-------- -------- --------------- ---------------
Net income....... $ (240) $ 205 $ 885 $ 1,258
======== ======== =============== ===============
Pro forma data:
Historical net
income(8)....... $ (240) $ 205 $ 885 $ 1,258
Pro forma income
taxes(8)........ (94) 80 345 491
-------- -------- --------------- ---------------
Pro forma net in-
come (loss)(8).. $ (146) $ 125 $ 540 $ 767
======== ======== =============== ===============
Pro forma net in-
come per
share(8)........ $ 0.07 $ 0.10
Pro forma
weighted average
shares outstand-
ing(9).......... 8,052,160 8,052,160
OTHER DATA(1):
Facilities (as of
end of period)
Owned(10)(11).... 9 9 9 13
Leased(11)....... 10 17 17 17
-------- -------- --------------- ---------------
Total........... 19 26 26 30
Licensed beds (as
of end of peri-
od)
Owned(10)(11).... 1,022 1,028 1,028 1,720
Leased(11)....... 1,343 1,980 1,980 1,980
-------- -------- --------------- ---------------
Total........... 2,365 3,008 3,008 3,700
Average occupancy
rate(12)........ 90.9% 91.3% 91.3% 91.8%
Sources of net
patient service
revenues(13):
Private and oth-
er(14).......... 34.2% 31.8% 31.8% 31.8%
Medicare......... 30.6% 28.3% 28.3% 27.3%
Medicaid......... 35.2% 39.9% 39.9% 40.9%
<CAPTION>
AS OF MARCH 31,
----------------------------------------
1996 PRO FORMA AS ADJUSTED
-------------------------------
BEFORE OHIO INCLUDING OHIO
1996 TRANSACTION(15) TRANSACTION(16)
-------- --------------- ---------------
<S> <C> <C> <C> <C>
BALANCE SHEET DA-
TA(1):
Cash and cash
equivalents..... $10,000 $23,340 $ 17,840
Working capital.. 12,395 26,516 17,414
Total assets..... 63,378 76,646 134,185
Total debt....... 43,422 18,422 75,961
Stockholders' eq-
uity............ 5,001 43,269 43,269
</TABLE>
27
<PAGE>
(1) Harborside Healthcare has been created in anticipation of the Offering in
order to combine under its control the operations of the long-term care
facilities and ancillary businesses that are currently under the control
of Berkshire and its affiliates. See "The Reorganization." The Company's
financial and operating data above combine the historical results of
these business entities.
(2) Gives effect to the consummation of the New Hampshire Transaction on
January 1, 1996, the sale by KYP of the Seven Facilities on December 31,
1995 and the subsequent Distribution, the 1995 REIT Lease, the Offering
and the application of the net proceeds therefrom (assuming an initial
public offering price of $12.50 per share), as if such transactions had
occurred on January 1, 1995.
(3) Gives effect to the transactions described in Note (2) above and the
pending Ohio Transaction as if such transactions had occurred on January
1, 1995. The Ohio Transaction will be accounted for as a capital lease as
a result of the bargain purchase option granted at the end of the lease
term. This accounting treatment will result in an increase in
depreciation and amortization expense of $1,195,000 and an increase in
interest expense, net, of $4,349,000. The Company expects to complete the
Ohio Transaction in the third quarter of 1996, subject to the
satisfaction of certain customary conditions, including the satisfactory
completion of the Company's due diligence review and receipt of
regulatory and other approvals.
(4) Gives effect to the consummation of the Offering and the application of
the net proceeds therefrom (assuming an initial public offering price of
$12.50 per share), as if the Offering had occurred on January 1, 1996.
(5) Gives effect to (i) the consummation of the Offering and the application
of the net proceeds therefrom (assuming an initial public offering price
of $12.50 per share), and (ii) the pending Ohio Transaction, as if the
transactions had occurred on January 1, 1996. The Ohio Transaction will
result in an increase in depreciation and amortization expense for the
period of $299,000 and an increase in interest expense, net, for the
period of $1,087,000.
(6) Total net revenues include net patient service revenues from the
Company's facilities and revenues from ancillary services provided at
non-affiliated long-term care facilities. Total net revenues exclude net
patient service revenues from the Larkin Chase Center, but include
management fees and rehabilitation therapy service revenues from such
facility. See "Business--Properties" and Note F to the Company's audited
combined financial statements included elsewhere in this Prospectus.
(7) Represents the Company's allocation of operating results for the Larkin
Chase Center which the Company accounts for using the equity method. See
"Business--Properties" and Note F to the Company's audited combined
financial statements included elsewhere in this Prospectus.
(8) Prior to the Reorganization, the Company's predecessors operated under
common control but were not subject to Federal or state income taxation
and, accordingly, no provision for income taxes has been made in the
Company's audited combined financial statements. Following the
Reorganization, these predecessors will be subject to Federal and state
income taxes. Pro forma net income (loss) and pro forma net income per
share reflect the combined income tax expense that the Company's
predecessors would have incurred had they been subject to taxation during
each of the periods indicated.
(9) Pro forma weighted average shares outstanding include 52,160 dilutive
common equivalent shares (stock options issued within one year prior to
the Offering calculated using the treasury stock method and an assumed
initial public offering price of $12.50 per share) as if they were
outstanding for all periods presented.
(10) Includes the Larkin Chase Center commencing in 1994.
(11) On December 31, 1995, the Seven Facilities were reclassified as "leased"
following the sale and concurrent 1995 REIT Lease. See Note (2) above.
The Ohio Facilities are classified as "owned" reflecting the treatment of
the Ohio Transaction as a capital lease.
(12) "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.
(13) Net patient service revenues exclude all management fees and all
rehabilitation therapy service revenues and the net patient service
revenues of the Larkin Chase Center. The Company accounts for its
investment in this facility using the equity method because of certain
control and purchase rights held by the minority investor in that
facility. See "Business--Properties."
(14) Consists primarily of revenues derived from private pay individuals,
managed care organizations, HMOs, hospice programs and commercial
insurers.
(15) Gives effect to the consummation of the transactions described in Note
(4) above and the Bonus Payment, as if such transactions had occurred on
March 31, 1996.
(16) Gives effect to the transactions described in Note (15) above and the
Ohio Transaction as if such transactions had occurred on March 31, 1996.
The Ohio Transaction will be accounted for as a capital lease. See Note
(3) above. This accounting treatment will result in an increase in total
debt of $57,539,000.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's predecessors commenced operations in 1988 with the acquisition
of two long-term care facilities. The Company has experienced significant
growth since that time, primarily through the acquisition of additional
facilities. The Company operates 26 long-term care facilities and provides
rehabilitation therapy services to patients at 35 non-affiliated long-term
care facilities. The Company has been created in anticipation of the Offering
in order to combine under its control the operations of long-term care
facilities and ancillary businesses (the "Predecessors") that are currently
under the control of Berkshire and its affiliates. Immediately prior to the
completion of the Offering, the owners of the Predecessors will contribute
their interests in such entities to the Company in exchange for 4,400,000
shares of Common Stock. See "The Reorganization." The Company's audited
combined financial statements included elsewhere in this Prospectus have been
prepared by combining the historical financial statements of the Predecessors,
similar to a pooling of interests presentation.
One of the Predecessors is the general partner of KYP, which owned the Seven
Facilities throughout the period from January 1, 1991 to December 31, 1995.
During this period, 95% of the net income of KYP was allocated to the
Unitholders and 5% to the general partner. Effective December 31, 1995, KYP
sold the Seven Facilities to Meditrust for a purchase price of $47,000,000.
Simultaneously, the general partner leased the Seven Facilities from the
purchaser pursuant to the 1995 REIT Lease. The accounts of KYP are included in
the Company's audited combined financial statements and the interest of its
limited partners is reflected as the minority interest. See "Business--
Properties" and Notes B and N to the Company's audited combined financial
statements included elsewhere in this Prospectus.
The Company's audited combined financial statements do not include a
provision for Federal or state income taxes because the Predecessors were not
subject to Federal or state income taxation. Accordingly, the Company's
audited combined financial statements reflect a pro forma income tax expense
for each year presented, as if the Predecessors had previously been tax-paying
entities.
The following discussion should be read in conjunction with "Selected
Combined Financial and Operating Data" and the Company's audited combined
financial statements and the notes thereto included elsewhere in this
Prospectus.
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:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------- -------------------------
1996
PRO FORMA
AS ADJUSTED
INCLUDING OHIO
1993 1994 1995 1996 TRANSACTION
------ ------ ------ ----- --------------
<S> <C> <C> <C> <C> <C>
Facilities:
Owned.......... 15 16(/1/) 9(/1/)(/2/) 9(/1/) 13(/1/)
Leased......... 2 3 11(/2/) 17 17
------ ------ ------ ----- -----
Total........ 17 19 20 26 30
====== ====== ====== ===== =====
Licensed beds:
Owned.......... 1,860 1,976(/1/) 1,028(/1/)(/2/) 1,028(/1/) 1,720(/1/)
Leased......... 289 389 1,443(/2/) 1,980 1,980
------ ------ ------ ----- -----
Total........ 2,149 2,365 2,471 3,008 3,700
====== ====== ====== ===== =====
</TABLE>
- --------
(1) Includes the Larkin Chase Center, which is owned by Bowie Center Limited
Partnership ("Bowie L.P."), a joint venture in which the Company has a 75%
ownership interest and a non-affiliated investor has a 25% ownership
interest. See "Business--Properties" and Note F to the Company's audited
combined financial statements included elsewhere in this Prospectus.
(2) On December 31, 1995, KYP sold the Seven Facilities which were
concurrently leased by the Company pursuant to the 1995 REIT Lease. See
"Business--Properties" and Note D to the Company's audited combined
financial statements included elsewhere in this Prospectus.
29
<PAGE>
The following table sets forth certain operating data for the periods
indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------- --------------------------------
1995 1996
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
INCLUDING OHIO INCLUDING OHIO
1993 1994 1995 TRANSACTION 1995 1996 TRANSACTION
------- ------- ------- -------------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Patient days:
Private and other..... 258,847 258,585 257,864 397,675 62,296 74,365 94,028
Medicare.............. 60,459 68,256 90,107 117,756 22,223 23,496 30,206
Medicaid.............. 366,105 404,372 432,392 684,331 100,887 142,226 174,929
------- ------- ------- --------- ------- ------- -------
Total............... 685,411 731,213 780,363 1,199,762 185,406 240,087 299,163
======= ======= ======= ========= ======= ======= =======
Average occupancy
rate(1)................ 92.5% 91.5% 91.5% 92.2% 90.9% 91.3% 91.8%
Net patient service
revenues(2):
Private and other..... 39.9% 37.1% 32.3% 32.9% 34.2% 31.8% 31.8%
Medicare.............. 21.2 24.9 33.1 27.0 30.6 28.3 27.3
Medicaid.............. 38.9 38.0 34.6 40.1 35.2 39.9 40.9
------- ------- ------- --------- ------- ------- -------
Total............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ========= ======= ======= =======
</TABLE>
- --------
(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 management fees and all
rehabilitation therapy service revenues and the net patient service
revenues of the Larkin Chase Center. See "Business--Properties."
RESULTS OF OPERATIONS
The Company's total net revenues include net patient service revenues
(excluding those recorded at the Larkin Chase Center), management fees from
the Larkin Chase Center, and rehabilitation therapy service revenues from
contracts with the Larkin Chase Center and, beginning in 1995, 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. Estimated Medicare and Medicaid revenues may
be adjusted after the year of origination based on payor audits, improved
revenue estimates or final settlements. Such adjustments are included in the
net revenues for the period in which the adjustment occurs.
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 provided by third parties, 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 "loss on investment in limited partnership" reflects the Company's 75%
allocation of the net loss of the Larkin Chase Center. The Company accounts
for its investment in this facility using the equity method because of certain
purchase rights held by the minority investor in the facility and because the
Company does not exercise control over the operations. As described in Note N
to the Company's audited combined financial statements, KYP sold the Seven
Facilities in December 1995 and recognized a net gain of $4,869,000, all of
which was allocated to the KYP Unitholders and is reflected in "minority
interest in net income of combined affiliates."
30
<PAGE>
The following table presents certain combined financial data of the Company
expressed as a percentage of total net revenues for the historical periods
presented and for the year ended December 31, 1995 on a pro forma basis after
giving effect to the consummation of the New Hampshire Transaction, the sale
by KYP of the Seven Facilities and the subsequent Distribution, the 1995 REIT
Lease, the Offering and the application of the net proceeds therefrom and the
pending Ohio Transaction.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ------------------------------
1995 1996
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
INCLUDING OHIO INCLUDING OHIO
1993 1994 1995 TRANSACTION 1995 1996 TRANSACTION
----- ----- ----- -------------- ----- ----- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total net revenues...... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- ----- -----
Expenses:
Facility operating..... 76.5 79.8 81.7 80.2 83.0 80.5 79.8
General and administra-
tive.................. 4.1 4.5 4.6 4.1 4.8 6.4 5.6
Service charges paid to
an affiliate.......... 1.0 0.9 0.6 0.4 0.7 0.5 0.4
Depreciation and
amortization.......... 5.7 5.0 4.0 2.0 4.4 1.6 1.9
Facility rent.......... 0.7 1.2 1.8 6.0 1.7 7.3 5.9
----- ----- ----- ----- ----- ----- -----
Total expenses....... 88.0 91.4 92.7 92.7 94.6 96.3 93.6
----- ----- ----- ----- ----- ----- -----
Income from operations.. 12.0 8.6 7.3 7.3 5.4 3.7 6.4
Other:
Interest expense, net.. (6.3) (5.4) (4.6) (3.5) (5.3) (2.7) (3.2)
Loss on investment in
limited partnership... -- (0.5) (0.1) (0.1) (0.3) (0.4) (0.3)
Gain on sale of facili-
ties, net............. -- -- 4.4 -- -- -- --
Loss on refinancing.... -- (0.5) -- -- -- -- --
Minority interest in
net income of combined
affiliates............ (3.1) (1.8) (5.9) -- (0.8) -- --
----- ----- ----- ----- ----- ----- -----
Net income (loss)....... 2.6 % 0.4 % 1.1 % 3.7 % (1.0)% 0.6 % 2.9 %
Pro forma data:
Pro forma income tax-
es.................... (1.0)% (0.2)% (0.4)% (1.4)% 0.4 % (0.2)% (1.1)%
----- ----- ----- ----- ----- ----- -----
Pro forma net income
(loss)................ 1.6 % 0.2 % 0.7 % 2.3 % (0.6)% 0.4 % 1.8 %
===== ===== ===== ===== ===== ===== =====
</TABLE>
The Company experienced an increase in average net patient service revenues
per patient day as a result of an increase in the proportion of patients
requiring higher levels of medical care, including subacute care. In 1993, the
Company anticipated a decline in revenues from traditional custodial care
private pay patients and sought to offset this potential loss through the
expansion of subacute care and other specialty medical services. As a result,
the percentage of net patient service revenues attributable to the Medicare
program was 33.1% in 1995, a substantial increase from the 24.9% and 21.2%
experienced in 1994 and 1993, respectively.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total Net Revenues. Total net revenues increased by $23,049,000, or 26.7%,
from $86,376,000 in 1994 to $109,425,000 in 1995. This increase resulted
primarily from the operation of two additional facilities, the generation of
revenues from rehabilitation therapy services provided to patients at the
Larkin Chase Center and non-affiliated long-term care facilities and increased
net patient service revenues per patient day at the Company's existing
facilities. Of such increase, $6,279,000, or 27.2%, resulted from the
operation of the Brevard facility, which the Company began leasing in October
1994, and the Swanton facility, which the Company began leasing in April 1995.
In 1995, the Company began providing rehabilitation therapy services at non-
affiliated long-term care facilities, which generated revenues of $3,045,000,
or 13.2% of such increase. In addition,
31
<PAGE>
rehabilitation therapy service revenues from the Larkin Chase Center increased
by $687,000, or 3.0% of such increase, to $1,031,000 in 1995. The remaining
$13,038,000, or 56.6% of such increase, is attributable to higher average net
patient service revenues per patient day at the Company's existing facilities,
primarily resulting from increased care levels provided to patients with
medically complex conditions. Average net patient service revenues per patient
day increased by 14.4% from $117.54 in 1994 to $134.45 in 1995. The average
occupancy rate at the Company's facilities remained unchanged in 1995 at
91.5%.
Facility Operating Expenses. The increase in the number of facilities
operated by the Company and the expansion of the Company's rehabilitation
therapy services to include 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 $20,427,000, or 29.6%, from
$68,951,000 in 1994 to $89,378,000 in 1995. Facilities added during 1994 and
1995 accounted for $4,962,000, or 24.3%, of the increase in facility operating
expenses. As described above, in 1995 the Company began providing
rehabilitation therapy services to patients at non-affiliated facilities.
During 1995, the Company entered into rehabilitation therapy service contracts
with 16 non-affiliated facilities and expensed all related contract
development costs as incurred, including marketing, recruiting and other
related expenses. These expenses, together with the cost of providing
rehabilitation therapy services at these facilities, increased the Company's
facility operating expenses by $3,290,000, which approximated the revenues
derived from such activities in 1995. The remainder of the increase in
facility operating expenses, approximately $12,175,000, is due to significant
increases in the costs of labor, medical supplies and rehabilitation therapy
services purchased from third parties. The Company's efforts to enhance its
clinical capabilities required it to significantly increase facility staffing
levels in 1995 as compared to 1994.
General and Administrative; Service Charges Paid to Affiliate. Expenses
associated with the Company's regional and corporate offices increased by
$1,217,000, or 31.5%, from $3,859,000 in 1994 to $5,076,000 in 1995. The
majority of this increase resulted from the creation of new positions to
support the development of subacute programs, as well as from the addition of
administrative services needed to support facilities added during 1995 and
late in 1994. The Company reimbursed Berkshire in 1995 for rent and other
expenses related to its corporate headquarters, as well as for certain data
processing and administrative services. See "Certain Transactions." In 1995,
such reimbursements totaled $700,000, compared to $759,000 in 1994. The
reduction in this expense is attributable to functions assumed by employees of
the Company during 1995.
Depreciation and Amortization. Depreciation and amortization remained
relatively unchanged at $4,385,000 in 1995 as compared to $4,311,000 in 1994.
Facility Rent. Facility rent expense increased by $870,000, or 83.9%, from
$1,037,000 in 1994 to $1,907,000 in 1995. The increase in rent is attributable
to the addition of two facilities financed pursuant to long-term leases. In
April 1995, the Company began leasing its Swanton facility. In October 1994,
the Company entered into a lease for its Brevard facility with an affiliate.
See "Certain Transactions."
Interest Expense, net. Interest expense, net, increased from $4,609,000 in
1994 to $5,107,000 in 1995. This increase of $498,000, or 10.8%, related to
the incurrence of approximately $13,100,000 of additional debt in October
1994, and was offset in part by the refinancing of certain high cost debt at a
lower interest rate. The increase in interest expense was partially offset by
increased interest income resulting from a higher average cash balance held
during 1995 following the incurrence of additional debt in October 1994 and
prior to the use of these funds for facility acquisitions.
Loss on Investment in Limited Partnership. The Company accounts for its
investment in the Larkin Chase Center using the equity method. The Company's
75% allocation of the net loss from this facility was reduced from $448,000 in
1994 to $114,000 in 1995. Most of the improvement resulted from an increase in
occupancy at this facility in 1995 and the recognition of start-up losses
during 1994. The Larkin Chase Center opened on April 30, 1994 and achieved
stabilized occupancy by the fourth quarter of 1995.
32
<PAGE>
Gain on Sale of Facilities. The net gain on sale of facilities of
approximately $4,869,000 in 1995 resulted from the sale on December 31, 1995
of the Seven Facilities. All of the net gain from this sale has been allocated
to the Unitholders in accordance with the partnership agreement and is
reflected in the increased minority interest charge in 1995. At the time of
the sale, the Company entered into the 1995 REIT Lease. See "Business--
Properties" and Note N to the Company's audited combined financial statements
included elsewhere in this Prospectus.
Minority Interest in Net Income of Combined Affiliates. The minority
interest charge increased from $1,575,000 in 1994 to $6,393,000 in 1995, an
increase of $4,818,000. Substantially all of the increase is attributable to
the allocation of the net gain on the sale of the Seven Facilities. Following
the Distribution and subsequent dissolution of the partnership, the minority
interest charge will be eliminated.
Net Income. Net income was $374,000 in 1994 as compared to $1,234,000 in
1995. The increase of $860,000 was primarily the result of increased operating
income in 1995 and a reduced loss from the Company's equity investment in the
Larkin Chase Center in 1995. In addition, in 1994 the Company incurred a loss
of $453,000 relating to the refinancing of certain indebtedness.
Year Ended December 31, 1994 Compared to Year ended December 31, 1993
Total Net Revenues. Total net revenues increased by $11,275,000, or 15.0%,
from $75,101,000 in 1993 to $86,376,000 in 1994. This increase resulted
primarily from the operation of three additional facilities and increased net
patient service revenues per patient day. Of such increase, $5,146,000, or
45.6%, resulted from the operation of these additional facilities. The
remaining $6,129,000, or 54.4%, of such increase in revenues was the result of
higher average net patient service revenues per patient day associated with
increased levels of care to patients with medically complex conditions.
Average net patient service revenues per patient day increased by 7.3% from
$109.57 in 1993 to $117.54 in 1994, while the average occupancy rate decreased
from 92.5% to 91.5% during the same period. Part of the reduction in average
occupancy rate was the result of the opening of the newly constructed Larkin
Chase Center in April 1994. Excluding the Larkin Chase Center, the average
occupancy rate at the Company's facilities was 92.1% in 1994, only a slight
reduction from 1993. Additionally, the Company closed certain Medicare and
Medicaid cost reports in 1994 and 1993 which resulted in additional net
patient service revenues of $1,000,000 and $2,000,000, respectively.
Facility Operating Expenses. Facility operating expenses increased by
$11,539,000, or 20.1%, from $57,412,000 in 1993 to $68,951,000 in 1994. Of
this increase, $4,361,000, or 37.8%, resulted from increased expenses
associated with the addition of three facilities in 1993 and 1994. The
remaining $7,178,000, or 62.2%, of such increase resulted from increased
expenses associated with higher skilled staffing levels and increased use of
rehabilitation therapy and medical supplies. The incurrence of higher
operating expenses is consistent with the Company's objective of providing
care to patients requiring higher levels of medical care or specialized
treatment. Beginning in 1993, the Company began providing its own
rehabilitation therapy services to patients at certain of its facilities. The
closing of certain Medicare and Medicaid cost reports in 1993 and 1994 had the
effect of reducing facility operating expenses as a percentage of net
revenues.
General and Administrative; Service Charges Paid to Affiliate. General and
administrative expenses increased by $767,000, or 24.8%, from $3,092,000 in
1993 to $3,859,000 in 1994. This increase resulted from higher expenses
associated with expansion of regional and corporate support as well as
increases in salaries. During 1994, the Company added corporate marketing and
clinical positions as it expanded subacute care and other forms of specialty
medical care. The Company reimbursed Berkshire in 1994 for rent and other
expenses related to its corporate headquarters as well as for certain data
processing and administrative services which were provided to the Company. In
1994, reimbursements to Berkshire totaled $759,000 as compared to $746,000 in
1993.
Depreciation and Amortization. Depreciation and amortization remained
relatively unchanged at $4,311,000 in 1994 as compared to $4,304,000 in 1993.
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Facility Rent. Facility rent expense increased by $512,000, or 97.5%, from
$525,000 in 1993 to $1,037,000 in 1994. This increase was primarily due to the
addition of two facilities in June 1993 and one facility in October 1994, all
of which were financed pursuant to long-term leases.
Interest Expense, net. Interest expense, net, was $4,740,000 in 1993 as
compared to $4,609,000 in 1994. The Company refinanced the majority of its
long-term debt in October 1994. As a result, the Company incurred
approximately $13,100,000 of additional debt at a reduced interest rate. The
Company recorded a loss on refinancing of $453,000 in connection with this
transaction.
Loss on Investment in Limited Partnership. The Company recorded a loss of
$448,000 in 1994 in connection with its 75% ownership interest in the Larkin
Chase Center. The loss recognized in 1994 is primarily the result of the
recognition of start-up costs incurred before the facility achieved stabilized
occupancy.
Minority Interest in Net Income of Combined Affiliates. Minority interest
declined from $2,297,000 in 1993 to $1,575,000 in 1994, a decrease of
$722,000. Minority interest in net income of combined affiliates reflects the
allocation of 95% of the net income of KYP to the Unitholders. KYP generated
less net income in 1994 than in 1993 and the minority interest was
correspondingly reduced.
Net Income. Net income was $1,985,000 in 1993 as compared to $374,000 in
1994. The decrease of $1,611,000 was primarily the result of reduced Medicare
and Medicaid settlements in 1994, the loss related to the Company's equity
investment in the Larkin Chase Center, and the loss on refinancing recorded by
the Company in October 1994. A reduction in minority interest partially offset
these factors.
Year Ended December 31, 1995, Pro Forma As Adjusted Including the Ohio
Transaction, Compared to Historical Year Ended December 31, 1995
Total Net Revenues. Total net revenues on a pro forma basis in 1995
increased by $54,273,000, or 49.6%, to $163,698,000 as compared to the
Company's historical 1995 net revenues of $109,425,000. The addition of the
six New Hampshire Facilities represented $21,956,000, or 40.5%, of such
increase and the four Ohio Facilities represented $32,317,000, or 59.5%, of
such increase.
Facility Operating Expenses. Facility operating expenses on a pro forma
basis increased 46.8%, or $41,866,000, to $131,244,000 in 1995 as compared to
the Company's historical 1995 facility operating expenses of $89,378,000. The
increase resulted from the addition of the New Hampshire and Ohio Facilities.
Facility operating expenses as a percentage of total net revenues were 80.2%
on a pro forma basis in 1995 and 81.7% on a historical basis. The operating
expenses of these facilities are lower as a percentage of total net revenues
than the Company's historical percentage due to differences in levels of
medical care provided and start-up expenses incurred by the Company in
connection with its rehabilitation therapy business.
General and Administrative Expenses. General and administrative expenses on
a pro forma basis in 1995 increased by $1,562,000, or 30.8%, to $6,638,000 as
compared to the Company's historical 1995 general and administrative expenses
of $5,076,000. This increase resulted from costs associated with the addition
of the New Hampshire and Ohio Facilities. The New Hampshire Facilities operate
as a new region of the Company and correspondingly require a higher level of
general and administrative expenses than the Ohio Facilities, which are
expected to be integrated into the Company's existing Midwest region.
Depreciation and Amortization. Depreciation and amortization expense on a
pro forma basis in 1995 decreased by $1,035,000, or 23.6%, to $3,350,000 as
compared to the Company's historical 1995 depreciation and amortization
expense of $4,385,000. The net reduction was largely the result of the
elimination of $2,430,000 in depreciation and amortization expense recorded by
the Seven Facilities owned by KYP after giving effect to the sale and
subsequent lease of the Seven Facilities. This amount was partly offset by a
$1,195,000 increase relating to the Ohio Transaction which has been recorded
as a capital lease.
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Facility Rent. Facility rent expense on a pro forma basis in 1995 increased
by $7,975,000 to $9,882,000 as compared to the Company's historical 1995
expense of $1,907,000. The increase in rent expense was solely the result of
the effect of the sale and subsequent lease of the Seven Facilities and the
lease of the New Hampshire Facilities.
Interest Expense, net. Interest expense, net, on a pro forma basis in 1995
increased by $585,000, or 11.5%, to $5,692,000 as compared to the Company's
historical interest expense, net, of $5,107,000. Interest expense increased by
$4,349,000 as the result of the Ohio Transaction, which has been recorded as a
capital lease. This increase was partially offset by a pro forma adjustment of
$2,727,000 as a result of the repayment of $25,000,000 of Meditrust debt with
the proceeds of the Offering. All non-recurring items such as the prepayment
penalty of $1,700,000 and the write-off of deferred financing costs of
$572,000 have been excluded from the unaudited pro forma combined statement of
operations.
Net Income. Net income on a pro forma basis in 1995 increased by $2,954,000
to $3,707,000 as compared to the Company's historical net income of $753,000
(after reflecting a pro forma tax expense). Net income increased primarily as
the result of reduced interest expense following the Debt Repayment as well as
the addition of the New Hampshire Facilities and the Ohio Facilities.
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
Total Net Revenues. Total net revenues increased by $11,154,000, or 46.9%,
from $23,777,000 in 1995 to $34,931,000 in 1996. This increase resulted
primarily from the operation of seven additional facilities in 1996, and the
generation of revenues from additional contracts to provide rehabilitation
therapy services to patients at non-affiliated long-term care facilities. Of
such increase, $6,345,000, or 56.9%, resulted from the operation of the
Swanton facility, which the Company began leasing on April 1, 1995, and the
six New Hampshire Facilities, which the Company began leasing on January 1,
1996. In 1995 the Company began providing rehabilitation therapy services to
patients at non-affiliated long-term care facilities. As of March 31, 1995 the
Company had one contract with a non-affiliated long-term care facility as
compared to 35 contracts with such facilities as of March 31, 1996. Revenues
during the first quarter of 1995 from non-affiliated rehabilitation therapy
services were $136,000 as compared to $2,141,000 for the first quarter of
1996, an increase of $2,005,000, or 18.0% of the overall increase in net
revenues. The remaining $2,804,000, or 25.1% of such increase, is attributable
to higher average net patient service revenues per patient day at the
Company's previously existing facilities, primarily resulting from increased
care levels provided to patients with medically complex conditions. Total net
revenues on a pro forma basis adjusted for the Offering and the Ohio
Transaction for the three months ended March 31, 1996 increased by $8,272,000,
or 23.7%, to $43,203,000 as compared to the Company's historical net revenues
of $34,931,000 as a result of the addition of the Ohio Facilities.
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 $8,386,000, or 42.5%, from
$19,734,000 during the first quarter of 1995 to $28,120,000 during the first
quarter of 1996. Facilities operated by the Company during the first quarter
of 1996 but not during the prior year period accounted for $4,933,000, or
58.8%, of the increase in facility operating expenses. During 1995 the Company
began providing rehabilitation services to patients at non-affiliated
facilities. At the end of the first quarter of 1995 the Company had entered
into only one contract with a non-affiliated facility but by the end of the
first quarter of 1996, the Company had entered into 35 such contracts. The
costs associated with the development of these contracts (including marketing
and recruiting) together with the costs of providing rehabilitation therapy
services at these facilities increased the Company's facility operating
expenses by approximately $1,642,000, or 19.6%, of the total increase in these
costs. The remainder of the increase in facility operating expenses,
approximately $1,811,000, is primarily due to increases in the costs of labor,
medical supplies and rehabilitation therapy services purchased from third
parties. Facility operating expenses on a pro forma basis adjusted for the
Offering and the Ohio Transaction for the three months ended March 31, 1996
increased by $6,343,000, or 22.6%,
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to $34,463,000 as compared to the Company's historical facility operating
expenses of $28,120,000 as a result of the addition of the Ohio Facilities.
General and Administrative; Services Charges Paid to Affiliate. Expenses
associated with the Company's regional and corporate offices increased by
$1,094,000, or 95.9%, from $1,141,000 during the first quarter of 1995 to
$2,235,000 during the first quarter of 1996. General and administrative
expenses for the first quarter of 1996 included a compensation charge of
$438,000 as a result of a special bonus paid to the President of the Company.
Most of the remaining increase, $656,000, resulted from the creation of new
positions and additional administrative costs required to support the addition
of the new facilities and the development of subacute programs. The Company
reimbursed Berkshire during the first quarter of 1995 and 1996 for rent and
other expenses related to its corporate headquarters, as well as for certain
data processing and administrative services. See "Certain Transactions."
During the first quarter of 1995, such reimbursements totalled $177,000,
compared to $185,000 during the first quarter of 1996. The level of services
provided by Berkshire on behalf of the Company was comparable in each period.
General and administrative expenses on a pro forma basis adjusted for the
Offering and the Ohio Transaction for the three months ended March 31, 1996
increased by $170,000, or 7.6%, to $2,405,000, as compared to the Company's
historical general and administrative expenses of $2,235,000 as a result of
the addition of the Ohio Facilities.
Depreciation and Amortization. Depreciation and amortization expense
decreased by $504,000, from $1,043,000 during the first quarter of 1995 to
$539,000 during the first quarter of 1996. This decrease is the result of the
sale of the Seven Facilities, which accounted for $601,000 of depreciation and
amortization during the prior period, partially offset by additional expenses
recorded at newly acquired facilities during the first quarter of 1996.
Depreciation and amortization expense on a pro forma basis adjusted for the
Offering and the Ohio Transaction for the three months ended March 31, 1996
increased by $299,000, or 55.5%, to $838,000 as compared to the Company's
historical depreciation and amortization expense of $539,000 as a result of
the Ohio Transaction, which has been recorded as a capital lease.
Facility Rent. Facility rent expense increased by $2,153,000, from $392,000
during the first quarter of 1995 to $2,545,000 during the first quarter of
1996. The increase in rent is attributable to the addition of the Swanton
facility on April 1, 1995, the sale and subsequent lease of the Seven
Facilities on December 31, 1995, and the addition of New Hampshire Facilities
effective January 1, 1996.
Interest Expense, net. Interest expense, net, decreased by $289,000 from
$1,264,000 during the first quarter of 1995 to $975,000 during the first
quarter of 1996. This decrease was primarily the result of the retirement of
the KYP Medium-Term Notes and the elimination of the related interest expense
of $248,000 which was incurred during the first quarter of 1995. Interest
expense, net, on a pro forma basis adjusted for the Offering and the Ohio
Transaction for the three months ended March 31, 1996 increased by $407,000,
or 41.7%, to $1,382,000 as compared to the Company's historical interest
expense, net, of $975,000. Interest expense increased by $1,087,000 as the
result of the Ohio Transaction, which has been recorded as a capital lease.
This increase was partially offset by a pro forma adjustment of $680,000 as a
result of the repayment of $25,000,000 of Meditrust debt with the proceeds of
the Offering. All non-recurring items such as the prepayment penalty of
$1,700,000 and the write-off of deferred financing costs of $572,000 have been
excluded from the unaudited pro forma combined statement of operations.
Loss on Investment in Limited Partnership. The Company accounts for its
investment in the Larkin Chase Center using the equity method. The Company's
75% allocation of the net loss from this facility increased from $81,000
during the first quarter of 1995 to $127,000 during the first quarter of 1996.
Net Income (Loss). The Company recorded a net loss of $240,000 during the
first quarter of 1995 compared to net income of $205,000 during the first
quarter of 1996, which is net of the $438,000 special bonus compensation
charge included in general and administrative expenses. The improved
performance was primarily the result of increased operating income during the
first quarter of 1996 together with higher interest income.
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<PAGE>
Net income on a pro forma basis adjusted for the Offering and the Ohio
Transaction for the three months ended March 31, 1996 increased by $642,000 to
$767,000 (after reflecting a pro forma tax expense of $491,000). Pro forma net
income increased primarily as the result of reduced interest expense following
the Debt Repayment as well as the addition of the Ohio Facilities.
LIQUIDITY AND CAPITAL RESOURCES
The Predecessors historically financed their operations and acquisitions
growth primarily through a combination of mortgage financing, operating
leases, and capital contributed by the KYP Unitholders. Although the Company
had cash and cash equivalents totalling $40,157,000 as of December 31, 1995,
approximately $33,493,000 of such amount was held pending the Distribution,
which occurred in March 1996. As of March 31, 1996 the Company had cash and
cash equivalents totaling $10,000,000.
The Company had two mortgage loans outstanding as of March 31, 1996. The
mortgage loan from Meditrust had an outstanding principal balance of
$41,809,000 and bears 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. The loan is secured by mortgages in favor of Meditrust on
seven of the Company's facilities. The Company plans to use $25,000,000 of the
net proceeds of the Offering to prepay a portion of this debt. In connection
with this prepayment the Company expects to incur a cash prepayment penalty of
approximately $1,700,000. See "Use of Proceeds." After giving effect to the
Debt Repayment as of March 31, 1996, the outstanding principal as of such date
would have been reduced to $16,809,000 and the outstanding principal due at
maturity in 2004 would be $14,598,000. The Company's other mortgage loan,
which encumbers a single facility, had an outstanding principal balance of
$1,613,000 as of March 31, 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. See "Business--Properties." The
Company expects that such leasing arrangements will continue to provide it
with the most attractive form of financing to support its growth.
The Company expects that cash on hand and the net proceeds of the Offering
will be sufficient to meet its operating requirements and to finance
anticipated growth over the next twelve months. The Company has been and will
continue to be dependent on third-party financing to fund its acquisition
strategy. The Company is currently involved in discussions with several
financial institutions to obtain acquisition financing and to establish a
working capital line of credit secured by its receivables. There can be no
assurances that such financing will be available to the Company on acceptable
economic terms, or at all. 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 within approximately six
months. 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 1996. 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 in 1995 generated net cash of $1,886,000
as compared to $4,939,000 in 1994, a decrease of $3,053,000. Most of the
reduction in cash provided by operations was the result of an increase in
accounts receivable of $7,573,000. This increase is the result of a
substantial growth in revenues as well as a shift in payor mix toward slower-
paying sources such as Medicare.
Net cash provided by investing activities was $36,818,000 in 1995. After
deducting the gross proceeds of $47,000,000 from the sale of the Seven
Facilities and related transaction costs of $884,000, net cash used by
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investing activities was $9,298,000 in 1995 as compared to $6,078,000 used in
1994. In each year the primary use of invested cash related to additions to
property and equipment ($2,585,000 in 1994 compared to $3,081,000 in 1995),
the funding of escrow accounts in connection with debt or lease financing
arrangements ($1,995,000 in 1994 compared to $760,000 in 1995), and additions
to deferred financing costs associated with these financings ($1,410,000 in
1994 compared to $1,202,000 in 1995). In 1995, the Company loaned $1,255,000
to Bowie L.P. to finance its working capital requirements. The Company expects
that this loan will be repaid during 1996. In 1995, the Company also paid
acquisition deposits totalling $3,000,000 in connection with two groups of
facilities for which it was negotiating leases. The Company began leasing the
first group (the New Hampshire Facilities) on January 1, 1996 and received its
$1,000,000 deposit back upon the closing of the transaction. The Company's
offer to lease the second 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 from Berkshire to pay this acquisition deposit and repaid Berkshire
in March 1996. See "Certain Transactions."
Net cash used by financing activities was $12,560,000 in 1995. The repayment
of debt and the incurrence of a related prepayment penalty upon the sale of
the Seven Facilities and liquidation of KYP required the use of $10,954,000.
In 1994 the Company refinanced existing debt by incurring approximately
$13,100,000 in additional debt at a lower effective interest rate. A portion
of the funds raised through this refinancing, $2,200,000, was distributed to
shareholders of the Company's Predecessors.
The Company's operating activities in the first three months of 1995
generated net cash of $2,000 as compared to $1,097,000 in the comparable
period of 1996, an increase of $1,095,000. Most of the increase in cash
provided by operations was the result of an increase in accrued employee
compensation offset by an increase in prepaid expenses and a decrease in
accounts payable.
Net cash used by investing activities was $275,000 in the three months ended
March 31, 1995 as compared to $224,000 provided in the comparable period of
1996. In each period the primary use of invested cash related to additions to
property and equipment ($486,000 in 1995 compared to $504,000 in 1996),
changes in escrow account balances established in connection with debt or
lease financing arrangements (a decrease of $247,000 in 1995 and an increase
of $1,576,000 in 1996), and additions to deferred financing costs associated
with these financings ($36,000 in 1995 compared to $696,000 in 1996).
Additionally, in 1996 the Company received $3,000,000 in refunded acquisition
deposits in connection with two groups of facilities which it was negotiating
to acquire.
Net cash used by financing activities was $1,068,000 in the three months
ended March 31, 1995 as compared to $31,478,000 in 1996. Distributions to
minority interest required the use of $909,000 in 1995 compared to $33,727,000
in 1996. The 1996 distribution consisted of the liquidating distribution to
the KYP Unitholders. During the first three months of 1996 the Company also
repaid a $2,000,000 note payable to an affiliate, but received a cash lease
inducement from a landlord of $3,685,000 and received $803,000 in capital
contributions through the Executive Equity Purchase and the Director Equity
Purchase. The note payable was incurred when the Company borrowed funds from
an affiliate to finance a deposit related to the acquisition of a group of
facilities. The lease inducement was received as the result of the leasing of
the New Hampshire Facilities.
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. See "Business--Governmental Regulation."
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BUSINESS
THE COMPANY
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). Within these regions, the Company
operates 26 licensed long-term care facilities (9 owned and 17 leased) with a
total of approximately 3,000 licensed beds. After giving effect to the pending
acquisition of the four Ohio Facilities, the Company will operate 30 long-term
care 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 certain
rehabilitation therapy and behavioral health services both at Company-operated
and non-affiliated 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.
Since commencing operations in 1988, the Company has experienced significant
growth through strategic acquisitions in states it believes possess favorable
demographic and regulatory environments, as well as through the expansion of
subacute care and other specialty medical services provided at its long-term
care facilities. Since 1993 and after giving effect to the recent and pending
transactions, the Company increased its overall patient capacity by
approximately 1,550 licensed beds, or 72.2%. During the same period, the
Company also improved its overall quality mix (defined as net patient service
revenues derived from Medicare, commercial insurance and other private payors)
from 61.1% to 65.4% of net patient service revenues for the years ended
December 31, 1993 and 1995, respectively, primarily as a result of the
Company's rapid expansion of its subacute care and other specialty medical
services. For the three months ended March 31, 1996, during which the Company
began leasing the New Hampshire Facilities, the Company's quality mix was
60.1% (31.8% private and other and 28.3% Medicare) and its average occupancy
rate was 91.3%. The Company believes that its quality mix and its average
occupancy rate have consistently been among the highest in the long-term care
industry.
The Company believes that it is favorably positioned to benefit from trends
impacting the healthcare industry, including favorable demographic shifts,
advances in medical technology and continuing public and private pressures to
contain growing healthcare costs. At the same time, government restrictions
and high construction and start-up costs are expected to continue to constrain
the supply of long-term care and subacute facilities. The Company further
believes that an increasingly complex operating environment is motivating
smaller, less efficient long-term care facility operators to combine with or
sell to established operators. Harborside Healthcare expects that such recent
trends toward industry consolidation will continue and will provide it with
future acquisition opportunities.
GROWTH STRATEGY
The Company intends to continue to grow by (i) selectively acquiring
additional long-term care facilities in its existing and in new geographic
regions, (ii) expanding the range of subacute care provided, including the
addition of distinct COMPASS (COMprehensive Patient Active Subacute Systems)
subacute care units, (iii) expanding its existing rehabilitation therapy and
behavioral healthcare businesses, (iv) developing and acquiring new ancillary
service operations, such as institutional pharmacy, home healthcare and
infusion therapy and (v) expanding its Alzheimer's and hospice care programs.
The Company believes that its strategy of concentrating its operations in
selected geographic markets and complementing its long-term care platform with
a wide range of specialty medical services and ancillary services will enable
the Company to benefit from economies of scale and improve its ability to
penetrate regional managed care markets.
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Acquisition Strategy
The Company generally seeks to acquire long-term care facilities in its
existing regions as well as in new geographic markets it believes possess
favorable demographic and regulatory environments. The Company believes that
concentrating its long-term care facilities within selected geographic regions
enables it to achieve certain operating efficiencies through economies of
scale, reduced corporate overhead and more effective management supervision
and financial controls. Geographic concentration also allows the Company to
establish more effective working relationships with referral sources and
regulatory authorities in the states in which it operates. The Company
believes that this strategy complements its operating approach of building
integrated networks of healthcare services targeted at managed care and other
private insurance organizations.
Harborside Healthcare generally seeks to acquire long-term care facilities
that: (i) have a history of stable occupancy and operations, (ii) are in good
physical condition, (iii) have been constructed or renovated in the past
fifteen years, (iv) have an overall size generally ranging from 100 to 200
licensed beds, (v) have a good reputation in the community, (vi) operate in
markets with favorable competitive climates and (vii) provide opportunities
for additional growth through the expansion of the range and scope of services
offered. All acquisition opportunities considered by the Company are subject
to the availability of financing on acceptable terms. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
The Company employs a full-time acquisitions staff to locate, evaluate,
negotiate and complete the acquisition of long-term care facilities. The
Company believes that maintaining a dedicated acquisitions staff enables it to
complete acquisitions without disruption of its operations. Prior to
consummating an acquisition, the Company conducts a comprehensive due
diligence review, including analyses of (i) financial and operating
performance, (ii) survey results and compliance with Federal and state
regulations, (iii) competition and market assessments, (iv) regulatory and
reimbursement issues, (v) engineering and environmental matters and (vi) legal
and ancillary risk issues. Upon completion of the due diligence process, the
Company's acquisition staff, in conjunction with its operating and marketing
personnel, develops a business plan for each facility or group of facilities
to be acquired. The plan is subsequently reviewed by the Company's senior
management and a decision whether to proceed is made.
In keeping with its growth strategy, the Company leased six additional long-
term care facilities with 537 beds in New Hampshire in January 1996. The
Company believes that a significant opportunity exists to improve the quality
mix revenues of its New Hampshire Facilities through the addition of Medicare,
subacute care and other specialty medical services at these facilities.
Subsequently, the Company also entered into an agreement to lease the Ohio
Facilities pursuant to a capital lease. This transaction is expected to
strengthen the Company's existing network of five long-term care facilities in
Ohio and to provide the Company with an opportunity to achieve regional
overhead cost efficiencies while further enhancing its ability to attract
managed care payors in that state. Together, the New Hampshire Facilities and
Ohio Facilities represented approximately $54.3 million in combined total net
revenues for the year ended December 31, 1995. See "--The Ohio Transaction."
Since 1993 and after giving effect to the New Hampshire Transaction and the
Ohio Transaction, the Company increased its overall patient capacity by
approximately 1,550 licensed beds, or approximately 72.2%.
The Company is continuously discussing with third parties the possible
acquisition of long-term care facilities. Although the Company regularly
considers and evaluates opportunities for expansion and from time to time
enters into letters of intent that provide the Company with an exclusivity
period during which it considers possible acquisitions, the Company does not
at this time have any firm commitments to make any material acquisitions of
long-term care facilities other than the Ohio Transaction, nor has it
identified any material, specific ancillary business.
Expansion of Specialty Medical Services
The Company also expects to continue to expand the range of subacute care
and other specialty medical services provided at its long-term care
facilities. Since its inception, the Company has developed strong
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capabilities in the areas of subacute care and other specialty medical service
design and delivery and has implemented subacute care services at each of its
current long-term care facilities, other than two of the recently acquired New
Hampshire Facilities. The Company is evaluating opportunities to further
introduce subacute care and other specialty medical services at its New
Hampshire Facilities.
Where demand for subacute care is particularly strong, the Company has
developed distinct subacute care units. Where appropriate, the Company expects
to continue to add distinct subacute care units within its existing facilities
or within newly acquired long-term care facilities. Within these units, the
Company has designed and implemented several clinical pathways designed to
achieve specified, measurable treatment outcomes in an efficient and cost-
effective manner. The Company believes that its subacute services and clinical
pathways are attractive to managed care organizations and other private payors
as a result of the Company's emphasis on quality and cost efficiency. The
Company has also developed and expects to continue to develop specialized care
units for patients with Alzheimer's disease and hospice units for patients
with terminal illnesses. See "--Patient Services." Primarily as a result of
the Company's expansion of specialty medical services, net revenues per
patient day have increased from $109.57 in 1993 to $134.45 in 1995.
Expansion of Ancillary Businesses
The Company currently provides a range of ancillary services, including
physical, occupational and speech rehabilitation therapy, at 15 Company-
operated and 35 non-affiliated long-term care facilities. Where appropriate,
the Company expects to add its rehabilitation therapy programs at newly
acquired long-term care facilities and to selectively expand its ancillary
business with non-affiliated long-term care facilities. The Company also
recently began providing behavioral health services at selected Company-
operated, as well as non-affiliated, long-term care facilities.
The Company is currently evaluating opportunities to acquire or develop
additional ancillary businesses, including home healthcare, institutional
pharmacy and infusion therapy. The Company believes that providing home
healthcare services will make it more attractive to managed care and other
private payors, allow it to retain patients within a broader continuum of care
and provide wider access to its current nursing capacity. The Company further
believes that entry into institutional pharmacy and infusion therapy
businesses will offer it opportunities to reduce operating costs and capture
additional profits by bringing within its organization services typically
purchased from third-party contractors. Although such activities are under
consideration, the Company has not at this time identified any specific
acquisitions or new business developments of these businesses. See "--
Ancillary Businesses."
OPERATING STRATEGY
The Company's operating strategy emphasizes (i) providing high quality
healthcare on a cost-effective basis and expanding the range of medical
services it provides, (ii) maintaining high occupancy rates and further
improving its quality mix and (iii) achieving operating efficiencies and
actively managing overhead costs.
The Company will continue to focus its efforts to ensure the efficient and
cost-effective delivery of high quality healthcare to its medically demanding
patients. To achieve these goals, the Company will continue to recruit highly
qualified administrators, nurses and medical directors. Performance
improvement standards and committees at each facility (comprised of the
facility administrator and the facility's senior medical professionals)
continually monitor the quality of care provided. The Company uses
interdisciplinary teams to provide high quality care and case managers to
coordinate, monitor and evaluate the delivery of care. The Company believes
that its commitment to providing high quality care has established its
favorable reputation in the markets it serves. The Company also seeks to
continually expand the range of medical services provided through its distinct
units and otherwise. In addition, the Company employs corporate-level staff in
the areas of specialty medical services, professional services and managed
care who are responsible for evaluating and expanding the range of medical
services provided at its facilities.
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<PAGE>
The Company also seeks to maintain high occupancy rates at its facilities
while further improving its quality mix. The Company intends to achieve this
goal by: (i) expanding the breadth and improving the quality of services
offered, including the addition of speciality medical services in order to
attract Medicare, managed care and other private pay patients; (ii) developing
additional referral sources and marketing programs designed to increase
occupancy; and (iii) closely monitoring census information and other patient
data at the corporate, regional and facility levels.
The Company believes that concentrating its long-term care facilities within
selected geographic regions enables it to achieve operating efficiencies
through economies of scale, reductions in corporate overhead and improvements
in supervision and financial controls. Geographic concentration facilitates
the centralization of purchasing, training, marketing and other management
services and also allows the Company to establish more effective working
relationships with referral sources and regulatory authorities. As a result,
the Company believes it is better able to attract managed care and other
private payors and thereby improve its quality mix.
The Company actively monitors and manages operating costs in order to
maintain and improve the profitability of its operations. The Company's
management philosophy stresses close oversight of facility operations by all
three levels of management (corporate headquarters, regional and facility).
The Company's centralized, automated financial reporting system enables
corporate financial personnel to monitor key operating and financial data and
budget variances on a timely basis, as well as to respond quickly to unusual
developments at its facilities. See "--Operations" and "--Sources of
Revenues."
PATIENT SERVICES
Basic Patient Services
Basic patient services are those traditionally provided to elderly patients
in long-term care facilities to assist with the activities of daily living and
to provide general medical care. The Company provides 24-hour skilled nursing
care by registered nurses, licensed practical nurses and certified nursing
aides in all of its facilities. Each facility is managed by an on-site
licensed administrator who is responsible for the overall operation of the
facility, including the quality of care provided. The medical needs of
patients are supervised by a medical director, who is a licensed physician.
Although treatment of patients is the responsibility of their own attending
physicians, who are not employed by the Company, the medical director monitors
all aspects of delivery of care. The Company also provides a broad range of
support services, including dietary services, therapeutic recreational
activities, social services, housekeeping and laundry services, pharmaceutical
and medical supplies and routine rehabilitation therapy.
Each facility offers a number of individualized therapeutic activities
designed to enhance the quality of life of its patients. These activities
include entertainment events, musical productions, trips, arts and crafts and
volunteer and other programs that encourage community interaction.
Specialty Medical Services
Specialty medical services are those provided to patients with medically
complex needs, who generally require more extensive treatment and a higher
level of skilled nursing care. These services typically generate higher net
patient service revenues per patient day than basic patient services as a
result of increased levels of care and the provision of ancillary services.
The Company intends to expand the scope and range of its specialty medical
services and programs in order to further enhance revenues, profitability and
the reputation of its facilities for providing quality care.
Subacute Care. Subacute care is goal-oriented, comprehensive care designed
for an individual who has had an acute illness, injury, or exacerbation of a
disease process. Subacute care is typically rendered immediately after, or
instead of, acute hospitalization in order to treat one or more specific,
active, complex medical conditions or in order to administer one or more
technically complex treatments. The Company provides subacute care services at
all of its existing facilities (other than at two of its recently acquired New
Hampshire Facilities) in
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<PAGE>
such areas as complex medical, cardiac recovery, digestive, immuno-suppressed
disease, post-surgical, wound, and CVA/stroke care, hemodialysis, infusion
therapy, and diabetes and pain management.
In facilities that have shown strong demand for subacute services, the
Company has developed distinct subacute units marketed under the name
"COMprehensive Patient Active Subacute System" or "COMPASS." Each COMPASS unit
contains 20 to 60 beds and is specially staffed and equipped for the delivery
of subacute care. Patients in COMPASS units typically range in age from late
teens to the elderly, and typically require high levels of nursing care and
the services of physicians, therapists, dietitians, clinical pharmacists or
psycho/social counselors. Certain patients may also require life support or
monitoring equipment. Because patient goals are generally rehabilitation-
oriented, lengths of stay in COMPASS units are generally expected to be less
than 30 days each. The Company recently opened its first five COMPASS units at
its Gulf Coast, Larkin Chase, Tampa Bay, Sarasota and Troy facilities
containing a total of approximately 170 licensed beds. Four additional COMPASS
units are expected to open during 1996.
The Company has designed clinical pathways for these COMPASS units in the
areas of orthopedic rehabilitation, CVA/stroke recovery, cardiac recovery,
pulmonary rehabilitation and wound care management. These clinical pathways
are designed to achieve specified measurable outcomes in an efficient and
cost-effective manner. The Company's COMPASS units and the clinical pathways
used in these units are designed to attract commercial insurance and managed
care organizations, such as HMOs and PPOs. The Company has personnel dedicated
to actively marketing its COMPASS units to commercial insurers and managed
care organizations. The Company is currently developing five additional
clinical pathways in the areas of oncology, HIV/AIDS, post-surgical recovery,
ventilator care and neuro-trauma rehabilitation, and expects to introduce
these pathways in selected COMPASS units at various times during 1996.
The Company is seeking to establish a Medical Services Organization network
in conjunction with Humana Health Care Plans in the Pasco County, Florida
area. The Company will develop a network of healthcare providers and manage a
continuum of care ranging from subacute care to home healthcare services. The
network is expected to include the Company's Gulf Coast and Palm Harbor
facilities and is expected to commence operation in the third quarter of 1996.
Alzheimer's and Hospice Care. The Company has also developed distinct units
that provide care for patients with Alzheimer's disease and hospice units for
patients with terminal illnesses. As of March 31, 1996, the Company operates
three dedicated Alzheimer's units at its Pinebrook, Swanton and Northwood
facilities, with a total of 88 licensed beds. One of the Ohio Facilities
operates a dedicated Alzheimer's unit with 50 licensed beds. The Company
expects to open two additional Alzheimer's units at its Naples and Troy
facilities during 1996. The Company also operates three distinct hospice units
with a total of 46 licensed beds at its Tampa Bay, Clearwater and Sarasota
facilities, where it provides care to terminally ill patients and counseling
to their families. The Company expects to open an additional hospice unit with
ten licensed beds during 1996 at its Pinebrook facility.
ANCILLARY BUSINESSES
The Company currently provides rehabilitation therapy services and
behavioral health services, principally at its own long-term care facilities
and, beginning in 1995, at selected non-affiliated long-term care facilities.
The Company believes it can improve the operating performance of its long-term
care facilities by further expanding the scope of ancillary services provided.
In this regard, the Company intends to pursue selected opportunities to
acquire or develop additional ancillary businesses, such as home healthcare,
institutional pharmacy, and infusion therapy, in order to complement existing
Company services. See "--Growth Strategy."
Rehabilitation Therapy Services. Commencing in January 1994, the Company
began to provide comprehensive physical, occupational and speech therapy
programs. As of March 31, 1996, the Company provided rehabilitation therapy
services at 13 of the Company's facilities and had therapy contracts with 35
non-affiliated long-term care providers. The Company currently employs
approximately 430 therapists.
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<PAGE>
Behavioral Health Services. The Company recently commenced its behavioral
health business, which offers services provided by teams of licensed
professionals who assist patients with emotional and psychological issues
relating to their loss of functioning and relocation to a long-term care
setting. These teams of professionals also provide a range of therapy and
emotional support services to assist patients and their families in improving
the quality of their lives. The Company provides behavioral health services at
five of the Company's facilities in Florida and at seven non-affiliated
facilities in that region.
PROPERTIES
The Company operates 26 long-term care facilities, nine of which are owned
and 17 of which are leased. All nine of the properties owned by the Company
are subject to mortgages. See "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and Note E to the Company's audited combined financial
statements included elsewhere in this Prospectus. Of the Company's leased
facilities, fourteen are leased from subsidiaries of Meditrust. The Company's
Northwestern Ohio and Defiance facilities are leased from a non-affiliated
lessor and the Company's Brevard facility is leased from an affiliate. See
"Certain Transactions." The Company has also entered into an agreement to
acquire the Ohio Facilities from a non-affiliated lessor pursuant to a capital
lease. See "--The Ohio Transaction."
The Company's leases with Meditrust have initial terms which expire on
various dates in the year 2005 and provide for up to two five-year renewals.
The Company's annual rental expense under its leases with Meditrust for the
year ended December 31, 1995, were $0.5 million and are expected to be $8.7
million for the year ended December 31, 1996 (without giving effect to any
additional leases that might be entered into following the Offering). The
Company's lease for its Northwestern Ohio and Defiance facilities has a ten-
year term expiring in the year 2003 with no renewal options. The Company's
lease for its Brevard facility has an initial term expiring in the year 2004
and provides for up to two five-year renewal terms. Each of the Company's
leases provides for the payment of annual rent which in most cases increases
by a formula or by a fixed percentage each year. The lease with Meditrust for
the Company's Swanton facility provides for additional rent of up to $14,650
based on increases in that facility's revenues as compared to a base year. The
Company's leases also generally provide that the Company is responsible for
expenses such as taxes, insurance and maintenance and repairs.
Each of the Company's leases with Meditrust provides the Company with
options to purchase the leased facilities which are exercisable on the eighth
anniversary of the lease (the ninth anniversary in the case of the New
Hampshire Facilities), at the end of the initial term and at the end of each
renewal term at a price equal to the greater of (i) the fair market value of
the facilities subject to the purchase option (90% of the fair market value in
the case of the New Hampshire Facilities), excluding capital expenditures made
by the Company or (ii) Meditrust's purchase price for the facilities subject
to the purchase option. The lease with Meditrust for the Company's Swanton
facility grants the Company a right of first refusal to purchase the facility
which the Company may exercise if it exercises its first renewal option under
the lease. Each of the Company's other leases with Meditrust grants the
Company a right of first refusal to purchase the facility subject to the lease
exercisable at any time during the term of the lease. The leases for the
Company's Northwestern Ohio and Defiance facilities provides for a purchase
option to acquire both of the facilities, which the Company may exercise
during the final year of the lease term for an aggregate purchase price of
$8,500,000. In the event the Company does not exercise its purchase option
under the lease, the Company will be required to pay a one-time termination
fee of $500,000 to the lessor. The lease also grants the Company a right of
first refusal during the lease term. See Note D to the Company's audited
combined financial statements included elsewhere in this Prospectus. The
Company's lease for its Brevard facility also contains a purchase option. See
"Certain Transactions."
The Company's leases with Meditrust are secured by the facilities, the
facilities' accounts receivable, cash collateral and a pledge of the ownership
interests in the subsidiary lessees and the general partners of such lessees.
The facilities subject to the Meditrust leases are also cross-collateralized
and contain cross-default provisions, so that a default under one of the
leases would trigger a default under each of the other Meditrust leases. As a
result, the Company could lose all of the facilities subject to such leases in
the event of a default
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<PAGE>
under one such lease. In addition, the leases permit Meditrust to require the
Company to purchase the facilities at a specified purchase price upon the
occurrence of a default. The Meditrust leases also subordinate all
intercompany obligations and distributions of the subsidiary lessees to the
obligations owing to Meditrust pursuant to the leases.
Although many of the Company's leases provide for non-disturbance from
mortgagees of the leased properties, the lease for the Company's Northwood
facility is not so protected and is subject to termination in the event the
mortgage is foreclosed following a default by the owner-lessor. However, the
Company has the right to make mortgage payments on behalf of the owner-lessor
in order to prevent such foreclosure. In the case of the Company's Brevard
facility, the assets of the facility are subject to security interests in
favor of a mortgagee of the property and intercompany payments from the
subsidiary lessee are subordinate to payments under the mortgage. All of the
Company's lease obligations and certain of the Company's debt obligations are
guaranteed by Harborside Healthcare Limited Partnership ("HHLP"), the
Company's principal operating subsidiary. The Company has agreed that it will
also guaranty all of the current leases and loans between its subsidiaries and
Meditrust. In addition, HHLP has also agreed to indemnify Meditrust, as lessor
under the Meditrust leases, and the senior mortgage holder on the Company's
Brevard facility, for certain environmental liabilities.
One of the Company's owned facilities, the Larkin Chase Center, is owned by
Bowie L.P., a joint venture which is owned 75% by the Company and 25% by a
non-affiliated investor. Bowie L.P. subleases the land on which the facility
is located from an affiliate of the minority investor. The Company manages the
facility for a fee equal to 6.0% of the facility's annual total net revenues.
The minority investor has an option to purchase the Company's interest in
Bowie L.P. at fair market value, which option is exercisable during a sixty-
day period each year commencing in 2001. The Company accounts for the Larkin
Chase Center using the equity method and its share of the facility's operating
results is reflected in the Company's audited combined financial statements as
a "loss on investment in limited partnership." See "Selected Combined
Financial and Operating Data" and Note F to the Company's audited combined
financial statements included elsewhere in this Prospectus.
The following table summarizes certain information regarding the Company's
facilities and the facilities included in the Ohio Transaction:
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<PAGE>
SUMMARY OF FACILITIES
<TABLE>
<CAPTION>
YEAR OWNED/ LICENSED AVERAGE
FACILITY LOCATION ACQUIRED LEASED BEDS OCCUPANCY RATE(1)
- ----------- -------- -------- ------ -------- -----------------
<S> <C> <C> <C> <C> <C>
SOUTHEAST REGION
FLORIDA
Brevard Rockledge 1994 Leased(/2/) 100 91.6%
Clearwater Clearwater 1990 Owned(/3/) 120 94.1%
Gulf Coast New Port Richey 1990 Owned(/3/) 120 90.7%
Naples Naples 1989 Leased(/4/) 120 93.3%
Ocala Ocala 1990 Owned(/3/) 120 95.5%
Palm Harbor Palm Harbor 1990 Owned(/3/) 120 90.8%
Pinebrook Venice 1989 Leased(/4/) 120 93.6%
Sarasota Sarasota 1990 Leased(/4/) 120 92.4%
Tampa Bay Oldsmar 1990 Owned(/3/) 120 93.2%
-----
1,060
MIDWEST REGION
OHIO
Defiance Defiance 1993 Leased 100 87.9%
Northwestern Ohio Bryan 1993 Leased 189 80.4%
Swanton Swanton 1995 Leased(/4/) 100 97.2%
Toledo Perrysburg 1990 Owned(/3/) 100 95.7%
Troy Troy 1989 Leased(/4/) 195 95.2%
The Ohio Facilities -- Pending Owned(/5/) 692 93.0%
INDIANA
Decatur Indianapolis 1988 Owned(/6/) 88 90.6%
Indianapolis Indianapolis 1988 Leased(/4/) 103 91.5%
New Haven New Haven 1990 Leased(/4/) 120 92.4%
Terre Haute Terre Haute 1990 Owned(/3/) 120 91.9%
-----
1,807
NEW ENGLAND REGION
NEW HAMPSHIRE
Applewood Winchester 1996 Leased(/4/) 70 91.4%
Crestwood Milford 1996 Leased(/4/) 82 96.6%
Milford Milford 1996 Leased(/4/) 52 96.2%
Northwood Bedford 1996 Leased(/7/) 147 95.9%
Pheasant Wood Peterborough 1996 Leased(/4/) 99 96.7%
Westwood Keene 1996 Leased(/4/) 87 86.7%
-----
537
MID-ATLANTIC REGION
MARYLAND
Larkin Chase Center Bowie 1994 Owned(/8/) 120 81.5%(9)
NEW JERSEY
Woods Edge Bridgewater 1988 Leased(/4/) 176 94.6%
-----
296
-----
TOTAL 3,700
=====
</TABLE>
- ------------
(1) Average occupancy rate is computed by dividing the number of occupied
licensed beds by the total number of available licensed beds during 1995.
(2) Leased from Rockledge T. Limited Partnership ("RTLP"), an affiliate of the
Company. See "Certain Transactions."
(3) Subject to a mortgage in favor of Meditrust which secures a loan in the
aggregate principal amount of $42.3 million. A portion of the proceeds of
the Offering will be used to repay a portion of this loan pursuant to the
Debt Repayment. See "Use of Proceeds." The loan bears interest at a 10.65%
annual rate. Additional interest payments may also be required commencing
on January 1, 1997 in an amount equal to 0.3% of the difference between
the operating revenues of the borrowers after that date and the operating
revenues during a 12 month base period which commenced October 1, 1995.
Following the Debt Repayment the loan may be voluntarily prepaid, subject
to a 1.5% prepayment penalty commencing in 1999. The prepayment penalty
declines to zero in 2002. See Note E to the Company's combined financial
statements included elsewhere in this Prospectus.
(4) Leased from Meditrust.
(5) To be acquired in connection with the pending Ohio Transaction. The
capital lease for each of these facilities does not provide non-
disturbance protection from, and is subject to, prior mortgages. See "--
The Ohio Transaction."
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<PAGE>
(6) This property is subject to a first mortgage loan which the Company
assumed in connection with its purchase of the facility in 1988. The
outstanding principal balance on the loan as of March 31, 1996 is
$1,613,000. The loan bears interest at 14% and requires the annual
retirement of $20,000 of principal each year. The final maturity of the
loan is in 2010 and the loan may be prepaid commencing in 1999 without
penalty. See Note E to the Company's combined financial statements
included elsewhere in this Prospectus.
(7) Leased from Meditrust. The lease for the Northwood facility does not
provide non-disturbance protection from, and is subject to, a prior
mortgage.
(8) Owned by Bowie L.P. The Company's interest in Bowie L.P. is pledged to the
facility's mortgage lender. HHLP has guaranteed the indebtedness of Bowie
L.P. See Note F to the Company's audited combined financial statements
included elsewhere in this Prospectus.
(9) Average occupancy rate for the fourth quarter of 1995. The Larkin Chase
Center was opened in April 1994 and did not reach stabilized occupancy
until the fourth quarter of 1995.
The Company's corporate offices in Boston are subleased from Berkshire. See
"Certain Transactions." The Company also leases regional offices in
Clearwater, Florida and Indianapolis, Indiana, maintains a regional office at
its facility in Bridgewater, New Jersey, and owns a regional office in
Peterborough, New Hampshire. An accounting and data processing office is
leased by the Company in Fort Wayne, Indiana and the Company's ancillary
services companies lease offices in Palm Harbor, Florida and Indianapolis,
Indiana.
The Company considers its properties to be in good operating condition and
suitable for the purposes for which they are being used. See "--The Ohio
Transaction" and "--Selected Expansion Projects" for a description of pending
property acquisitions and expansions.
THE OHIO TRANSACTION
The Company has entered into an agreement to lease the four Ohio Facilities,
with a total of approximately 700 licensed beds, which will be accounted for
as a capital lease for financial statement purposes. The Company expects to
complete the Ohio Transaction in the third quarter of 1996, subject to the
satisfaction of certain customary conditions, including the satisfactory
completion of the Company's due diligence review, and receipt of regulatory
and other approvals. The Company has agreed to lease these facilities for an
initial term ending in the year 2001. During the first six months of the final
year of the initial term, the Company may exercise an option to purchase all
four facilities (the "Ohio Purchase Option") for approximately $57.1 million
(the "Ohio Purchase Price").
If the Company exercises the Ohio Purchase Option but is unable to finance
the Ohio Purchase Price, the lease may be extended (subject to the terms of
the lease) for up to two additional years, during which time the Company must
finance, either directly or through lease financing, and complete the purchase
of the Ohio Facilities. The annual aggregate base rent (which is payable
monthly) will be $5.0 million during the initial term and $5.5 million during
the extension term, if any. The Company will be responsible for expenses such
as taxes, insurance and maintenance and repairs.
The Company has agreed to pay a total of $8 million for the Ohio Purchase
Option (the "Ohio Purchase Option Price"), which will be applied toward the
Ohio Purchase Price upon the closing of the purchase of the Ohio Facilities.
The Company paid $600,000 (the "Initial Deposit") of the Ohio Purchase Option
Price upon execution of the agreement to lease, which will be refunded if the
Company terminates the Ohio Transaction after completing its due diligence
investigation. An additional $600,000 of the Ohio Purchase Option Price
(together with the Initial Deposit, the "Deposit") is payable upon the
satisfactory completion of the Company's due diligence and may be funded with
a portion of the net proceeds of the Offering. The Deposit is non-refundable
except under certain limited circumstances, including an inability to obtain
necessary governmental approvals. An additional $3.8 million of the Ohio
Purchase Option Price will become payable upon the commencement of the lease
term and will be funded with a portion of the net proceeds of the Offering.
See "Use of Proceeds." The remaining $3.0 million of the Ohio Purchase Option
Price will be paid by the Company at the end of the lease term whether or not
the Company exercises the Ohio Purchase Option. If the Company exercises the
Ohio Purchase Option, the balance of the Ohio Purchase Option Price will be
paid upon the closing of the purchase or at the end of the two-year extension
term, if applicable.
The Company will account for the Ohio Transaction as a capital lease for
financial statement purposes. The Company has chosen this treatment because it
believes that the Ohio Purchase Price constitutes a bargain
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<PAGE>
purchase within the meaning of paragraph 7(b) of Statement of Financial
Accounting Standards No. 13, "Accounting for Leases." The Company has a strong
economic incentive to exercise the Ohio Purchase Option at the end of the
lease term, in part because the Company will forfeit the $8 million Ohio
Purchase Option Price if it fails to exercise the Ohio Purchase Option. In
addition, the incremental cost to the Company to purchase the Ohio Facilities
is $49.1 million, net of the Ohio Purchase Option Price. Further, the Company
believes the Ohio Purchase Price constitutes a bargain purchase based on a
review of comparable facility valuations, although there can be no assurance
as to the current or future actual value of the Ohio Facilities. Based upon
current and forecasted operating results, the Company intends to exercise the
Ohio Purchase Option, although there can be no assurance that unanticipated
events or circumstances may cause the Company not to exercise the Ohio
Purchase Option.
In connection with the Ohio Transaction, the Company has agreed to engage an
executive and principal owner of the lessor as a consultant. As compensation
for these services, the consultant will receive up to $120,000 per year during
the term of the lease and the extension term, if any. The consultant will also
receive $500,000 payable at the end of the initial lease term and an
additional $500,000 payable upon termination of the lease.
HHLP will guarantee the performance of the obligations of the leasees and
their affiliates under the Ohio Transaction and the Ohio Purchase Option.
While the guarantee is in effect, payments by HHLP to its affiliates will be
permitted subject to maintaining certain financial covenants. These covenants,
and a requirement that the Company maintain a $5.0 million security deposit,
will be waived upon delivery of an additional guaranty by the Company
following the Offering.
The leases under the Ohio Transaction are subordinate to certain mortgages
insured by the U.S. Department of Housing and Urban Development ("HUD"). The
lessors are responsible for debt service payments made in connection with such
mortgages, but the Company may satisfy any lessor's debt service obligations
should the lessor default in the payment of its debt service obligations under
its respective mortgage. The leases provide for non-disturbance protection
with respect to subsequent mortgages placed on the Ohio Facilities by the
lessors but do not provide for non-disturbance protection against the HUD
insured mortgages. The Ohio Transaction is subject to HUD approval, and no
assurance can be given that such approval will be obtained.
Certain portions of one of the Ohio Facilities are currently leased to third
parties. During the lease term, the Company will assume all of the lessor's
rights under the leases, and the lessor will remain responsible for obtaining
the necessary HUD approval for such leases or terminating the leases if
approval is not obtained.
SELECTED EXPANSION PROJECTS
From time to time, the Company expects to pursue select expansion and new
development opportunities which (i) complement its existing operations, (ii)
enable the Company to broaden the range of services offered at its facilities
or (iii) enhance its ability to compete effectively in a particular market.
The Company is currently in the initial phases of the following expansion
projects:
Ocala Expansion. In March 1996, the Company received a CON to construct an
addition to its existing 120-bed facility in Ocala, Florida. The CON permits
the addition of 60 licensed beds and a rehabilitation therapy area. The CON
also provides for a 21-bed COMPASS unit and a 20-bed distinct Alzheimer's unit
to be located within the addition. The CON permits project costs of up to
approximately $2.8 million. The Company expects to commence construction
within approximately six months.
Larkin Chase Center Expansion. Bowie L.P. has received a CON permitting it
to construct a 60-bed addition to its existing 120-bed facility, the Larkin
Chase Center, located in Bowie, Maryland. The total permitted project cost is
approximately $2.5 million including allowances for inflation. Bowie L.P.
expects to commence construction during 1996.
The Company expects to finance these expansion projects with debt or lease
financings. There can be no assurance that sufficient financing will be
available on favorable terms, that all required licenses and governmental
approvals will be received or that the Company will be able to successfully
complete these
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projects. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
OPERATIONS
Facilities. Each of the Company's facilities is supervised by a licensed
facility administrator who is responsible for all aspects of the facility's
operations. The facility administrator oversees (i) a director of nursing who
supervises a staff of registered nurses, licensed practical nurses and
certified nursing aides, (ii) a director of admissions who is responsible for
developing local marketing strategies and programs and (iii) various other
departmental supervisors. The Company also contracts with one or more licensed
physicians at each facility to serve as medical directors for the purpose of
supervising the medical management of patients. Facilities with subacute or
specialty medical units or programs may also contract with physician
specialists to serve as rehabilitation or specialty program medical directors
in areas such as physiatry (physical medicine), neurology or gero-psychology.
Facilities may also employ or contract for additional clinical staff such as
case managers, respiratory therapists and program directors. Department
supervisors at each of the Company's facilities oversee personnel who provide
dietary, maintenance, laundry, housekeeping, therapy and social services. In
addition, a business office staff at each facility routinely performs
administrative functions, including billing, payroll, accounts payable and
data processing. The Company's corporate and regional staff provide support
services such as quality assurance, management training, clinical consultation
and support, management information systems, risk management, human resource
policies and procedures, operational support, accounting and reimbursement
expertise.
Regions. The Company seeks to cluster its long-term care facilities and
ancillary businesses in selected geographic regions to establish a strong
competitive position as well as to position the Company as a healthcare
provider of choice to managed care and private payors in these markets. The
Company's facilities currently serve four principal geographic regions: the
Southeast (Florida), the Midwest (Ohio and Indiana), New England (New
Hampshire), and the Mid-Atlantic (New Jersey and Maryland). The Company
maintains regional operating offices in Clearwater, Florida; Indianapolis,
Indiana; Bridgewater, New Jersey; and Peterborough, New Hampshire. Geographic
concentration enables the Company to take advantage of economies of scale in
operations support, purchasing, training and other management services. Each
region is supervised by a regional director of operations who directs the
efforts of a team of professional support staff in the areas of clinical
services, marketing, bookkeeping, human resources and engineering. Other
Company staff, who are principally based in the regions, provide support and
assistance to all of the Company's facilities in the areas of subacute
services, managed care contracting, reimbursement services, risk management,
data processing and training. Financial control is maintained through
financial and accounting policies established at the corporate level for use
at each facility. The Company has standardized operating policies and
procedures and continually monitors operating performance to assure
consistency and quality of operations. In addition to its principal executive
office in Boston, an accounting and data processing office is maintained in
Fort Wayne, Indiana. The Company's ancillary services businesses maintain
offices in Palm Harbor, Florida, and Indianapolis, Indiana.
Management and Financial Systems. The Company maintains a comprehensive
system of management and financial controls which is designed to enable the
Company to monitor operating costs closely and to quickly distribute financial
and other operational information to appropriate levels of management. All of
the Company's existing long-term care facilities, other than the recently
acquired New Hampshire Facilities, together with its ancillary service
companies, share common data processing systems for all financial
applications, including the processing of billing, accounts payable, payroll
and general ledger transactions. In addition, each of the Company's long-term
care facilities processes clinical data through facility-based information
systems.
The Company expects that as new facilities are acquired, the Company will
initially integrate their operations on the basis of their existing computer
systems with a view toward ultimately converting all of its facilities to
operate under a common management information system. In this regard, the
Company expects to continue to use existing information systems to operate its
six recently-acquired New Hampshire Facilities as well as those to be leased
pursuant to the Ohio Transaction.
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Continuous Quality Improvement Program. The Company has developed a
continuous quality improvement program which is designed to monitor, evaluate
and improve the delivery of patient care. The program is supervised by the
Company's Vice President of Professional Services and consists of the
standardization of policies and procedures, routine site visits and
assessments and a quality control system for patient care and physical plant
compliance. Pursuant to its quality control system, the Company routinely
collects information from patients, family members, referral sources,
employees and state survey agencies which is then compiled, analyzed and
distributed throughout the Company in order to monitor the quality of care and
services provided.
The Company's continuous quality improvement program is modeled after
guidelines for long-term care and subacute facilities promulgated by the Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO"), a
nationally recognized accreditation agency for hospitals and other healthcare
organizations. The Company has received accreditation "with commendation" by
JCAHO for its Pinebrook and Tampa Bay facilities. JCAHO recently completed an
additional accreditation survey at the Company's Terre Haute facility and the
Company is awaiting formal notification of the results of such survey. Of the
approximately 16,000 licensed long-term care facilities in the United States,
approximately 1,200, or 7.5%, are accredited by JCAHO. Of those surveyed in
1995, approximately 16% were accredited "with commendation." The Company
believes accreditation by JCAHO is considered an important criterion by both
managed care and commercial insurance companies in awarding provider contracts
and is therefore seeking accreditation of its remaining facilities.
MARKETING
The Company's marketing program is designed to attract patients who will
have a favorable impact on the Company's profits and quality mix of revenues.
The Company establishes monthly occupancy and revenue goals for each of its
facilities and maintains marketing objectives to be met by each facility. The
Company's Vice President of Marketing is principally responsible for the
development and implementation of the Company's marketing program. Regional
marketing directors provide routine support to the facility-based admissions
directors through the development of facility-based marketing strategies,
competitive assessments and routine visits.
The Company uses a decentralized marketing approach in order to capitalize
on each facility's strengths and reputation in the community it serves.
Admissions staff at each facility are primarily responsible for marketing
basic medical services and developing semi-annual marketing plans in
consultation with the Company's regional marketing and operations staff. Basic
medical services are marketed to area physicians, hospital discharge planning
personnel, individual patients and their families and community referral
sources. Facility personnel also market the Company's specialty medical
services to these sources. Corporate and regional personnel who specialize in
subacute care, managed care and reimbursement also assist in the marketing of
specialty medical services.
Since June 1994, the Company has maintained a dedicated managed care
marketing group whose primary purpose is to solicit managed care and
commercial insurance contracts. The Company's regional and corporate staff
attend trade shows and events for managed care, commercial insurance companies
and case managers in order to broaden the Company's overall presence and
recognition with these groups. As of March 31, 1996, the Company had 35
contracts with these payors.
INDUSTRY BACKGROUND
The long-term care industry encompasses a broad range of healthcare services
provided to the elderly and to other patients, with medical needs ranging from
custodial to complex, who can be cared for outside of the acute care hospital
environment. The Company believes that the demand for the services it provides
will increase substantially during the foreseeable future primarily because of
demographic trends, advances in medical technology and emphasis on healthcare
cost containment. At the same time, government restrictions and high
construction and start-up costs are expected to limit the supply of long-term
care facilities. Furthermore, the Company believes that recent trends towards
industry consolidation will continue and will provide it with future
acquisition opportunities.
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Growth of Elderly Population. According to the U.S. Bureau of the Census,
the number of people age 65 and over in the U.S. has grown from approximately
25.6 million in 1980, or 11.3% of the population, to approximately 31.1
million in 1990, or 12.5% of the population, and is projected to grow to 40.1
million, or 13.3% of the population, by the year 2010. In addition, people age
85 and older represent one of the fastest growing segments of the elderly
population and are expected to approximately double in number between 1990 and
2010. This population segment comprises the largest number of consumers of
long-term care services as 42% of nursing-home residents are aged 85 or older.
The high growth rate of the elderly is due to general demographic changes as
well as advances in medical technology that have increased life expectancies.
Advances in Medical Technology. Sophisticated new forms of medical equipment
and treatment have lengthened life expectancies, thereby increasing the number
and medical needs of individuals requiring specialized care and supervision.
In addition, technological advances have made long-term care facilities a more
attractive alternative to acute care or rehabilitation hospitals by enabling
them to offer, on a more cost-effective basis, services traditionally provided
by acute care hospitals.
Cost Containment Pressures. In response to rapidly rising healthcare costs,
governmental and private pay sources have adopted cost containment measures
that have encouraged shorter stays in acute care hospitals. The Federal
government has acted to curtail increases in Medicare costs by limiting to
pre-established amounts acute care hospital reimbursement for specific
services. As a result, average hospital stays have been shortened, with many
patients being discharged despite a continuing need for long-term care. For
many of these patients, home healthcare is not a viable alternative because of
the complexity of the medical services, equipment or monitoring they require.
Long-term care facilities, such as those operated by the Company, are able to
provide many of these specialty services at significantly lower costs than
acute care hospitals because of their lower capital costs, overhead and salary
levels. The Company believes that managed care organizations, insurance
companies, hospital discharge personnel and physicians view long-term care
facilities as a cost-effective and appropriate environment for the delivery of
the type of care offered by the Company and are increasingly referring
patients to such facilities.
Industry Consolidation. The long-term care industry is highly fragmented.
There are approximately 16,000 long-term care facilities in the United States
which contain a total of approximately 1.6 million licensed beds. The 32
largest long-term care providers operate approximately 3,000 facilities
comprising approximately 360,000 licensed beds, or 22% of the industry total.
Recently, the long-term care industry has been subject to competitive
pressures and uncertainty with regard to future changes in governmental
regulations, which have resulted in a trend toward consolidation, especially
of smaller, local operators into larger, more established regional or national
providers. The increasing complexity of medical services provided, growing
regulatory and compliance requirements and increasingly complicated and
potentially volatile reimbursement systems have resulted in the consolidation
of operators who lack sophisticated management information systems, operating
efficiencies and financial resources to compete effectively. The Company
believes that this trend toward consolidation will continue and will provide
the Company with opportunities for continued growth. There can be no
assurance, however, that the Company will be successful in acquiring
facilities on favorable terms, if at all, and in incorporating acquired
facilities into its existing operations. See "--Growth Strategy."
Limitations on the Supply of Long-Term Care Facilities. All of the states in
which the Company operates have enacted CON programs or similar legislation,
which act to artificially restrict the supply of long-term care services.
These laws generally limit the construction of long-term care facilities and
the addition of beds or services in existing facilities. High construction
costs and limitations on government reimbursement of costs of construction and
start-up expenses also act to constrain growth in the number of facilities. As
a result, the Company believes that the supply of long-term care facilities
may not be able to keep up with the demand for such facilities. However, the
relaxation of CON programs could increase industry competition. See "--
Governmental Regulation" and "--Competition."
SOURCES OF REVENUES
The Company derives its revenues primarily from private pay sources, the
Federal Medicare program for certain elderly and disabled patients and state
Medicaid programs for indigent patients. The Company's revenues
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are influenced by a number of factors, including (i) the licensed bed capacity
of its facilities, (ii) occupancy rates, (iii) the mix of patients and the
rates of reimbursement among payor categories (private and other, Medicare and
Medicaid) and (iv) the extent to which subacute and other specialty medical
and ancillary services are utilized by the patients and paid for by the
respective payment sources. The Company employs specialists to monitor
reimbursement rules, policies and related developments in order to comply with
all reporting requirements and to assist the Company in receiving
reimbursements.
The following table identifies the Company's net patient service revenues
attributable to each of its payor sources for the periods indicated:
NET PATIENT SERVICE REVENUES(1)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------- ------------- -------------- ------------- -------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Private and other....... $29,967 39.9% $31,899 37.1% $ 33,912 32.3% $ 7,981 34.2% $10,313 31.8%
Medicare................ 15,904 21.2 21,423 24.9 34,730 33.1 7,129 30.6 9,176 28.3
Medicaid................ 29,230 38.9 32,627 38.0 36,274 34.6 8,216 35.2 12,943 39.9
------- ----- ------- ----- -------- ----- ------- ----- ------- -----
Total................. $75,101 100.0% $85,949 100.0% $104,916 100.0% $23,326 100.0% $32,432 100.0%
======= ===== ======= ===== ======== ===== ======= ===== ======= =====
</TABLE>
- --------
(1) Net patient service revenues exclude all management fees and all
rehabilitation therapy service revenues and the net patient service
revenues of the Larkin Chase Center. See "--Properties."
Private and Other. Private and other net patient service revenues include
payments from individuals who pay directly for services without governmental
assistance and payments from commercial insurers, HMOs, PPOs, Blue Cross
organizations, workers' compensation programs, hospice programs and other
similar payment sources. Private and other net patient service revenues as a
percentage of total net revenues have declined over the past three years
primarily due to the large increase in the portion of the Company's revenues
derived from Medicare. The Company's rates for private pay patients are
typically higher than rates for patients eligible for assistance under state
Medicaid programs. The Company's private pay rates vary from facility to
facility and are influenced primarily by the rates charged by other providers
in the local market and by the Company's ability to distinguish its services
from those provided by its competitors. Although private pay rates are
generally established on a facility-specific fee schedule, rates charged for
individual cases may vary widely because, in the case of managed care, they
are either negotiated on a case-by-case basis with the payor or are fixed by
contract. Rates charged to private pay patients are not subject to regulatory
control in any of the states in which the Company operates.
Medicare. All of the Company's facilities, except for two of the New
Hampshire Facilities, are certified Medicare providers. In addition, one of
the Ohio Facilities is not a certified Medicare provider. The Company does not
expect to seek Medicare certification for this Ohio Facility because all of
its current patients are private pay patients. The Company has applied for
Medicare certification of the two New Hampshire Facilities that are not
currently certified. Medicare is a Federally funded and administered health
insurance program primarily designed for individuals who are age 65 or over
and are entitled to receive Social Security benefits. The Medicare program
consists of two parts. The first part, Part A, covers inpatient hospital
services and certain services furnished by other institutional healthcare
providers, such as long-term care facilities. The second part, Part B, covers
the services of doctors, suppliers of medical items and services and various
types of outpatient services. Part B services include physical, speech and
occupational therapy, pharmaceuticals and medical supplies, certain intensive
rehabilitation and psychiatric services and ancillary services of the type
provided by long-term care or acute care facilities. Part A coverage, as
applied to services delivered in a long-term care facility, is limited to
skilled nursing and rehabilitative care related to a recent hospitalization
and is limited to a specified term (generally 100 days per calendar year),
requires beneficiaries to share some of the cost of covered services through
the payment of a deductible and a co-insurance payment and requires
beneficiaries to meet certain qualifying criteria. There are no limits on
duration of coverage for Part B services, but there is a co-insurance
requirement for most services covered by Part B.
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The method used in determining Medicare reimbursement for rehabilitation
therapy services furnished in the Company's facilities depends on the type of
therapy provided. Medicare applies salary equivalency guidelines to determine
the reasonable cost of physical therapy services and respiratory therapy
services provided on a contract basis, which is the cost that would be
incurred if the therapist were employed at the facility, plus an amount
designed to compensate the provider for certain general and administrative
overhead costs. Medicare pays for occupational therapy and speech language
pathology services on a reasonable cost basis, subject to the so-called
"prudent buyer" rule for evaluating the reasonableness of the costs. The
Company's gross margins for its contract physical therapy services are less
under the salary equivalency guidelines than for its services under the
"prudent buyer" rule. The Health Care Financing Administration ("HCFA") has
announced its intention to propose rules applying salary equivalency
guidelines to speech and occupational therapy services provided on a contract
basis. If these proposed rules are implemented, they could reduce the
profitability of these services. See "--Governmental Regulation."
Under the Medicare Part A program, the Company is reimbursed for its direct
costs plus an allocation of indirect costs up to a regional limit. As the
Company expands its subacute care and other specialty medical services, the
costs of care for these patients have exceeded and are expected to continue to
exceed the regional reimbursement routine cost limits. In order to recover
these costs, the Company is required to submit routine cost limit exception
requests to recover the excess costs from Medicare. There can be no assurance
that the Company will be able to recover such excess costs under any pending
or future requests. The failure to recover these excess costs in the future
could materially adversely affect the Company. Under current regulations, new
long-term care facilities are, in certain limited circumstances, able to apply
for a three year exemption from routine cost limits. The Company has applied
for, but has not received, such exemptions for its Indianapolis facility and
the Larkin Chase Center. Unless and until such exemptions are granted, these
facilities can recover excess costs only through routine cost limit exception
requests.
Medicaid. Medicaid includes the various state-administered reimbursement
programs for indigent patients created by Federal law. Medicaid programs vary
from state to state. Although reimbursement rates are determined by the state,
the Federal government retains the right to approve or disapprove individual
state plans. Providers must accept reimbursement from Medicaid as payment in
full for the services rendered, because the provider may not bill the patient
for more than the amount of the Medicaid payment received.
Each of the facilities operated by the Company participates in the Medicaid
program of the state in which it is located. One of the Ohio Facilities, which
is currently occupied solely by private pay patients, does not participate in
the Ohio Medicaid program. Under the Federal Medicaid statute and regulations,
state Medicaid programs must provide reimbursement rates that are reasonable
and adequate to cover the costs that would be incurred by efficiently and
economically operated facilities in providing services in conformity with
state and Federal laws, regulations and quality and safety standards.
Furthermore, payments must be sufficient to enlist enough providers so that
services under the state's Medicaid plan are available to recipients at least
to the extent that those services are available to the general population.
However, there can be no assurance that payments under Medicaid programs will
be sufficient to cover the costs allocable to patients eligible for
reimbursement pursuant to such programs. In several states, including New
Jersey and Indiana, healthcare provider organizations have initiated
litigation challenging the Medicaid reimbursement methodologies employed in
such states, asserting that reimbursement payments are not adequate to
reimburse an efficiently operated facility for the costs of providing Medicaid
covered services. Although there can be no assurance that any of these
proceedings will be determined in favor of the healthcare industry, the
Company would benefit from any increases in reimbursement levels resulting
from successful litigation in these states.
The Medicaid programs in the states in which the Company operates pay a per
diem rate for providing services to Medicaid patients based on the facility's
reasonable allowable costs incurred in providing services, subject to cost
ceilings applicable to both operating and capital costs. The Ohio, Florida,
and Maryland Medicaid programs currently include incentive allowances for
providers whose costs are less than certain ceilings and who meet other
requirements.
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There are generally two types of Medicaid reimbursement rates: retrospective
and prospective, although many states have adopted plans that have both
retrospective and prospective features. A retrospective rate is determined
after completion of a cost report by the service provider and is designed to
reimburse costs after they are incurred. Typically, an interim rate based upon
historical cost factors and inflation is paid by the state during the cost
reporting period and a cost settlement is made following an audit of the filed
cost report. Such adjustments may result in additional payments being made to
the Company or in recoupments from the Company, depending on actual
performance and the limitations within an individual state plan.
The more prevalent type of Medicaid reimbursement rate is the prospective
rate. Under a prospective plan, the state sets its rate of payment for the
period in advance of services rendered. Actual costs incurred by operators
during a period are used by the state to establish the prospective rate for a
subsequent period. The provider must accept the prospective rate as payment in
full for all services rendered. Although there is usually no settlement based
upon actual costs incurred subsequent to the cost report filing, subsequent
audits may provide a basis for the state program to retroactively recoup
monies. Maryland's, Florida's, Indiana's, New Hampshire's and New Jersey's
Medicaid programs are, at present, substantially prospective plans. Ohio's
reimbursement plan is a prospective plan with reimbursement rates adjusted on
a facility-by-facility basis. The Ohio plan recalculates certain costs on a
quarterly basis.
In November 1995, the State of New Hampshire adopted legislation which
eliminated incentive payments and froze reimbursement rates through June 30,
1996. The legislation also called for a redesign of the Medicaid payment
system in New Hampshire, effective July 1, 1996. These rate and payment system
changes have had and may continue to have an adverse effect on reimbursements
paid under New Hampshire's Medicaid program.
To date, adjustments from Medicaid audits have not had a material adverse
effect on the Company. Although there can be no assurance that future
adjustments will not have a material adverse effect on the Company, the
Company believes that it has properly applied the various payment formulas and
that it is not likely that audit adjustments would have a material adverse
effect on the Company.
Ancillary Services to Non-Affiliates. The Company generates revenues from
services to non-affiliates from its rehabilitation therapy and behavioral
healthcare businesses which provide services to patients at long-term care
facilities not operated by the Company. In general, payments for these
services are received directly from the non-affiliated long-term care
facilities, which in turn are reimbursed by Medicare or other payors. The
Company's revenues from non-affiliates, though not directly regulated, are
effectively limited by competitive market factors and regulatory reimbursement
policies imposed on the long-term care facilities that contract for these
therapy services. In addition, the revenues that the Company derives for these
services are subject to adjustment in the event the facility is denied
reimbursement by Medicare or any other applicable payor on the basis that the
services provided by the Company were not medically necessary.
GOVERNMENTAL REGULATION
The Federal government and all states in which the Company operates regulate
various aspects of the Company's business. In addition to the regulation of
rates by governmental payor sources, the development and operation of long-
term care facilities and the provision of long-term care services are subject
to Federal, state and local licensure and certification laws which regulate
with respect to a facility, among other matters, the number of beds, the
services provided, the distribution of pharmaceuticals, equipment, staffing
requirements, patients' rights, operating policies and procedures, fire
prevention measures, environmental matters and compliance with building and
safety codes. There can be no assurance that Federal, state or local
governmental regulations will not change or be subjected to new
interpretations that impose additional restrictions which might adversely
affect the Company's business.
All of the facilities operated by the Company are licensed under applicable
state laws, possess the required CONs from responsible state authorities and
are certified or approved as providers under the Medicaid and Medicare
programs, except that two of the New Hampshire Facilities are not certified
for Medicare (although the
54
<PAGE>
Company has applied for such certification). One of the Ohio Facilities is
also not certified for Medicare or Medicaid. Both the initial and continuing
qualification of a long-term care facility to participate in such programs
depend upon many factors, including accommodations, equipment, services, non-
discrimination policies against indigent patients, patient care, quality of
life, patients' rights, safety, personnel, physical environment and adequacy
of policies, procedures and controls. Licensing, certification and other
applicable standards vary from jurisdiction to jurisdiction and are revised
periodically. State agencies survey or inspect all long-term care facilities
on a regular basis to determine whether such facilities are in compliance with
the requirements for participation in government-sponsored third-party payor
programs. In some cases or upon repeat violations, the reviewing agency has
the authority to take various adverse actions against a facility, including
the imposition of fines, temporary suspension of admission of new patients to
the facility, suspension or decertification from participation in the state
Medicaid or the Medicare program, offset of amounts due against future
billings to the Medicare or Medicaid programs, denial of payments under
Medicaid for new admissions, reduction of payments, restrictions on the
ability to acquire new facilities and, in extreme circumstances, revocation of
a facility's license or closure of a facility. The compliance history of a
prior operator may be used by state or Federal regulators in determining
possible action against a successor operator.
The Company believes that its facilities are in substantial compliance with
all statutes, regulations, standards and requirements applicable to its
business, including applicable Medicaid and Medicare regulatory requirements.
However, in the ordinary course of its business, the Company from time to time
receives notices of deficiencies for failure to comply with various regulatory
requirements. In most cases, the Company and the reviewing agency will agree
upon corrective measures to be taken to bring the facility into compliance.
Although the Company has been subject to fines and in one instance to a 30-day
moratorium on admissions at one of the Company's Florida facilities in January
1995, statements of deficiency and other corrective actions have not had a
material adverse effect on the Company. There can be no assurance that future
agency inspections will not have a material adverse effect on the Company.
Certificates of Need. All states in which the Company operates have adopted
CON or similar laws which generally require that a state agency determine that
a need exists prior to the construction of new facilities, the addition or
reduction of licensed beds or services, the implementation of other changes,
the incurrence of certain capital expenditures, the approval of certain
acquisitions and changes in ownership or, in certain states, the closure of a
facility. State CON approval is generally issued for a specific project or
number of beds, specifies a maximum expenditure, is sometimes subject to an
inflation adjustment, and requires implementation of the proposal within a
specified period of time. Failure to obtain the necessary state approval can
result in the inability of the facility to provide the service, operate the
facility or complete the acquisition, addition or other change and can also
result in adverse reimbursement action or the imposition of sanctions or other
adverse action on the facility's license. Ohio has imposed a moratorium on the
issuance of CONs for the construction of new long-term care facilities and the
addition of beds to existing facilities. The moratorium is scheduled to remain
in effect until June 30, 1997. Recent legislation in New Hampshire has
eliminated the right to "leeway beds" on existing CONs. New Hampshire
previously permitted long-term care facilities to add up to 10 licensed beds
every two years as a matter of right.
Medicare and Medicaid. Effective October 1, 1990, the Omnibus Budget
Reconciliation Act of 1987 ("OBRA") eliminated the different certification
standards for "skilled" and "intermediate care" nursing facilities under the
Medicaid program in favor of a single "nursing facility" standard. This
standard requires, among other things, that the Company have at least one
registered nurse on each day shift and one licensed nurse on each other shift
and also increases training requirements for nurses aides by requiring a
minimum number of training hours and a certification test before a nurses aide
can commence work. In order to obtain Medicare reimbursement, states continue
to be required to certify that nursing facilities provide "skilled care." The
Omnibus Budget Reconciliation Act of 1993 ("OBRA 93") affects Medicare
reimbursement for skilled nursing services in two ways, neither of which have
had a material adverse effect on the Company's revenues. First, the current
limits on the portion of the Medicare reimbursement known as "routine service
costs" (excluding capital-related expenses) were frozen for two consecutive
cost report years beginning October 1, 1993. Second,
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<PAGE>
the return on equity component of Medicare reimbursement was eliminated
beginning October 1, 1993. Although the Company believes that it is in
substantial compliance with the current requirements of OBRA and OBRA 93, it
is unable to predict how future interpretation and enforcement of regulations
promulgated under OBRA and OBRA 93 by the state and Federal governments could
affect the Company in the future.
Effective July 1, 1995, the HCFA promulgated new survey, certification and
enforcement rules governing long-term care facilities participating in the
Medicare and Medicaid programs, which impose significant new burdens on long-
term care facilities and may require state survey agencies to take aggressive
enforcement actions. Among other things, the new HCFA rules governing survey
and certification requirements define or redefine a number of terms used in
the survey and certification process. The rules require states to amend their
state plans (as required by Federal law) to incorporate the provisions of the
new rules. The regulations may require state survey agencies to take
aggressive enforcement actions. The breadth of the new rules and their recent
effective date create uncertainty over the manner in which the rules will be
implemented, the ability of any long-term care facility to comply with them
and the effect of the new rules on the Company.
Under the new rules, unannounced standard surveys of facilities must be
conducted at least once every 15 months with a state-wide average of 12
months. In addition to the standard survey, survey agencies have the authority
to conduct surveys as frequently as necessary to determine whether facilities
comply with participation requirements, to determine whether facilities have
corrected past deficiencies and to monitor care if a change occurs in the
ownership or management of a facility. Furthermore, the state survey agency
must review all complaint allegations and conduct a standard or an abbreviated
survey to investigate such complaints if a review of the complaint shows that
a deficiency in one or more of the Federal requirements may have occurred and
only a survey will determine whether a deficiency or deficiencies exist. If a
facility has been found to furnish substandard care, it is subject to an
extended survey. The extended survey is intended to identify the policies and
procedures that caused a facility to furnish substandard care.
HCFA's new rules substantially revise provisions regarding the enforcement
of compliance requirements for long-term care facilities with deficiencies.
The rules allow either HCFA or state agencies to impose one or more remedies
provided under the rules for any particular deficiency. Facilities must
provide a plan of correction for all deficiencies regardless of whether a
remedy is imposed. At a minimum, the following remedies are available:
termination of provider agreement; temporary management; denial of payment for
new admissions; civil money penalties; closure of the facility in emergencies
or transfer of patients or both; and on-site state monitoring. States may also
adopt optional remedies. The new rules divide remedies into three categories.
Category 1 remedies include directed plans of correction, state monitoring and
directed in-service training. Category 2 remedies include denial of payments
for new admissions, denial of payments for all individuals (imposed only by
HCFA) and civil money penalties of $50 to $3,000 per day. Category 3 remedies
include temporary management, immediate termination or civil money penalties
of $3,050 to $10,000 per day. The rules define situations in which one or more
of the penalties must be imposed.
HCFA has announced its intention to propose rules applying salary
equivalency guidelines to speech and occupational therapy services, while
updating physical and respiratory therapy guidelines. In addition, on April
14, 1995, HCFA issued a memorandum in response to requests by intermediaries
for information on reasonable costs for speech and occupational therapy. The
cost data in the memorandum set forth rates for speech and occupational
therapy services that are lower than the Medicare reimbursement rates
currently received by the Company for such services. Although the memorandum
states that the cost data are to be informative and not serve as a limit on
reimbursement rates for speech and occupational therapy services,
intermediaries and customers of the Company may apply the cost data guidelines
as absolute limits on payments. The cost data figures contained in the
memorandum have been subject to criticism by the industry and the Company is
unable to determine what effect, if any, such criticism will have on future
actions or policy decisions taken by HCFA in connection with Medicare
reimbursement rates for speech and occupational therapy services. The Company
cannot predict when, or if, any changes will be made to the current Medicare
reimbursement methodologies for contract speech and occupational therapy
services, or the extent to which the data in the HCFA memorandum will be used
by intermediaries and customers in determining reimbursement. The imposition
of salary
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<PAGE>
equivalency guidelines on contract speech and occupational therapy services,
or the widespread use by intermediaries of the data in the memorandum, could
adversely affect the Company's revenues derived from ancillary services and
thereby limit the Company's ability to recoup its investment in that part of
its business. Similarly, any future regulations reducing the government
payment rates for subacute or other specialty medical services could
materially adversely affect the Company.
Fee Splitting and Referrals. The Company is also subject to Federal and
state laws that govern financial and other arrangements between healthcare
providers. Federal laws, as well as the laws of certain states, prohibit
direct or indirect payments or fee splitting arrangements between healthcare
providers that are designed to induce or encourage the referral of patients
to, or the recommendation of, a particular provider for medical products and
services. These laws include the Federal "anti-kickback law" which prohibits,
among other things, the offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of Medicare and Medicaid patients. A
wide array of relationships and arrangements, including ownership interests in
a company by persons in a position to refer patients and personal service
agreements have, under certain circumstances, been alleged to violate these
provisions. Certain discount arrangements may also violate these laws. Because
of the broad reach of these laws, the Federal government has published certain
"safe harbors," which set forth the requirements under which certain
relationships will not be considered to violate such laws. One of these safe
harbors protects investment interests in certain large, publicly traded
entities which meet certain requirements regarding the marketing of their
securities and the payment of returns on the investment. A second safe harbor
protects payments for management services which are set in advance at a fair
market rate and which do not vary with the value or volume of services
referred, so long as there is a written contract which meets certain
requirements. A safe harbor for discounts, which focuses primarily on
appropriate disclosure, is also available. A violation of the Federal anti-
kickback law could result in the loss of eligibility to participate in
Medicare or Medicaid, or in criminal penalties. Violation of state anti-
kickback laws could lead to loss of licensure, significant fines and other
penalties.
Various Federal and state laws regulate the relationship between healthcare
providers and physicians, including employment or service contracts and
investment relationships. These laws include the broadly worded fraud and
abuse provisions of the Medicaid and Medicare statutes, which prohibit various
transactions involving Medicaid or Medicare covered patients or services. In
particular, OBRA 93 contains provisions which greatly expand the Federal
prohibition on physician referrals to entities with which they have a
financial relationship. Effective January 1, 1995, OBRA 93 prohibits any
physician with a financial relationship (defined as a direct or indirect
ownership or investment interest or compensation arrangement) with an entity
from making a referral for "designated health services" to that entity and
prohibits that entity from billing for such services. "Designated health
services" do not include skilled nursing services but do include many services
which long-term care facilities provide to their patients, including infusion
therapy and enteral and parenteral nutrition. Various exceptions to the
application of this law exist, including one that protects physician ownership
in publicly traded companies which in the past three years have had average
shareholder equity exceeding $75 million and one which protects the payment of
fair market compensation for the provision of personal services, so long as
various requirements are met. Violations of these provisions may result in
civil or criminal penalties for individuals or entities and/or exclusion from
participation in the Medicaid and Medicare programs. Various state laws
contain analogous provisions, exceptions and penalties. The Company believes
that in the past it has been, and in the future it will be, able to arrange
its business relationships so as to comply with these provisions.
Each of the Company's long-term care facilities has at least one medical
director that is a licensed physician. The medical directors may from time to
time refer their patients to the Company's facilities in their independent
professional judgment. The physician anti-referral restrictions and
prohibitions could, among other things, require the Company to modify its
contractual arrangements with its medical directors or prohibit its medical
directors from referring patients to the Company. From time to time, the
Company has sought guidance as to the interpretation of these laws. However,
there can be no assurance that such laws will ultimately be interpreted in a
manner consistent with the practices of the Company.
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Healthcare Reform. In addition to extensive existing governmental healthcare
regulation, there are numerous legislative and executive initiatives at the
Federal and state levels for comprehensive reforms affecting the payment for
and availability of healthcare services. It is not clear at this time what
proposals, if any, will be adopted or, if adopted, what effect such proposals
would have on the Company's business. Aspects of certain of these proposals,
such as reductions in funding of the Medicare and Medicaid programs, potential
changes in reimbursement regulations for rehabilitation therapy services,
interim measures to contain healthcare costs such as a short-term freeze on
prices charged by healthcare providers or changes in the administration of
Medicaid at the state level, could materially adversely affect the Company.
There can be no assurance that currently proposed or future healthcare
legislation or other changes in the administration or interpretation of
governmental healthcare programs will not have an adverse effect on the
Company.
Environmental and Other. The Company is also subject to a wide variety of
Federal, state and local environmental and occupational health and safety laws
and regulations. Among the types of regulatory requirements faced by
healthcare providers are: air and water quality control requirements, waste
management requirements, specific regulatory requirements applicable to
asbestos, polychlorinated biphenyls and radioactive substances, requirements
for providing notice to employees and members of the public about hazardous
materials and wastes and certain other requirements.
In its role as owner and/or operator of properties or facilities, the
Company may be subject to liability for investigating and remedying any
hazardous substances that have come to be located on the property, including
such substances that may have migrated off of, or emitted, discharged, leaked,
escaped or been transported from, the property. The Company's operations may
involve the handling, use, storage, transportation, disposal and/or discharge
of hazardous, infectious, toxic, radioactive, flammable and other hazardous
materials, wastes, pollutants or contaminants. Such activities may harm
individuals, property or the environment; may interrupt operations and/or
increase their costs; may result in legal liability, damages, injunctions or
fines; may result in investigations, administrative proceedings, penalties or
other governmental agency actions; and may not be covered by insurance. The
cost of any required remediation or removal of hazardous or toxic substances
could be substantial and the liability of an owner or operator for any
property is generally not limited under applicable laws and could exceed the
property's value. Although the Company is not aware of any material liability
under any environmental or occupational health and safety laws, there can be
no assurance that the Company will not encounter such liabilities in the
future, which could have a material adverse effect on the Company.
COMPETITION
The long-term care industry is highly competitive. The Company competes with
other providers of long-term care on the basis of the scope and quality of
services offered, the rate of positive medical outcomes, cost-effectiveness
and the reputation and appearance of its long-term care facilities. The
Company also competes in recruiting qualified healthcare personnel, in
acquiring and developing additional facilities and in obtaining CONs. The
Company's current and potential competitors include national, regional and
local long-term care providers, some of whom have substantially greater
financial and other resources and may be more established in their communities
than the Company. The Company also faces competition from assisted living
facility operators as well as providers of home healthcare. In addition,
certain competitors are operated by not-for-profit organizations and similar
businesses which can finance capital expenditures and acquisitions on a tax-
exempt basis or receive charitable contributions unavailable to the Company.
The Company expects competition for the acquisition and development of long-
term care facilities to increase in the future as the demand for long-term
care increases. Construction of new (or the expansion of existing) long-term
care facilities near the Company's facilities could adversely affect the
Company's business. State regulations generally require a CON before a new
long-term care facility can be constructed or additional licensed beds can be
added to existing facilities. CON legislation is in place in all states in
which the Company operates or expects to operate. The Company believes that
these regulations reduce the possibility of overbuilding and promote higher
utilization of existing facilities. However, a relaxation of CON requirements
could lead to an increase in competition. In addition, as cost containment
measures have reduced occupancy rates
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at acute care hospitals, a number of these hospitals have converted portions
of their facilities into subacute units. Competition from acute care hospitals
could adversely affect the Company. The New Jersey legislature is currently
considering legislation that would permit acute care hospitals to offer
subacute care services under existing CONs issued to those providers. Ohio has
imposed a moratorium on the conversion of acute care hospital beds into long-
term care beds. See "--Governmental Regulation."
EMPLOYEES
As of March 31, 1996, the Company employed approximately 3,420 facility-
based personnel on a full- and part-time basis. The Company's corporate and
regional staff consisted of 76 persons as of such date. In addition, the
Company's ancillary businesses employed approximately 480 persons as of such
date. Approximately 180 employees at two of the Company's facilities are
covered by collective bargaining agreements. Although the Company believes
that it maintains good relationships with its employees and the unions that
represent certain of its employees, it cannot predict the impact of continued
or increased union representation or organizational activities on its future
operations.
The Company believes that the attraction and retention of dedicated, skilled
and experienced nursing and other professional staff has been and will
continue to be a critical factor in the successful growth of the Company. The
Company believes that its wage rates and benefit packages for nursing and
other professional staff are commensurate with market rates and practices.
The Company competes with other healthcare providers in attracting and
retaining qualified or skilled personnel. The long-term care industry has, at
times, experienced shortages of qualified personnel. A shortage of nurses or
other trained personnel or general economic inflationary pressures may require
the Company to enhance its wage and benefits package in order to compete with
other employers. There can be no assurance that the Company's labor costs will
not increase or, if they do, that they can be matched by corresponding
increases in private-payor revenues or governmental reimbursement. Failure by
the Company to attract and retain qualified employees, to control its labor
costs or to match increases in its labor expenses with corresponding increases
in revenues could have a material adverse effect on the Company.
INSURANCE
The Company carries general liability, professional liability, comprehensive
property damage and other insurance coverages that management considers
adequate for the protection of its assets and operations based on the nature
and risks of its business, historical experience and industry standards. There
can be no assurance, however, that the coverage limits of such policies will
be adequate or that insurance will continue to be available to the Company on
commercially reasonable terms in the future. A successful claim against the
Company not covered by, or in excess of, its insurance coverage could have a
material adverse effect on the Company. Claims against the Company, regardless
of their merit or eventual outcome, may also have a material adverse effect on
the Company's business and reputation, may lead to increased insurance
premiums and may require the Company's management to devote time and attention
to matters unrelated to the Company's business. The Company is self-insured
(subject to contributions by covered employees) with respect to most of the
healthcare benefits and workers' compensation benefits available to its
employees. The Company believes that it has adequate resources to cover any
self-insured claims and the Company maintains excess liability coverage to
protect it against unusual claims in these areas. See Note J to the Company's
audited combined financial statements included elsewhere in this Prospectus.
However, there can be no assurance that the Company will continue to have such
resources available to it or that substantial claims will not be made against
the Company.
LEGAL PROCEEDINGS
The Company is a party to claims and legal actions arising in the ordinary
course of business. Management does not believe that unfavorable outcomes in
any such matters, individually or in the aggregate, would have a material
adverse effect on the Company.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers, key employees, Directors and Director nominees of the
Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stephen L. Guillard.............. 46 Chairman, President, Chief Executive
Officer and Director
Damian N. Dell'Anno.............. 36 Executive Vice President of Operations
William H. Stephan............... 39 Senior Vice President and Chief Financial
Officer
Bruce J. Beardsley............... 33 Senior Vice President of Acquisitions
Robert L. Boelter, R.R.T......... 45 Senior Vice President of Subacute and
Specialty Services
Michael E. Gomez, R.P.T.......... 34 Senior Vice President of Rehabilitation
Services
Lisa Vachet-Miller............... 37 Vice President of Marketing
Mary Anne Cherundolo, R.N........ 51 Vice President of Professional Services
Jeffrey J. Leroy................. 43 Vice President of Managed Care and
Commercial Insurance
Laurence Gerber.................. 39 Director
Douglas Krupp.................... 49 Director
David F. Benson.................. 46 Director Nominee
Robert M. Bretholtz.............. 51 Director Nominee
Robert T. Barnum................. 50 Director Nominee
Sally W. Crawford................ 42 Director Nominee
</TABLE>
The Director Nominees will become Directors of the Company upon
effectiveness of the Offering.
The Company's Board of Directors is classified into three classes which
consist of, as nearly as practicable, an equal number of directors. The
members of each class will serve staggered three-year terms. Mr. Guillard is a
Class I director, Mr. Gerber is a Class II director and Mr. Krupp is a Class
III director. Nominees for Director will be divided among the three classes
upon their election or appointment. The terms of Class I, Class II and Class
III directors expire at the annual meeting of stockholders to be held in 1997,
1998 and 1999, respectively. See "Description of Capital Stock--Classification
of Directors."
Stephen L. Guillard has served as President and Chief Executive Officer
since joining the Company in May 1988 and as a Director and Chairman of the
Board since its incorporation. Mr. Guillard previously served as Chairman,
President and Chief Executive Officer of Diversified Health Services ("DHS"),
a long-term care company which Mr. Guillard co-founded in 1982. DHS operated
approximately 7,500 long-term care and assisted living beds in five states.
Mr. Guillard has a total of 24 years of experience in the long-term care
industry and is a licensed Nursing Home Administrator.
Damian N. Dell'Anno has served as Executive Vice President of Operations
since 1994. From 1993 to 1994, he served as the head of the specialty services
group for the Company and was instrumental in developing the Company's
rehabilitation therapy business. From 1989 to 1993, Mr. Dell'Anno was Vice
President of Reimbursement for the Company. From 1988 to 1989, Mr. Dell'Anno
served as Director of Budget, Reimbursement and Cash Management for The
Mediplex Group, Inc. ("Mediplex"), a long-term care company. Mr. Dell'Anno has
a total of 14 years of experience in the long-term care industry.
William H. Stephan has served as Senior Vice President and Chief Financial
Officer since joining the Company in 1994. From 1986 to 1994, Mr. Stephan was
a Manager in the health care practice of Coopers & Lybrand L.L.P. His clients
there included long-term care facilities, continuing care retirement centers,
physician
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practices and acute care hospitals. Mr. Stephan is a Certified Public
Accountant and a member of the Healthcare Financial Management Association.
Bruce J. Beardsley has served as Senior Vice President of Acquisitions since
1994. From 1992 to 1994, he was Vice President of Planning and Development of
the Company with responsibility for the development of specialized services,
planning and engineering. From 1990 to 1992, he was an Assistant Vice
President of the Company responsible for risk management and administrative
services. From 1988 to 1990, Mr. Beardsley served as Special Projects Manager
of the Company. Prior to joining the Company in 1988, Mr. Beardsley was a
commercial and residential real estate appraiser.
Robert L. Boelter, R.R.T. has served as Senior Vice President of Subacute
and Specialty Services since 1995. From 1994 to 1995, he was Vice President of
Subacute and Specialized Services for the Company. From 1992 through 1994, Mr.
Boelter was the Manager and later, Corporate Director, of Subacute Programs
for Arbor Health Care Company ("Arbor"), a publicly-held nursing and subacute
care organization based in Lima, Ohio. While at Arbor, Mr. Boelter assisted
with the development of that company's subacute model and directed the
implementation of all distinct subacute programs. From 1984 to 1992, he was
President of Pedi-Medical, a hospital-affiliated home medical equipment
provider. Mr. Boelter is a licensed respiratory therapist.
Michael E. Gomez, R.P.T. has served as the Company's Senior Vice President
of Rehabilitation Services since 1994. From 1993 to 1994, Mr. Gomez served as
Director of Therapy Services for the Company with responsibility for
overseeing the coordination and direction of physical, occupational and speech
therapy services. From 1991 to 1993, Mr. Gomez was Director of Rehabilitation
Services at Mary Washington Hospital in Fredericksburg, Virginia. From 1988 to
1990, he was Physical Therapy State Manager for Pro-Rehab, a contract therapy
company based in Boone, North Carolina. Mr. Gomez is a licensed physical
therapist.
Lisa Vachet-Miller has served as Vice President of Marketing since 1994.
From 1990 to 1994, Mrs. Vachet-Miller was the Regional Marketing Director for
the Southeast Region of the Company. Before joining the Company, Mrs. Vachet-
Miller was Senior Director of Consumer Relations for Unicare Health Facilities
("Unicare"), a long-term care provider located in Evansville, Indiana and was
Admissions/Marketing Director for Medco Center North, a Unicare facility, also
in Evansville.
Mary Anne Cherundolo, R.N. has served as Vice President of Professional
Services since she joined the Company in 1994. From 1986 to 1993, Mrs.
Cherundolo served as the Director of Quality Management for PersonaCare, a
long-term care company which is now a subsidiary of Theratx, Inc. Mrs.
Cherundolo is a licensed Registered Nurse in the states of Connecticut and
Maryland and holds a gerontological nurse certification from the American
Nursing Association.
Jeffrey J. Leroy has served as Vice President of Managed Care and Commercial
Insurance since 1995. Before his promotion to Vice President, from 1994 to
1995, Mr. Leroy served as a Director of Managed Care and Commercial Insurance
of the Company in a similar capacity. From 1992 to 1994, Mr. Leroy served as
Vice President of Strategic Planning and Marketing for Mediplex in Wellesley,
Massachusetts and from 1989 to 1992, he served as the Regional Marketing
Director for the Hillhaven Corporation, a long-term care provider.
Douglas Krupp, a Director of the Company and Chairman of the Executive
Committee since its incorporation, is Co-founder and Chairman of Berkshire, a
holding company with approximately $3 billion under management for individual
and institutional investors. Separately, Mr. Krupp is Chairman of The Board of
Directors of Berkshire Realty Company, Inc. ("BRI"), a $500 million equity
real estate investment trust that is publicly traded on the New York Stock
Exchange and he serves as Chairman of the Board of Trustees for Krupp
Government Income Trusts I and II. Since 1990, Douglas Krupp has been a
trustee of Bryant College and he serves as a Corporate Overseer for Brigham
and Women's Hospital.
Laurence Gerber, a Director of the Company since its incorporation, is the
President and Chief Executive Officer of Berkshire. Prior to becoming
President and Chief Executive Officer in 1991, Mr. Gerber held various
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positions within Berkshire, where his responsibilities included strategic
planning and corporate finance. Mr. Gerber also serves as Chief Executive
Officer and a Director of BRI and as President and Trustee of Krupp Government
Income Trust and Krupp Government Income Trust II.
David F. Benson, a Director Nominee, has been President of Meditrust since
September 1991 and was Treasurer of Meditrust from June 1987 to May 1992. He
was Treasurer of Mediplex from January 1986 through June 1987. He was
previously associated with Coopers & Lybrand L.L.P., from 1979 to 1985. Mr.
Benson is a trustee of Mid-Atlantic Realty Trust, a publicly-held shopping
center real estate investment trust.
Robert T. Barnum, Director Nominee, has been President, Chief Operating
Officer and a Director of American Savings Bank ("American") since 1992. He
joined American, the largest privately held thrift in the United States, in
1989 as Chief Financial Officer. Mr. Barnum is also a Director of National RE
Holdings Corporation, a publicly held reinsurance holding company.
Robert M. Bretholtz, a Director Nominee, was President and a Director of
Madison Cable Corp., a privately held manufacturing company, from 1976 to
1995. Mr. Bretholtz is the Vice Chairman of the Board of Trustees of Brigham
and Women's Hospital in Boston and a Corporator for Partners Healthcare
System, Inc., the parent organization of the hospital. In addition, he is a
Trustee of the Foundation for Neurological Diseases.
Sally W. Crawford, a Director Nominee, has served since 1985 as Chief
Operating Officer of Healthsource, Inc., a publicly held managed care
organization headquartered in New Hampshire. Ms. Crawford's responsibilities
at Healthsource, Inc. include leading that company's Northern Region
operations and marketing efforts.
DIRECTOR COMPENSATION AND COMMITTEES
The Company established the Stock Option Plan for Non-Employee Directors
which will become effective upon completion of the Offering. See "--Stock
Option Plans." Commencing after the Offering, non-employee and non-affiliated
Directors will receive a $15,000 annual fee plus $1,000 for each meeting of
the Board of Directors or committee of the Board of Directors that they
attend.
The Board of Directors has established, effective upon the completion of the
Offering, an Executive Committee, a Compensation Committee, an Audit Committee
and a Stock Plan Committee. The Compensation Committee, which will be composed
of three directors, will establish salaries, incentives and other forms of
compensation for the Company's Directors and officers and will recommend
policies relating to the Company's benefit plans. The Stock Plan Committee,
which will be composed of three non-employee and non-affiliated Directors,
will administer the Company's 1996 Long-Term Stock Incentive Plan. The Audit
Committee, which will be composed of two non-employee and non-affiliated
Directors, will oversee the engagement of the Company's independent auditors
and, together with the Company's independent auditors, will review the
Company's accounting practices, internal accounting controls and financial
results. The Executive Committee will be composed of Douglas Krupp, Laurence
Gerber and Stephen Guillard. The By-laws of the Company provide the Executive
Committee the authority to meet with members of the Company's senior
management in between meetings of the Board of Directors for the purpose of
advice and consultation only, but the Executive Committee has no power to
exercise any of the powers of the Board of Directors.
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EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
of the Company's Chief Executive Officer and each of the four other most
highly compensated executive officers of the Company (collectively, the "Named
Executive Officers") for the fiscal year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND -------------------- ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION(1)
------------------ ---------- --------- ---------------
<S> <C> <C> <C>
Stephen L. Guillard
Chairman, President and Chief Executive
Officer.................................. $267,800 $80,000 $4,063
Damian N. Dell'Anno
Executive Vice President of Operations... 159,326 32,000 1,573
Bruce J. Beardsley
Senior Vice President of Acquisitions.... 117,192 37,306 3,191
William H. Stephan
Senior Vice President and Chief Financial
Officer.................................. 120,000 24,000 5,954
Robert L. Boelter
Senior Vice President of Subacute and
Specialty Services....................... 102,193 17,500 2,037
</TABLE>
- --------
(1) Includes matching contributions made by the Company under its Supplemental
Executive Retirement Plan and 401(k) Plan.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
Upon completion of the Offering, the Company will enter into employment
agreements with Messrs. Guillard, Dell'Anno, Beardsley and Stephan, each of
which will have an initial term of two years, subject to automatic renewal for
successive one-year periods unless the Company or the employee gives notice of
non-renewal 60 days prior to expiration. The employment agreements provide for
an annual base salary of $310,000 for Mr. Guillard, $180,000 for Mr.
Dell'Anno, $135,000 for Mr. Beardsley and $130,000 for Mr. Stephan. Such
salaries may be increased, but not decreased, at the discretion of the
Compensation Committee. Each employee will be entitled to participate in all
benefits generally made available to senior executives of the Company and to
receive annual bonus compensation in such amounts and upon such conditions as
determined by the Compensation Committee, but not less than 15% of base salary
in a given year. If any of the employment agreements is terminated by the
Company other than for cause, the employee is entitled to receive all accrued
but unpaid salary and bonus amounts plus termination payments equal to the
employee's monthly base salary for each of the greater of (i) the number of
months remaining under the term of the agreement or (ii) 12 months (24 months
in the case of Mr. Guillard). In the event of an employee's termination due to
disability or death, the employee (or his designated beneficiary) will receive
monthly payments equal to the employee's monthly base salary for 12 months,
reduced by payments made under any disability insurance policy or program
maintained by the Company for the employee's benefit. If any of the employment
agreements is not renewed by the Company at the end of its initial or
subsequent term, the employee will be entitled to receive severance payments
equal to the employee's monthly base salary for 12 months (24 months in the
case of Mr. Guillard).
Each employment agreement provides that neither the employee nor any
business enterprise in which he has an interest may (i) until the later of the
termination of the employee's employment with the Company and the expiration
of two years from the commencement of such employment, engage in activities
which compete with the Company's business, (ii) at any time during the
employee's employment and one year following his termination (two years in the
case of Mr. Guillard), manage or operate any long-term care facility managed
or operated by the Company and (iii) for a period of one year following
termination (two years in the case of Mr. Guillard), solicit or employ persons
employed or retained as a consultant by the Company.
Pursuant to prior employment agreements, Messrs. Guillard and Dell'Anno
received limited partner capital (but not income) interests in HHLP as
follows: Mr. Guillard received a 6.0% interest in HHLP; Mr. Dell'Anno
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<PAGE>
received a 2.0% interest in the excess value of HHLP above $7.0 million. As of
December 31, 1995 Mr. Guillard also subscribed for equity interests in certain
of the Predecessors pursuant to the Executive Equity Purchase. The aggregate
subscription price of $438,000, equal to the fair market value of such
interests as of December 31, 1995 was paid by Mr. Guillard in 1996 with the
proceeds of a special bonus equal to such purchase price. To pay taxes due
with respect to the Executive Equity Purchase and this bonus, Mr. Guillard is
entitled to receive a loan from the Company, evidenced by a note maturing
April 15, 2001, and bearing interest at 7.0% per annum. In connection with the
Reorganization, the interests subject to the Executive Equity Purchase and
Messrs. Guillard's and Dell'Anno's interests in HHLP will be exchanged for an
aggregate of 307,723 shares of Common Stock. Under his prior employment
agreement, Mr. Dell'Anno will also receive an additional 18,037 shares of
Common Stock pursuant to the Bonus Payment in connection with the Offering.
Mr. Dell'Anno will also receive a loan from the Company to pay income tax
liabilities that result from the Bonus Payment. The loan will bear interest at
1% over the prime rate and will mature on the earlier of three years or when
restrictions on sales of Common Stock under Rule 144 in respect of the Bonus
Payment terminate. See "The Reorganization" and "Stock Ownership of Directors,
Executive Officers and Principal Holders."
The Company has adopted an Executive Long-Term Incentive Plan (the
"Executive Plan") effective July 1, 1995. Eligible participants, consisting of
the Company's department heads and regional directors, are entitled to receive
a payment upon an initial public offering or sale of the Company above a
baseline valuation of $23,000,000 within two years of the effective date of
the plan. The total size of the pool available will depend upon the valuation
implied by the initial public offering price. Allocations of the available
pool among eligible participants were made by senior management. Assuming an
initial public offering price of $12.50 (the midpoint of the range set forth
on the cover page of this Prospectus), approximately $960,000 in the aggregate
will be paid to eligible participants under the Executive Plan, of which
Messrs. Beardsley and Stephan will receive $187,200 and $148,800,
respectively, upon the completion of the Offering. The Executive Plan will
terminate upon completion of the Offering.
401(k) PLAN
All Company employees with at least one year of service (defined as 1,000
working hours within a consecutive twelve-month period) are eligible to
participate in the Company's retirement savings program (the "401(k) Plan"),
which is designed to be tax deferred in accordance with the provisions of
Section 401(k) of the Internal Revenue Code of 1986 (the "Code"). The 401(k)
Plan provides that each participant may defer up to 15% of his or her total
compensation, subject to statutory limits, and the Company may also make a
discretionary matching contribution to the 401(k) Plan in an amount to be
determined by the Board of Directors at the end of each year. The Company may
also make additional discretionary contributions, in the Board's discretion,
to non-highly compensated participants.
To be eligible for an allocation of Company matching or discretionary
contributions, an employee must be employed by the Company on the last day of
the year. Company matching or additional contributions vest 20% following the
participant's second year of service and an additional 20% annually
thereafter.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective September 15, 1995, the Company established a Supplemental
Executive Retirement Plan ("SERP") to provide benefits for key employees of
the Company. Participants may defer up to 25% of their salary and bonus
compensation (100% for the period from September 16, 1995 to December 21,
1995) by making contributions to the SERP. Amounts deferred by the participant
are credited to his or her account and are always fully vested. The Company
matches 50% of amounts contributed (up to an amount equal to 10% of base
salary) which becomes vested as of January 1 of the second year following the
end of the plan year for which contributions were credited, provided the
employee is still employed with the Company on that date. In addition,
participants will be fully vested in such matching contribution amounts in the
case of death or permanent disability or at the discretion of the Company.
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Participants are eligible to receive benefits distributions upon retirement
or in certain predesignated years. Participants may not receive distributions
prior to a pre-designated year, except in the case of termination, death or
disability or demonstrated financial hardship. Only amounts contributed by the
employee may be distributed because of financial hardship.
Although amounts deferred and Company matching contributions are deposited
in a "rabbi trust," they are subject to risk of loss. If the Company becomes
insolvent, the rights of participants in the SERP would be those of an
unsecured general creditor of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During its fiscal year ended December 31, 1995, the Company had no
compensation committee. Decisions concerning compensation for 1995 were made
by a committee comprised of the Company's senior management. Future
compensation decisions will be made by the Compensation Committee. See "--
Director Compensation and Committees."
STOCK OPTION PLANS
1996 NON-EMPLOYEE DIRECTOR PLAN
The Company has established its 1996 Stock Option Plan for Non-Employee
Directors (the "Director Plan"). A maximum of 105,000 shares of Common Stock
(subject to adjustment for stock splits and similar events) has been reserved
by the Company for issuance pursuant to options under the Director Plan.
Directors of the Company who are not employees or affiliates of the Company
("Outside Directors") are eligible to participate. The Director Plan is
intended to allow the Outside Directors receiving grants to be "disinterested
persons" as defined in Rule 16b-3 of the Securities Exchange Act of 1934
("Rule 16b-3") with respect to other stock plans of the Company and,
accordingly, is intended to be self-governing to the extent required by Rule
16b-3. Any administrative issues that nevertheless arise under the Director
Plan will be resolved by the Board of Directors.
As of the effective date of the Offering, each Outside Director will be
granted an option to purchase 15,000 shares of Common Stock (60,000 in the
aggregate). Thereafter, each person who is elected or appointed as an Outside
Director will be granted an option to purchase 15,000 shares of Common Stock.
Commencing in 1997, each person who is an Outside Director on January 1 of
each year during the term of the Director Plan will receive an option to
purchase 3,500 shares of Common Stock. All options granted under the Plan will
be "nonqualified" stock options subject to the provisions of section 83 of the
Code.
Options issued under the Director Plan become exercisable on the first
anniversary of the date of grant and terminate on the earliest of the
following: (a) ten years from the date of grant; (b) one year from the
termination of the optionee's service as an Outside Director by reason of
death or Disability; (c) the termination of the optionee's service as an
Outside Director for cause (as defined in the Plan); and (d) three months from
the termination of the optionee's service as an Outside Director other than by
reason of death, disability or cause.
The exercise price of each option granted upon the effectiveness of the
Offering will be the initial public offering price per share and the exercise
price of all other options granted under the Director Plan will be the Fair
Market Value (as defined in the Director Plan) of a share of Common Stock on
the date the option is granted. Shares of Common Stock purchased upon the
exercise of an option are to be paid for in cash, check or money order or by
shares of Common Stock owned by the optionee for at least six months prior to
exercise. Subject to certain limitations, the Company's Board of Directors may
amend, suspend or discontinue the Director Plan at any time.
1996 LONG-TERM STOCK INCENTIVE PLAN
The Company has adopted, and the Company's stockholders approved, the
Harborside Healthcare Corporation 1996 Long-Term Stock Incentive Plan (the
"Stock Plan").
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The Stock Plan is administered by the Stock Plan Committee, which is
comprised of Directors who are intended to be "disinterested persons" (within
the meaning of Rule 16b-3) and "outside directors" (within the meaning of
section 162(m) of the Code). Any officer or other key employee or consultant
to the Company or any of its subsidiaries who is not a member of the Stock
Plan Committee may be designated as a participant under the Stock Plan. The
Stock Plan Committee has the sole and complete authority to determine the
participants to whom awards will be granted under the Stock Plan.
The Stock Plan authorizes the grant of awards to participants with respect
to a maximum of 680,000 shares of the Company's Common Stock ("Shares"),
subject to adjustment for stock splits, stock dividends and similar events,
which awards may be made in the form of (i) nonqualified stock options; (ii)
stock options intended to qualify as incentive stock options under section 422
of the Code; (iii) stock appreciation rights; (iv) restricted stock and/or
restricted stock units; (v) performance awards and (vi) other stock based
awards; provided that the maximum number of shares with respect to which stock
options and stock appreciation rights may be granted to any participant in the
Stock Plan in any calendar year shall not exceed 150,000 and the maximum
number of shares which may be paid to a participant in the Stock Plan in
connection with the settlement of any awards designated as a "Performance
Compensation Award" (as defined below) in respect of a single performance
period may not exceed 150,000 or, in the event such Performance Compensation
Award is paid in cash, the equivalent cash value thereof, after the effective
date of the Stock Plan, any Shares covered by an award granted under the Stock
Plan, or to which such an award relates, are forfeited, or if an award has
expired, terminated or been canceled for any reason whatsoever (other than by
reason of exercise or vesting), then the shares covered by such award will
again be, or will become, Shares with respect to which awards may be granted
under the Stock Plan.
Awards may be made under the Stock Plan in assumption of, or in substitution
for, outstanding awards previously granted by the Company or its affiliates or
a company acquired by the Company or with which the Company combines. The
number of shares underlying any such assumed or substitute awards will be
counted against the aggregate number of Shares which are available for grant
under awards made under the Stock Plan.
Awards of options, stock appreciation rights, restricted stock units,
performance awards and other stock based awards granted under the Stock Plan
will be subject to such terms, including exercise price, circumstances of
forfeiture and conditions and timing of exercise (if applicable), as may be
determined by the Stock Plan Committee. Stock options that are intended to
qualify as incentive stock options will be subject to terms and conditions
that comply with such rules as may be prescribed by section 422 of the Code.
Payment in respect of the exercise of an option granted under the Stock Plan
may be made in cash, or its equivalent, or, to the extent permitted by the
Stock Plan Committee, (i) by exchanging Shares owned by the optionee (which
are not the subject of any pledge or other security interest and which have
been owned by such optionee for at least 6 months) or (ii) through delivery of
irrevocable instructions to a broker to deliver promptly to the Company an
amount equal to the aggregate exercise price, or by a combination of the
foregoing, provided that the combined value of all cash and cash equivalents
and the fair market value of such Shares so tendered to the Company as of the
date of such tender is at least equal to the aggregate exercise price of the
option.
Awards in the form of stock options and stock appreciation rights are
intended to qualify as "performance-based compensation" and therefore be
deductible under section 162(m) of the Code provided that the exercise or
grant price, as the case may be, is the fair market value per Share on the
date of the grant. In addition, the Stock Plan Committee may designate awards
other than stock options or stock appreciation rights as a "Performance
Compensation Award." Such awards meeting the criteria described below are also
intended to be deductible under the section 162(m).
Each Performance Compensation Award will be payable only upon achievement
over a specified performance period (ranging from one to three years) of a
pre-established objective performance goal established by the Stock Plan
Committee for such period. The Stock Plan Committee may designate one or more
performance criteria for purposes of establishing a performance goal with
respect to Performance Compensation
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Awards made under the Stock Plan. The performance criteria that will be used
to establish such performance goals will be limited to the following: return
on net assets, return on shareholders' equity, return on assets, return on
capital, shareholder returns, profit margin, earnings per share, net earnings,
operating earnings, price per share and sales or market share.
With regard to a particular performance period, the Stock Plan Committee
will have the discretion, subject to the Stock Plan's terms, to select the
length of the performance period, the type(s) of Performance Compensation
Award(s) to be issued, the performance goals that will be used to measure
performance for the period and the performance formula that will be used to
determine what portion, if any, of the Performance Compensation Award has been
earned for the period. Such discretion shall be exercised by the Stock Plan
Committee in writing no later than 90 days after the commencement of the
performance period and performance for the period will be measured and
certified by the Stock Plan Committee upon the period's close. In determining
entitlement to payment in respect of a Performance Compensation Award, the
Stock Plan Committee may through use of negative discretion reduce or
eliminate such award, provided such discretion is permitted under section
162(m) of the Code.
No award that constitutes a "derivative security," for purposes of section
16 of the Exchange Act, may be assigned, alienated, pledged, attached, sold or
otherwise transferred or encumbered by a Participant otherwise than by will or
by the laws of descent and distribution or pursuant to a qualified domestic
relations order.
The Board may amend, alter, suspend, discontinue, or terminate the Stock
Plan or any portion thereof at any time; provided that no such amendment,
alteration, suspension, discontinuation or termination shall be made without
stockholder approval if such approval is necessary to comply with any tax or
regulatory requirement, including for these purposes any approval requirement
which is a prerequisite for exemptive relief from section 16(b) of the
Exchange Act.
Upon effectiveness of the Offering, the Company will grant options to
purchase 360,000 shares of Common Stock at the initial public offering price
to members of senior management and other employees. Of this total, Messrs.
Guillard and Dell'Anno will receive options to purchase 80,000 and 48,000
shares of Common Stock, respectively, at the initial public offering price.
Options to purchase interests in one of the Company's predecessors were
granted to Messrs. Beardsley and Stephan in February 1996. The exercise price
of these options reflected the fair market value of the predecessor at the
time of grant. Upon completion of the Offering, Messrs. Beardsley and Stephan
will both receive options to purchase 40,000 shares of Common Stock at $8.15
per share in pro rata substitution for these previously issued options. One-
third of each option described above will become exercisable on the first,
second and third anniversary of the date of grant.
DIRECTORS RETAINER FEE PLAN
The Company has adopted, and its shareholders have approved, the Harborside
Healthcare Corporation Directors Retainer Fee Plan (the "Retainer Fee Plan").
The aggregate number of shares authorized for issuance under the Retainer Fee
Plan is 15,000. Under the Retainer Fee Plan, a director who is not an employee
of the Company or an affiliate (an "Eligible Director") may elect to receive
payment of all or any portion of his annual cash retainer and meeting fees
(including fees for committee meetings) either currently, in cash or shares of
Common Stock, or may elect to defer receipt of such payment in stock.
Following the consummation of the Offering, it is expected that four directors
will be eligible to participate in the Retainer Fee Plan. Any deferral must be
made pursuant to an irrevocable election made prior to the year of service
with respect to which such fees relate and at least six months in advance of
the deferral. Any election by an Eligible Director to receive all or a portion
of such Eligible Director's retainer or meeting fees in shares of Common Stock
must be made at least six months prior to the date when such fees are to be
paid.
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Deferrals are invested, at the election of the Eligible Director, in a Stock
Unit Account (as defined in the Retainer Fee Plan). As elected by the Eligible
Director, distributions are made on the first day of the month following (i)
death, (ii) disability, (iii) termination of service or retirement, (iv) a
fixed date in the future or (v) the earliest to occur of the foregoing.
Distributions made from an Eligible Director's Stock Unit Account will be paid
in a single payment in the form of shares of Common Stock (and cash
representing any fractional share).
The Retainer Fee Plan is administered by a committee of employee directors
selected by the Board of Directors. No rights granted under the Retainer Fee
Plan are transferable other than pursuant to the laws of descent or
distribution. The Retainer Fee Plan may be amended or terminated by the Board
of Directors, provided that no amendment or termination may adversely affect
any rights accrued prior to the date of amendment or termination and provided
that any amendment for which shareholder approval is required by law or in
order to maintain continued qualification of the Plan under Rule 16b-3
promulgated under the Exchange Act shall not be effective until such approval
has been obtained.
CERTAIN TRANSACTIONS
Berkshire, one of the Contributors, is beneficially owned by, among others,
Douglas Krupp, a Director of the Company, his brother George Krupp and
Laurence Gerber, a Director of the Company. Berkshire has historically had and
expects to maintain certain relationships with the Company. All future
transactions with George or Douglas Krupp or their affiliates, including
Berkshire, will be approved by disinterested directors.
Effective October 1, 1994, the Company entered into an agreement to lease
its Brevard facility from RTLP, which is beneficially owned by Douglas Krupp,
George Krupp. The Brevard lease agreement is for a period of ten years, plus
up to two five-year renewals. Rent was $551,250 for the initial twelve-month
period and increases by 2.0% each year thereafter. At the end of the initial
lease term, the Company has the option to exercise two consecutive five-year
lease renewals. The Company also has the right after the fifth anniversary of
the commencement of the lease to purchase the facility at its fair market
value. RTLP is required to make capital expenditures totaling $500,000 during
the first three years of the lease. As of March 31, 1996, approximately
$338,000 of such capital expenditures have been made. See "Business--
Properties."
The Company's Boston headquarters occupy office space leased from Berkshire.
The Company has historically been allocated certain expenses for office space
and various services provided by Berkshire, including legal, tax, data
processing and other administrative services. The allocations of expenses for
the years ended December 31, 1993, 1994 and 1995 were $746,000, $759,000 and
$700,000, respectively. As of March 31, 1996, no amounts were owed to
Berkshire for these services. Berkshire also provided investor relations
services to KYP, for which the Company paid a total of $118,000 in 1995. The
Company and Berkshire will enter into an administrative services agreement,
which will become effective upon consummation of the Offering, pursuant to
which Berkshire will continue to provide the same services and office space to
the Company as described above, as well as certain investor relation services.
The administrative services agreement will have an initial term that ends on
December 31, 1996, and will be automatically renewable annually thereafter.
The Company or Berkshire may terminate the agreement upon 120 days' prior
written notice. Management believes that the terms of the administrative
services agreement will be as favorable to the Company as could be obtained
from independent third parties.
The administrative services agreement provides that the Company will
indemnify Berkshire, including its officers and partners, to the fullest
extent permitted by Delaware law, as if Berkshire were an agent of the Company
in connection with the performance of its services under the agreement.
Berkshire has agreed to indemnify the Company for losses arising from
Berkshire's deliberate dishonesty or gross negligence or willful misconduct.
The Company has entered into the Reorganization Agreement with the
Contributors, pursuant to which the Contributors will receive 4,400,000 shares
of Common Stock in exchange for their ownership interests in the Company's
predecessors. The Reorganization will be completed immediately prior to
completion of the Offering. See "The Reorganization."
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In connection with the acquisition of the Company's Decatur facility, a
subsidiary of the Company assumed a first mortgage note from the facility's
prior owner. Douglas Krupp personally guaranteed the note which at the time
had a remaining balance of $1,775,000. As of March 31, 1996, the remaining
principal balance on the note is $1,613,000. The Company has agreed to
indemnify Mr. Krupp for liability under such guaranty.
On December 28, 1995, an affiliate of Berkshire advanced $2,000,000 to the
Company at an interest rate of 9.0% per annum. The Company used these funds to
make a purchase deposit on five long-term care facilities which the Company
has since determined not to acquire. The advance and all accrued interest has
since been repaid.
In 1994, Bowie L.P. entered into an agreement with Krupp Construction
Corporation ("Krupp Construction"), an affiliate of Douglas Krupp and George
Krupp, to manage the construction of the Company's Larkin Chase Center. Krupp
Construction received a total of $278,000 in management fees and
reimbursements for certain costs incurred in connection with the agreement.
Effective December 31, 1995, Mr. Gerber purchased equity interests in
certain Predecessors pursuant to the Director Equity Purchase. Mr. Gerber
purchased these equity interests for an aggregate price of $365,000, the fair
market value of such interests on such date. In connection with the
Reorganization, Mr. Gerber will exchange the interests for an aggregate of
69,892 shares of Common Stock.
The Company has historically entered into a number of financings and lease
arrangements with Meditrust. David F. Benson, the President of Meditrust, is a
Director Nominee. Fourteen of the Company's facilities are leased from
Meditrust. See "Business--Properties." The Seven Facilities were sold to
Meditrust by KYP on December 31, 1995 for $47,000,000 and were subsequently
leased to the Company. Total minimum rent payments under the Company's leases
with Meditrust are expected to be approximately $7.6 million for 1996 and were
$0.5 million in 1995. Seven of the Company's owned facilities are subject to
mortgages in favor of Meditrust. See "Business--Properties" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." The Company will use a portion of the
proceeds of the Offering to repay an aggregate of $25 million principal amount
of these mortgages. Meditrust will also receive a prepayment penalty of $1.7
million. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
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STOCK OWNERSHIP OF DIRECTORS,
EXECUTIVE OFFICERS AND PRINCIPAL HOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of certain voting securities of the Company by all
persons known by the Company to own beneficially more than 5% of the Common
Stock, each of the Company's Directors, the Named Executive Officers and by
all Directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER OFFERING
------------------------- -------------------------
NUMBER OF PERCENTAGE NUMBER PERCENTAGE
NAME AND ADDRESS(1) SHARES OF CLASS OF SHARES OF CLASS
- ------------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Douglas Krupp(2)......... 3,382,305 76.9% 3,382,305 42.3%
George Krupp(2).......... 3,382,305 76.9% 3,382,305 42.3%
Laurence Gerber(3)....... 2,830,156 64.3% 2,830,156 35.4%
The Berkshire Companies
L.P..................... 2,696,903 61.3% 2,696,903 33.7%
The Douglas Krupp 1994
Family Trust(4)......... 622,042 14.1% 622,042 7.8%
The George Krupp 1994
Family Trust(4)......... 622,042 14.1% 622,042 7.8%
Stephen L. Guillard(5)... 260,160 5.9% 260,160 3.3%
Damian N. Dell'Anno(6)... 65,600 1.5% 65,600 *
Bruce J. Beardsley....... -- * -- *
William H. Stephan....... -- * -- *
Robert L. Boelter........ -- * -- *
All Directors and
Executive Officers as a
group (7 persons)....... 3,777,958 85.9% 3,777,958 47.2%
</TABLE>
- --------
* Less than one percent.
(1) The address of each person named, unless otherwise noted, is c/o
Harborside Healthcare Corporation, 470 Atlantic Avenue, Boston,
Massachusetts 02210.
(2) Includes 2,696,903 shares of Common Stock received by Berkshire and 63,360
shares of Common Stock received by Krupp Enterprises, L.P.
("Enterprises"), in each case in connection with the Reorganization. The
general partners of Berkshire are KGP-1, Inc. ("KGP-1") and KGP-2, Inc.
("KGP-2") and the general partner of Enterprises is KGP-1. KGP-1 and KGP-2
are both 50% owned by each of George Krupp and Douglas Krupp. By virtue of
their interests in the general partners of Berkshire and Enterprises,
George Krupp and Douglas Krupp may each be deemed to beneficially own the
2,760,263 shares of Common Stock held by Berkshire and Enterprises. In
addition, George Krupp and Douglas Krupp may each be deemed to
beneficially own the 622,042 shares of Common Stock held by their
respective family trusts. See Note 4, below.
(3) Includes 69,893 shares of Common Stock received in connection with the
Reorganization. Also includes an aggregate of the 2,760,263 shares of
Common Stock held by Berkshire and Enterprises, which Mr. Gerber may be
deemed to beneficially own because of his position as President of KGP-1
and KGP-2.
(4) Includes 622,042 shares of Common Stock received in connection with the
Reorganization by each of The George Krupp 1994 Family Trust ("GKFT") and
The Douglas Krupp 1994 Family Trust ("DKFT"). Each of George Krupp and
Douglas Krupp may be deemed to beneficially own the 622,042 shares of
Common Stock held by GKFT and DKFT, respectively. The trustees of both
GKFT and DKFT are Lawrence I. Silverstein, Paul Krupp and M. Gordon
Ehrlich (the "Trustees"). The Trustees share control over the power to
dispose of the assets of GKFT and DKFT and thus each may be deemed to
beneficially own the 622,042 shares of Common Stock held by GKFT and DKFT;
however, each of the Trustees disclaims beneficial ownership of all of
such shares which are or may be deemed to be beneficially owned by George
Krupp or Douglas Krupp.
(5) Includes 260,160 shares of Common Stock received in connection with the
Reorganization.
(6) Includes 65,600 shares of Common Stock received in connection with the
Reorganization, of which 18,037 shares of Common Stock received consist of
the Bonus Payment.
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DESCRIPTION OF CAPITAL STOCK
The following summary information is qualified in its entirety by the
provisions of the Company's Certificate of Incorporation and By-laws, copies
of which have been filed as exhibits to the Registration Statement of which
this Prospectus is a part. See "Additional Information."
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, par value $.01 per share, and 1,000,000 shares of preferred
stock, par value $.01 per share ("Preferred Stock"), of which 4,400,000 shares
of Common Stock are outstanding upon completion of the Reorganization but
prior to completion of the Offering. Upon completion of the Offering,
8,000,000 shares of Common Stock will be outstanding (8,540,000 shares if the
Underwriters' over-allotment is exercised in full) and no shares of preferred
stock will be issued or outstanding.
Prior to the Offering, there has been no public market for the Common Stock.
See "Underwriting."
COMMON STOCK
Voting Rights. The Company's Certificate of Incorporation provides that
holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders. The stockholders are not entitled to vote
cumulatively for the election of directors.
Dividends. Each share of Common Stock is entitled to receive dividends if,
as and when declared by the Board of Directors. Under Delaware law, a
corporation may declare and pay dividends out of surplus, or if there is no
surplus, out of net profits for the fiscal year in which the dividend is
declared and/or the preceding year. No dividends may be declared, however, if
the capital of the corporation has been diminished by depreciation in the
value of its property, losses or otherwise to an amount less than the
aggregate amount of capital represented by any issued and outstanding stock
having a preference on the distribution of assets. See "Dividend Policy."
Other Rights. Stockholders of the Company have no preemptive or other rights
to subscribe for additional shares. Subject to any rights of the holders of
any preferred stock that may be issued subsequent to the Offering, all holders
of Common Stock are entitled to share equally on a share-for-share basis in
any assets available for distribution to stockholders on liquidation,
dissolution or winding up of the Company. No shares of Common Stock are
subject to redemption or a sinking fund. All outstanding shares of Common
Stock are, and the Common Stock to be outstanding upon completion of the
Offering will be, fully paid and nonassessable.
Transfer Agent and Registrar. The Transfer Agent and Registrar for the
Common Stock is American Stock Transfer and Trust Company.
PREFERRED STOCK
The Company's Board of Directors is authorized to issue, without further
authorization from stockholders, up to 1,000,000 shares of Preferred Stock in
one or more series and to determine, at the time of creating each series, the
distinctive designation of, and the number of shares in, the series, its
dividend rate, the number of votes, if any, for each share of such series, the
price and terms on which such shares may be redeemed, the terms of any
applicable sinking fund, the amount payable upon liquidation, dissolution or
winding up, the conversion rights, if any, and such other rights, preferences
and priorities of such series as the Board of Directors may be permitted to
fix under the laws of the State of Delaware as in effect at the time such
series is created. The issuance of Preferred Stock could adversely affect the
voting power of the holders of Common Stock and could have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no present plan to issue any shares of Preferred Stock.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS
Certain provisions of the Certificate of Incorporation and By-laws of the
Company summarized below may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider in its best interest, including an attempt that might result in
the receipt of a premium over the market price for the shares held by
stockholders.
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The Company's Certificate of Incorporation or By-laws provide (i) that no
director may be removed from office during his term except for cause, (ii)
that vacancies on the Board of Directors may be filled only by the remaining
directors and not by the stockholders, (iii) that any action required or
permitted to be taken by the stockholders of the Company may be effected only
at an annual or special meeting of stockholders and stockholder action by
written consent in lieu of a meeting is prohibited, (iv) that special meetings
of stockholders may be called only by a majority of the Board of Directors, or
by the Chairman of the Board of Directors or the President of the Company, (v)
that stockholders are not permitted to call a special meeting or require that
the Board of Directors call a special meeting of stockholders and (vi) for an
advance notice procedure for the nomination, other than by or at the direction
of the Board of Directors, of candidates for election as directors as well as
for other stockholder proposals to be considered at annual meetings of
stockholders. In general, notice of intent to nominate a director or raise
business at such meetings must be received by the Company not less than 60 or
more than 90 days prior to the anniversary of the previous year's annual
meeting and must contain certain information concerning the person to be
nominated or the matters to be brought before the meeting and concerning the
stockholder submitting the proposal.
CLASSIFICATION OF DIRECTORS
The Company's Board of Directors is classified into three classes. It is
anticipated that each class will, as nearly as practicable, contain an equal
number of Directors. The members of each class will serve staggered three-year
terms. At each annual meeting of stockholders, Directors will be elected for a
full three-year term to succeed those Directors whose terms are expiring. The
Company's classified Board of Directors could have the effect of increasing
the length of time necessary to change the composition of a majority of the
Board of Directors. In general, at least two annual meetings of stockholders
will be necessary for stockholders to effect a change in a majority of the
members of the Board of Directors.
LIMITATION ON DIRECTORS' LIABILITY
The Company has included in its Certificate of Incorporation provisions to
eliminate the rights of the Company and its stockholders (through
stockholders' derivative suits on behalf of the Company) to recover monetary
damages from a director resulting from breaches of fiduciary duty (including
breaches resulting from grossly negligent behavior). This provision does not
eliminate liability for breaches of the duty of loyalty, acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law, violations under Section 174 of the Delaware General Corporation Law
("Delaware Law") concerning the unlawful payment of dividends or stock
redemptions or repurchases or for any transaction from which the director
derived an improper personal benefit. However, these provisions will not limit
the liability of the Company's Directors under Federal securities laws. The
Company believes that these provisions are necessary to attract and retain
qualified persons as directors and officers.
SECTION 203 OF THE DELAWARE LAW
Section 203 of the Delaware Law prohibits publicly held Delaware
corporations from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date of the transaction
in which the person or entity became an interested stockholder, unless (i)
prior to such date, either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder is approved by
the Board of Directors of the corporation, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the outstanding
voting stock of the corporation (excluding for this purpose certain shares
owned by persons who are directors and also officers of the corporation and by
certain employee benefit plans) or (iii) on or after such date the business
combination is approved by the Board of Directors of the corporation and by
the affirmative vote (and not by written consent) of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder. For
the purposes of Section 203, a "business combination" is broadly defined to
include mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or within the immediately
preceding three years did own) 15% or more of the corporation's voting stock.
72
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 8,000,000
shares of Common Stock (8,540,000 shares if the Underwriters' overallotment
option is exercised in full). An additional 500,000 shares of Common Stock
will be issuable upon the exercise in full of all outstanding options to
purchase Common Stock. Of the maximum 8,540,000 shares of Common Stock
outstanding, 4,140,000 shares will have been sold pursuant to the Offering and
all of such shares will be freely tradeable without restriction or further
registration under the Securities Act, except for any shares purchased or
acquired by an "affiliate" of the Company (as that term is defined under the
rules and regulations of the Securities Act). The remaining outstanding shares
of Common Stock were issued to the Contributors in connection with the
Reorganization and are "restricted securities" that may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including the exemptions contained under Rule 144.
In connection with the Reorganization, the Company has agreed to grant a
demand registration right, subject to certain limitations and at the Company's
expense, to financial institutions to whom the Contributors may pledge the
Common Stock received by them in the Reorganization. See "The Reorganization."
The Company has agreed that it will not, directly or indirectly, without the
prior written consent of NatWest Securities Limited, offer to sell, sell,
contract to sell, grant any option to purchase or otherwise dispose (or
announce any offer to sell, sale, contract to sell, grant of any option to
purchase or other disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock
for a period of 180 days after the date of this Prospectus, except for
specific grants of options to purchase shares of Common Stock described in
this Prospectus and for the issuance of shares in connection with the
Reorganization. The Contributors have agreed that they will not, directly or
indirectly, without the prior written consent of NatWest Securities Limited,
offer to sell, sell, contract to sell, grant any option to purchase or
otherwise dispose (or announce any offer to sell, sale, contract to sell,
grant of any option to purchase or other disposition) of any shares of Common
Stock or any securities convertible into, or exchangeable or exercisable for,
shares of Common Stock for a period of 180 days after the date of this
Prospectus.
An aggregate of 800,000 shares of Common Stock have been reserved for
issuance to employees, officers and Directors upon exercise of options, of
which options for 500,000 shares of Common Stock will be granted upon the
effectiveness of the Offering. The Company anticipates filing a registration
statement on Form S-8 under the Securities Act to register all of the shares
of Common Stock currently issuable or reserved for future issuance under the
Stock Plan, the Director Plan and the Retainer Fee Plan. Shares purchased upon
exercise of options granted pursuant to the Stock Plan, the Director Plan and
the Retainer Fee Plan generally will be available for resale in the public
market (in the case of the Stock Plan, to the extent the stock transfer
restriction agreements with NatWest Securities Limited have expired), except
that any such shares issued to affiliates are subject to the volume
limitations and certain other restrictions of Rule 144. See "Management--Stock
Option Plans" and "Management--Directors Retainer Fee Plan."
In general, under Rule 144 as currently in effect, beginning 90 days after
the Offering, a person (or persons whose shares are aggregated) who has
beneficially owned "restricted" shares for at least two years, including a
person who may be deemed to be an affiliate of the Company, is entitled to
sell within any three-month period a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of Common Stock of the
Company (80,000 shares after giving effect to the Offering) or (ii) the
average weekly trading volume of Common Stock during the four calendar weeks
preceding the date on which a notice of sale is filed with the Commission. A
person (or persons whose shares are aggregated) who is not at any time during
the 90 days preceding a sale an "affiliate" is entitled to sell such shares
under Rule 144, commencing three years after the date such shares were
acquired from the Company or an affiliate of the Company, without regard to
the volume limitations described above. As defined in Rule 144, an "affiliate"
of an issuer is a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with, such issuer. Sales under Rule 144 are subject to certain other
restrictions relating to the manner of sale, notice and the availability of
current public information about the Company. The Company is unable to
estimate the
73
<PAGE>
number of shares that may be resold from time to time under Rule 144, because
such number will depend on the market price and trading volume for the Common
Stock, the personal circumstances of the sellers and other factors.
Prior to the Offering, there has been no public market for Common Stock and
no prediction can be made as to the effect, if any, that the sale or
availability for sale of additional shares of Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of significant amounts
of such shares in the public market or the availability of large amounts of
shares for sale could adversely affect the market price of Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.
74
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement, the Company has agreed to sell to each of the Underwriters named
below (the "Underwriters"), for whom NatWest Securities Limited and Dean
Witter Reynolds Inc. are acting as representatives (the "Representatives"),
and each such Underwriter has severally agreed to purchase from the Company,
the number of shares of Common Stock set forth opposite its name:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
NatWest Securities Limited...........................................
Dean Witter Reynolds Inc. ...........................................
---------
Total.............................................................. 3,600,000
=========
</TABLE>
The Company is obligated to sell, and the Underwriters are severally
obligated to purchase, all of the shares of Common Stock offered hereby if any
such shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public initially at the
public Offering price set forth on the cover page of this Prospectus and to
certain securities dealers at such price, less a concession not in excess of
$ per share of Common Stock. The Underwriters may allow, and such selected
dealers may reallow, a concession not in excess of $ per share of Common
Stock to certain other brokers and dealers. The public Offering price,
concession and discount to dealers may be changed by the Underwriters after
the shares of Common Stock are released for sale to the public. The
Representatives have informed the Company that the Underwriters do not intend
to confirm sales to any accounts over which they exercise discretionary
authority.
The Company has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to 540,000 additional
shares of Common Stock at the initial public offering price, less the
underwriting discount set forth on the cover page of this Prospectus. If the
Underwriters exercise their option to purchase any of the additional shares of
Common Stock, each of the Underwriters will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by each of them as
shown in the above table bears to the Underwriters' initial commitment. The
Underwriters may exercise the option only to cover over-allotments in the sale
of the shares of Common Stock offered hereby.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments which the Underwriters may be required to make in respect thereof.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price of the Common Stock will be determined by
negotiations between the Company and the Representatives. The factors
considered in determining the initial public offering price will include an
assessment of the history and the prospects for the industry in which the
Company operates, the ability of the Company's management, the past and
present operations of the Company, the historical results of operations of the
Company, the Company's earnings prospects, the general conditions of the
securities markets at the time of the Offering and the prices of similar
securities of comparable companies. There can be no assurance, however, that
the price at which the Common Stock will sell in the public market after this
Offering will not be lower than the price at which it is sold by the
Underwriters.
75
<PAGE>
The Company has agreed that it will not, directly or indirectly, without the
prior written consent of NatWest Securities Limited, offer to sell, sell,
contract to sell, grant any option to purchase or otherwise dispose (or
announce any offer to sell, sale, contract to sell, grant of any option to
purchase or other disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock
for a period of 180 days after the date of this Prospectus, except for
specific grants of options to purchase shares of Common Stock described in
this Prospectus and for the issuance of shares in connection with the
Reorganization. The Contributors have agreed that they will not, directly or
indirectly, without the prior written consent of NatWest Securities Limited,
sell, offer to sell, contract to sell, grant any option to purchase or
otherwise dispose of any shares of Common Stock or any securities convertible
into, or exchangeable or exercisable for, shares of Common Stock for a period
of 180 days after the date of this Prospectus.
NatWest Securities Limited, a United Kingdom broker-dealer and a member of
the Securities and Futures Authority Limited, has agreed that, as part of the
distribution of the Common Stock offered hereby and subject to certain
exceptions, it will not offer or sell any Common Stock within the United
States, its territories or possessions or to persons who are citizens thereof
or residents therein. The Underwriting Agreement does not limit the sale of
the Common Stock offered hereby outside of the United States.
NatWest Securities Limited has represented and agreed that (i) it has not
offered or sold and will not offer to sell any shares of Common Stock to
persons in the United Kingdom, except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purpose of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995 or the Financial Services Act 1986 (the "Act"),
(ii) it has complied and will comply with all applicable provisions of the Act
with respect to anything done by it in relation to the shares of Common Stock
in, from or otherwise involving the United Kingdom and (iii) it has only
issued or passed on, and will only issue or pass on, in the United Kingdom,
any document which consists of or any part of listing particulars,
supplementary listing particulars, or any other document required or permitted
to be published by listing rules under Part IV of the Act, to a person who is
of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1995 or is a person to whom the
document may otherwise lawfully be issued or passed on.
An affiliate of NatWest Securities Limited has in the past provided
investment banking services to an affiliate of the Company.
At the request of the Company, up to 180,000 shares of Common Stock offered
hereby have been reserved for sale to certain individuals, including directors
and employees of the Company and members of their families. The price of such
shares to such persons will be the initial public offering price set forth on
the cover of this Prospectus. The number of shares available to the general
public will be reduced to the extent those persons purchase reserved shares.
Any shares not so purchased will be offered hereby at the public Offering
price set forth on the cover of this Prospectus.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York.
Certain legal matters will be passed upon for the Underwriters by Stroock &
Stroock & Lavan, New York, New York.
EXPERTS
The combined balance sheets as of December 31, 1994 and 1995 and the
combined statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995, of
the Company included in this Prospectus and elsewhere in the Registration
Statement of which this Prospectus is a part, have been audited by Coopers &
Lybrand L.L.P., independent accountants, as indicated in their report with
respect thereto, and are included herein and in the Registration Statement, of
which this Prospectus is a part, given on the authority of said firm as
experts in accounting and auditing.
76
<PAGE>
The combined balance sheets as of December 31, 1993, 1994 and 1995 and the
combined statements of income, retained earnings and cash flows for each of
the three years in the period ended December 31, 1995, of Sowerby Enterprises,
the former owner of the New Hampshire Facilities, included in this Prospectus
and elsewhere in the Registration Statement of which this Prospectus is a
part, have been audited by Leverone & Company, independent accountants, as
indicated in their report with respect thereto, and are included herein and in
the Registration Statement of which this Prospectus is a part, given on the
authority of said firm as experts in accounting and auditing.
The combined balance sheets as of December 31, 1994 and 1995 and the
combined statements of income, partners' equity and cash flows for the years
ended December 31, 1993, 1994 and 1995 of the owners of the Ohio Facilities
included in this Prospectus and elsewhere in this Registration Statement of
which this Prospectus is a part have been audited by Howard, Wershbale & Co.,
independent accountants, as indicated in their report with respect thereto,
and are included herein and in the Registration Statement of which this
Prospectus is a part, given on the authority of said firm as experts in
accounting and auditing.
The balance sheets as of December 31, 1994 and 1995 and the statements of
operations and partners' equity and cash flows for the period from April 7,
1993 (date of inception) through December 31, 1993 and for the years ended
December 31, 1994 and 1995, of Bowie Center Limited Partnership included in
this Prospectus and elsewhere in the Registration Statement of which this
Prospectus is a part, have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as indicated in their report with respect thereto,
and are included herein and in the Registration Statement, of which this
Prospectus is a part, given on the authority of said firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 (together with all amendments and exhibits, the "Registration Statement")
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information, reference is hereby
made to the Registration Statement and to the schedules and exhibits thereto.
The Registration Statement, including the exhibits and schedules thereto, may
be inspected, without charge, and copies may be obtained, at prescribed rates,
at the public reference facilities of the Commission maintained at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Copies of
the Registration Statement may also be inspected, without charge, at the
Commission's regional offices at Seven World Trade Center, Suite 1300, New
York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. In addition, copies of the Registration
Statement may be obtained by mail at prescribed rates, from the Commission's
Public Reference Section at Judiciary Plaza, 450 Fifth Street, N.W.
Washington, D.C. 20549.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract, agreement or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
As a result of this Offering, the Company will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
of 1934, as amended, and, in accordance therewith, will file periodic reports,
proxy statements and other information with the Commission. Such periodic
reports, proxy statements and other information will be available for
inspection and copying at the public reference facilities and regional offices
referred to above. The Company intends to furnish to its stockholders annual
reports containing audited financial statements and an opinion thereon
expressed by independent certified public accountants and quarterly reports
containing unaudited interim summary financial information for the first three
fiscal quarters of each fiscal year of the Company.
77
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
Report of Independent Accountants....................................... F-2
Combined Balance Sheets as of December 31, 1994, December 31, 1995 and
(unaudited) March 31, 1996............................................. F-3
Combined Statements of Operations for the years ended December 31, 1993,
1994 and 1995 and (unaudited) for the three months ended March 31, 1995
and 1996............................................................... F-4
Combined Statements of Changes in Stockholders' Equity for the years
ended December 31, 1993, 1994 and 1995 and (unaudited) for the three
months ended March 31, 1995 and 1996................................... F-5
Combined Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995 and (unaudited) for the three months ended March 31, 1995
and 1996............................................................... F-6
Notes to Combined Financial Statements.................................. F-7
</TABLE>
<TABLE>
<S> <C>
SOWERBY ENTERPRISES:
Independent Auditors' Report............................................ F-21
Combined Balance Sheets at December 31, 1993, 1994 and 1995............. F-22
Combined Statements of Income for the years ended December 31, 1993,
1994 and 1995.......................................................... F-24
Combined Statements of Retained Earnings (Deficit) for the years ended
December 31, 1993, 1994 and 1995....................................... F-25
Combined Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995.......................................................... F-26
Notes to Combined Financial Statements.................................. F-27
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY,
WESTBAY MANOR II DEVELOPMENT COMPANY,
ROYALVIEW MANOR COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY:
Independent Auditors' Report............................................ F-31
Combined Balance Sheets at December 31, 1994, December 31, 1995 and
(unaudited) March 31, 1996............................................. F-32
Combined Statements of Income for the years ended December 31, 1993,
1994 and 1995 and (unaudited) for the three months ended March 31,
1996................................................................... F-33
Combined Statements of Partners' Equity for the years ended December 31,
1993, 1994 and 1995 and (unaudited) for the three months ended March
31, 1996............................................................... F-34
Combined Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995 and (unaudited) for the three months ended March 31,
1996................................................................... F-35
Notes to Combined Financial Statements.................................. F-36
BOWIE CENTER LIMITED PARTNERSHIP:
Report of Independent Accountants....................................... F-42
Balance Sheets as of December 31, 1994 and 1995......................... F-43
Statements of Operations and Partners' Equity for the period from April
7, 1993 (date of inception) through December 31, 1993 and the years
ended December 31, 1994 and 1995....................................... F-44
Statements of Cash Flows for the period from April 7, 1993 (date of
inception) through December 31, 1993 and the years ended December 31,
1994 and 1995.......................................................... F-45
Notes to Financial Statements........................................... F-46
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Harborside Healthcare
Corporation:
We have audited the accompanying combined balance sheets of Harborside
Healthcare Corporation and its combined affiliates (the "Company") as of
December 31, 1994 and 1995 and the related combined statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Company as of
December 31, 1994 and 1995, and the combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
1995 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 19, 1996
F-2
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
----------------
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
PRO FORMA
MARCH 31, MARCH 31,
1994 1995 1996 1996 (NOTE B)
------- ------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $14,013 $40,157 $10,000 $10,000
Accounts receivable, net of
allowances for doubtful accounts
of $801, $1,526 and $1,618,
respectively.................... 5,351 9,967 11,354 11,354
Prepaid expenses and other....... 1,334 1,790 1,935 1,935
Demand note due from limited
partnership
(Note F)........................ -- 1,255 1,284 1,284
Facility acquisition deposits
(Notes O and P)................. -- 3,000 -- --
Restricted cash (Note C)......... 586 -- -- --
------- ------- ------- -------
Total current assets........... 21,284 56,169 24,573 24,573
Restricted cash (Note C)........... 1,409 2,755 4,331 4,331
Investment in limited partnership
(Note F).......................... 633 519 395 395
Property and equipment, net (Note
G)................................ 66,938 30,139 30,185 30,185
Intangible assets, net (Note H).... 3,612 3,050 3,894 3,894
------- ------- ------- -------
Total assets................... $93,876 $92,632 $63,378 $63,378
======= ======= ======= =======
LIABILITIES
Current liabilities:
Current maturities of long-term
debt (Note E)................... $ 391 $ 428 $ 448 $ 448
Accounts payable................. 2,689 4,034 3,762 3,762
Employee compensation and bene-
fits............................ 3,110 4,495 6,640 6,640
Other accrued liabilities........ 664 959 892 892
Note payable to affiliate (Note
P).............................. -- 2,000 -- --
Accrued interest................. 515 25 67 67
Current portion of deferred in-
come............................ -- -- 369 369
Distribution payable to minority
interest
(Note N)........................ -- 33,493 -- --
------- ------- ------- -------
Total current liabilities...... 7,369 45,434 12,178 12,178
Long-term portion of deferred in-
come.............................. -- -- 3,225 3,225
Long-term debt (Note E)............ 52,905 43,068 42,974 42,974
------- ------- ------- -------
Total liabilities.............. 60,274 88,502 58,377 58,377
------- ------- ------- -------
Minority interest (Notes B and N).. 30,736 -- -- --
------- ------- ------- -------
Commitments and contingencies
(Notes C, D, F and J)..............
STOCKHOLDERS' EQUITY (NOTE M)
Common stock, $.01 par value, 1,000
shares authorized, issued and
outstanding; pro forma 30,000,000
shares authorized, 4,400,000
shares issued and outstanding..... -- -- -- 44
Additional paid-in capital......... 10,342 10,372 11,038 10,994
Accumulated deficit................ (7,476) (6,242) (6,037) (6,037)
------- ------- ------- -------
Total stockholders' equity..... 2,866 4,130 5,001 5,001
------- ------- ------- -------
Total liabilities and stock-
holders' equity............... $93,876 $92,632 $63,378 $63,378
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-3
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE FOR THE THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total net revenues...... $ 75,101 $ 86,376 $ 109,425 $ 23,777 $ 34,931
--------- --------- --------- ---------- ----------
Expenses:
Facility operating.... 57,412 68,951 89,378 19,734 28,120
General and
administrative....... 3,092 3,859 5,076 1,141 2,235
Service charges paid
to affiliate (Note
P)................... 746 759 700 177 185
Depreciation and
amortization......... 4,304 4,311 4,385 1,043 539
Facility rent......... 525 1,037 1,907 392 2,545
--------- --------- --------- ---------- ----------
Total expenses...... 66,079 78,917 101,446 22,487 33,624
--------- --------- --------- ---------- ----------
Income from operations.. 9,022 7,459 7,979 1,290 1,307
Other:
Interest expense,
net.................. (4,740) (4,609) (5,107) (1,264) (975)
Loss on investment in
limited partnership
(Note F)............. -- (448) (114) (81) (127)
Gain on sale of
facilities, net (Note
N)................... -- -- 4,869 -- --
Loss on refinancing of
debt (Note E)........ -- (453) -- -- --
Minority interest in
net income of
combined affiliates
(Notes B and N)...... (2,297) (1,575) (6,393) (185) --
--------- --------- --------- ---------- ----------
Net income (loss)....... $ 1,985 $ 374 $ 1,234 $ (240) $ 205
========= ========= ========= ========== ==========
Pro forma data
(unaudited--Notes C and
L):
Historical net income
(loss)............... $ 1,985 $ 374 $ 1,234 $ (240) $ 205
Pro forma income
taxes................ (774) (146) (481) 94 (80)
--------- --------- --------- ---------- ----------
Pro forma net income
(loss)............... $ 1,211 $ 228 $ 753 $ (146) $ 125
========= ========= ========= ========== ==========
Pro forma net income
(loss) per share
(Note C)............. $ 0.27 $ 0.05 $ 0.17 $ (0.03) $ 0.03
========= ========= ========= ========== ==========
Weighted average number
of common and common
equivalent shares used
in pro forma net income
(loss) per share
(Note B)............... 4,452,160 4,452,160 4,452,160 4,452,160 4,452,160
========= ========= ========= ========== ==========
</TABLE>
The accompanying notes are an integral
part of the combined financial statements.
F-4
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
----------------
<TABLE>
<CAPTION>
ADDITIONAL
PAID- IN ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ----------- -------
<S> <C> <C> <C>
Stockholders' equity, December 31, 1992....... $11,266 $(7,635) $ 3,631
Net income for the year ended December 31,
1993......................................... -- 1,985 1,985
Distributions................................. (698) -- (698)
------- ------- -------
Stockholders' equity, December 31, 1993....... 10,568 (5,650) 4,918
Net income for the year ended December 31,
1994......................................... -- 374 374
Distributions................................. (226) (2,200) (2,426)
------- ------- -------
Stockholders' equity, December 31, 1994....... 10,342 (7,476) 2,866
Net income for the year ended December 31,
1995......................................... -- 1,234 1,234
Contributions................................. 30 -- 30
------- ------- -------
Stockholders' equity, December 31, 1995....... 10,372 (6,242) 4,130
Net income for the three months ended March
31, 1996 (unaudited)......................... -- 205 205
Purchase of equity interests (unaudited)...... 803 -- 803
Distributions (unaudited)..................... (137) -- (137)
------- ------- -------
Stockholders' equity, March 31, 1996 (unau-
dited)....................................... $11,038 $(6,037) $ 5,001
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-5
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
----------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------- ----------------------
1993 1994 1995 1995 1996
------- ------- ------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss).......... $ 1,985 $ 374 $ 1,234 $ (240) $ 205
Adjustments to reconcile
net income (loss) to net
cash provided by operating
activities:
Minority interest.......... 2,297 1,575 6,393 185 234
Gain on sale of facilities,
net....................... -- -- (4,869) -- --
Loss on refinancing of
debt...................... -- 453 -- -- --
Depreciation of property
and equipment............. 3,734 3,744 3,924 924 459
Amortization of intangible
assets.................... 570 567 461 119 80
Amortization of deferred
income.................... -- -- -- -- (91)
Loss from investment in
limited partnership....... -- 448 114 81 127
Amortization of loan costs
and fees.................. 355 172 109 27 33
Deferred interest.......... 472 -- -- -- --
Other...................... 108 8 14 -- (5)
------- ------- ------- ---------- ----------
9,521 7,341 7,380 1,096 1,042
Changes in operating assets
and liabilities:
(Increase) in accounts
receivable................ (534) (2,888) (7,573) (1,630) (1,387)
(Increase) decrease in
prepaid expenses and
other..................... (95) (521) (456) 372 (406)
Increase (decrease) in
accounts payable.......... 147 656 1,345 148 (272)
Increase in employee
compensation and
benefits.................. 713 635 1,385 302 2,145
Increase (decrease) in
accrued interest.......... 9 367 (490) (248) 42
Increase (decrease) in
other accrued
liabilities............... 169 (60) 295 (38) (67)
Increase (decrease) in due
to affiliates............. 591 (591) -- -- --
------- ------- ------- ---------- ----------
Net cash provided by
operating activities..... 10,521 4,939 1,886 2 1,097
------- ------- ------- ---------- ----------
Investing activities:
Additions to property and
equipment................. (1,205) (2,585) (3,081) (486) (504)
Facility acquisition
deposits.................. -- -- (3,000) -- 3,000
Additions to intangibles... (1,365) (1,410) (1,202) (36) (696)
Transfers to (from)
restricted cash, net...... -- (1,995) (760) 247 (1,576)
Purchase of commercial
paper..................... (2,677) -- -- -- --
Maturity of commercial
paper..................... 6,100 -- -- -- --
Demand note from limited
partnership............... -- -- (1,255) -- --
Contributions to investment
in limited partnership.... (995) (88) -- -- --
Payment of costs related to
sale of facilities........ -- -- (884) -- --
Proceeds from sale of
facilities................ -- -- 47,000 -- --
------- ------- ------- ---------- ----------
Net cash provided (used)
by investing activities.. (142) (6,078) 36,818 (275) 224
------- ------- ------- ---------- ----------
Financing activities:
Payment of long-term debt.. (663) (29,842) (9,800) (93) (102)
Debt prepayment penalty.... -- -- (1,154) -- --
Payment of termination fee
on interest protection
agreement................. -- (384) -- -- --
Payment of demand note
payable................... -- (225) -- -- --
Issuance of long-term
debt...................... 11 42,300 -- -- --
Note payable to an
affiliate................. -- -- 2,000 -- (2,000)
Receipt of lease
inducement................ -- -- -- -- 3,685
Dividend distribution...... (698) (2,426) -- (66) (137)
Distributions to minority
interest.................. (4,750) (4,485) (3,636) (909) (33,727)
Purchase of equity
interests and other
contributions............. -- -- 30 -- 803
------- ------- ------- ---------- ----------
Net cash provided (used)
by financing activities.. (6,100) 4,938 (12,560) (1,068) (31,478)
------- ------- ------- ---------- ----------
Net increase (decrease) in
cash and cash equivalents.. 4,279 3,799 26,144 (1,341) (30,157)
Cash and cash equivalents,
beginning of period........ 5,935 10,214 14,013 14,013 40,157
------- ------- ------- ---------- ----------
Cash and cash equivalents,
end of period.............. $10,214 $14,013 $40,157 $12,672 $10,000
======= ======= ======= ========== ==========
Supplemental Disclosure:
Interest paid............... $ 4,197 $ 4,505 $ 6,208 $ 1,705 $ 1,227
======= ======= ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-6
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS ENDED MARCH 31,
1995 AND 1996 IS UNAUDITED)
----------------
A. NATURE OF BUSINESS
Harborside Healthcare Corporation and its combined affiliates (the
"Company") operate long-term care facilities and provide rehabilitation
therapy services (see Note B). As of December 31, 1995, the Company owned
eight facilities, operated eleven additional facilities under various leases
and owned a rehabilitation therapy services company. The Company also
maintained a majority equity investment in Bowie Center Limited Partnership
("Bowie L.P.") which owns an additional long-term care facility (see Note F).
The Company's long-term care facilities are located in Florida, Ohio, Indiana,
Maryland and New Jersey. In January 1996, the Company entered into a leasing
arrangement for six additional facilities located in New Hampshire (see Note
Q).
B. BASIS OF PRESENTATION
Harborside Healthcare Corporation is a Delaware corporation and was
incorporated on March 19, 1996. The Company was formed as a holding company,
in anticipation of an initial public offering, to combine under the control of
a single corporation the operations of various business entities (the
"Predecessor Entities") which are all under the majority control of several
related stockholders. These stockholders expect to enter into an agreement
(the "Reorganization Agreement") whereby they will transfer their ownership of
the Predecessor Entities to the Company in exchange for shares of Common Stock
of the Company.
The accompanying financial statements have been prepared to reflect the
combination of the Predecessor Entities in a manner which is similar to a
pooling-of-interests. This presentation results in a combination of the
Predecessor Entities (which will become subsidiaries of the Company under the
terms of the Reorganization Agreement) at each entity's respective historical
accounting basis.
A Pro Forma unaudited balance sheet as of March 31, 1996 has been presented
to reflect the exchange of the ownership interests of the Predecessor Entities
for 4,400,000 shares of common stock of the Company, which will occur upon
implementation of the Reorganization Agreement, and which will result in a
transfer of $44,000 from additional paid-in capital to common stock.
The Predecessor Entities include one C corporation, KHI Corporation ("KHI"),
two limited partnerships, HH Advisors Limited Partnership ("HH Advisors") and
Riverside Retirement Limited Partnership ("Riverside") and seven Subchapter S
corporations (the "S Corporations") and their direct and indirect wholly-owned
subsidiaries. The common stock of KHI Corporation has not been presented on
the balance sheet as it is immaterial. The partnership equity of HH Advisors
and Riverside has been presented as additional paid-in capital and accumulated
deficit.
A subsidiary of HH Advisors, HHCI Limited Partnership ("HHCI"), is the
general partner of Krupp Yield Plus Limited Partnership ("KYP"), a partnership
which was formed in June 1987 to purchase and operate long-term care
facilities. KYP raised proceeds through the sale of limited partnership
interests ("Units") in KYP to the public, and by March 6, 1990, KYP had
purchased seven long-term care facilities. For financial reporting purposes,
the interests of the holders of the Units ("Unitholders"), including
distributions of capital, have been reflected in the accompanying financial
statements as a minority interest. The net income of KYP was allocated 95% to
the Unitholders and 5% to HHCI. In December 1995, a majority of the
Unitholders approved the sale, effective December 31, 1995, of the real estate
owned by the seven KYP facilities to Meditrust, a real estate investment trust
("Meditrust"). Simultaneously, Meditrust leased the real estate of these
facilities to HHCI (see Notes D and N).
In addition to the seven leased facilities described above, KHI and HH
Advisors together control subsidiaries, which as of December 31, 1995, leased
four long-term care facilities and owned a rehabilitation therapy services
company.
F-7
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
Additionally, Riverside owns one long-term care facility, and the S
Corporations in total own seven long-term care facilities.
C. SIGNIFICANT ACCOUNTING POLICIES
The Company uses the following accounting policies for financial reporting
purposes:
Principles of Combination
The combined financial statements include the accounts of the Company and
its combined affiliates. All significant intercompany transactions and
balances have been eliminated in combination.
Unaudited Interim Financial Data
The interim financial data at March 31, 1996 and for the three months ended
March 31, 1995 and 1996 included herein are unaudited and, in the opinion of
management, reflect all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of financial position and the
results of operations and cash flows for such interim periods.
Total Net Revenues
Total net revenues include net patient service revenues, rehabilitation
therapy service revenues from contracts to provide services to non-affiliated
long-term care facilities and management fees from the facility owned by Bowie
L.P. (see Note F).
Net patient service revenues payable by patients at the Company's facilities
are recorded at established billing rates. Net patient service revenues to be
reimbursed by contracts with third-party payors, primarily the Medicare and
Medicaid programs, are recorded at the amount estimated to be realized under
these contractual arrangements. Revenues from Medicare and Medicaid are
generally based on reimbursement of the reasonable direct and indirect costs
of providing services to program participants or a prospective payment system.
The Company separately estimates revenues due from each third party with which
it has a contractual arrangement and records anticipated settlements with
these parties in the contractual period during which services were rendered.
The amounts actually reimbursable under Medicare and Medicaid are determined
by filing cost reports which are then audited and generally retroactively
adjusted by the payor. Legislative changes to state or federal reimbursement
systems may also retroactively affect recorded revenues. Changes in estimated
revenues due in connection with Medicare and Medicaid may be recorded by the
Company subsequent to the year of origination and prior to final settlement
based on improved estimates. Such adjustments and final settlements with third
party payors, which could materially and adversely affect the Company, are
reflected in operations at the time of the adjustment or settlement.
In addition, direct and allocated indirect costs reimbursed under the
Medicare program are subject to regional limits. The Company's costs generally
exceed these limits and accordingly, the Company is required to submit
exception requests to recover such excess costs. The Company believes it will
be successful in collecting these receivables, however, the failure to recover
these costs in the future could materially and adversely affect the Company.
Beginning in 1995, total net revenues includes revenues recorded by the
Company's rehabilitation therapy combined affiliate (which does business under
the name "Theracor") for therapy services provided to non-affiliated long-term
care facilities. These revenues approximated $3,045,000, $136,000 and
$2,141,000 for the year ended December 31, 1995 and the three months ended
March 31, 1995 and 1996, respectively and were derived from contracts
negotiated with each facility. Additionally, Theracor recorded approximately
$345,000, $1,031,000, $265,000 and $240,000 in rehabilitation therapy service
revenues in connection with services
F-8
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
provided to the facility owned by Bowie L.P. for the years ended December 31,
1994 and 1995 and the three months ended March 31, 1995 and 1996,
respectively.
Concentrations
A significant portion of the Company's revenues are derived from the
Medicare and Medicaid programs. There have been, and the Company expects that
there will continue to be, a number of proposals to limit reimbursement
allowable to long-term care facilities under these programs. The Company
cannot predict at this time whether any of these proposals will be adopted, or
if adopted and implemented, what effect such proposals would have on the
Company. Approximately 60%, 63%, 68%, 66% and 68% of the Company's net patient
service revenues in the years ended December 31, 1993, 1994 and 1995 and the
three months ended March 31, 1995 and 1996, respectively, are from the
Company's participation in the Medicare and Medicaid programs. As of December
31, 1994, December 31, 1995 and March 31, 1996, $4,637,000, $7,780,000 and
$8,405,000, respectively, of net accounts receivable were due from the
Medicare and Medicaid programs.
Facility Operating Expenses
Facility operating expenses include expenses associated with the normal
operations of a long-term care facility. The majority of these costs consist
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 therapies, medical and pharmacy supplies, food and
utilities. Beginning in 1995, facility operating expenses include expenses of
$3,311,000 associated with services rendered by Theracor to non-affiliated
facilities. For the three months ended March 31, 1995 and 1996, these expenses
totaled $96,000 and $1,738,000, respectively.
Provision for Doubtful Accounts
Provisions for uncollectible accounts receivable of $285,000, $538,000,
$1,240,000, $235,000 and $131,000 are included in facility operating expenses
for the years ended December 31, 1993, 1994 and 1995 and the three months
ended March 31, 1995 and 1996, respectively. Individual patient accounts
deemed to be uncollectible are written off against the allowance for doubtful
accounts.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the period reported.
Actual results could differ from those estimates. Estimates are used when
accounting for the collectibility of receivables, depreciation and
amortization, employee benefit plans, taxes and contingencies.
Stock-Based Compensation
In 1996, the Company will adopt Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation." This standard will require
the Company to report the fair value for stock-based compensation plans either
through recognition or disclosure. The Company intends to adopt this standard
by disclosing the pro forma net income and pro forma net income per share
amounts assuming the fair value method was adopted on January 1, 1996. The
adoption of this standard will not impact the Company's results of operations,
financial position or cash flows.
Income Taxes
Prior to the implementation of the Reorganization Agreement, the Predecessor
Entities were operated under common control but, other than KHI (which is a C
corporation), were not subject to federal or state income
F-9
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
taxation and, accordingly, no provision for income taxes has been made in the
combined financial statements. No provision for income taxes and deferred
assets and liabilities of KHI has been reflected in the combined financial
statements, as it has never reported material taxable income. However, since
the Company will be a taxable entity upon implementation of the Reorganization
Agreement, a pro forma income tax expense has been reflected for each year
presented, as if the Company had always been a C corporation (see Note L).
Pro Forma Net Income Per Share (Unaudited)
Pro forma net income per share is computed using the estimated weighted
average number of common and dilutive common equivalent shares (stock options)
anticipated to be outstanding upon the implementation of the Reorganization
Agreement during each year presented. Pursuant to Securities and Exchange
Commission staff requirements, stock options issued within one year of an
initial public offering, calculated using the treasury stock method and an
assumed initial public offering price of $12.50 per share, have been included
in the calculation of pro forma net income (loss) per common share as if they
were outstanding for all periods presented.
Property and Equipment
Property and equipment are stated at cost. Expenditures that extend the
lives of affected assets are capitalized, while maintenance and repairs are
charged to expense as incurred. Upon the retirement or sale of an asset, the
cost of the asset and any related accumulated depreciation are removed from
the balance sheet, and any resulting gain or loss is included in net income.
Depreciation expense is estimated using the straight-line method. These
estimates are calculated using the following estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements........................ 31.5 to 40 years
Furniture and equipment........................... 5 to 10 years
Leasehold improvements............................ over the life of the lease
Land improvements................................. 8 to 40 years
</TABLE>
Intangible Assets
Intangible assets consist of amounts identified in connection with certain
facility acquisitions accounted for under the purchase method and certain
deferred costs which were incurred in connection with various financings (see
Note H).
In connection with each of its acquisitions, the Company reviewed the assets
of the acquired facility and assessed its relative fair value in comparison to
the purchase price. Certain acquisitions resulted in the allocation of a
portion of the purchase price to the value associated with the existence of a
workforce in place, residents in place at the date of acquisition and
covenants with sellers which limit their ability to engage in future
competition with the Company's facilities. The assets recognized from an
assembled workforce and residents in place are amortized using the straight-
line method over the estimated periods (from three to seven years) during
which the respective benefits would be in place. Covenants not-to-compete are
being amortized using the straight-line method over the period during which
competition is restricted.
Goodwill resulted from the acquisition of certain facilities for which the
negotiated purchase prices exceeded the allocations of the fair market value
of identifiable assets. The Company's policy is to evaluate each acquisition
separately and identify an appropriate amortization period for goodwill based
on the acquired property's characteristics. Goodwill was being amortized using
the straight-line method over a 31.5 to 40 year period. The Company's
remaining goodwill was written-off in connection with the sale of seven
facilities in 1995 (see Note N).
F-10
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
Costs incurred in obtaining financing (including loans, letters of credit
and facility leases) are amortized as interest expense using the straight-line
method (which approximates the interest method) over the term of the related
financial obligation.
Assessment of Long-Lived Assets
Effective for the year ended December 31, 1995, the Company has adopted the
provisions of Statement of Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Accordingly, the Company periodically reviews the carrying value of its long-
lived assets (primarily property and equipment and intangible assets) to
assess the recoverability of these assets; any impairments would be recognized
in operating results if a diminution in value considered to be other than
temporary were to occur. The adoption of this Statement had no impact on the
Company's combined financial position, results of operations or liquidity. As
part of this assessment, the Company reviews the expected future net operating
cash flows from its facilities, as well as the values included in appraisals
of its facilities, which have periodically been obtained in connection with
various refinancings.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with
maturities of three months or less at the date of their acquisition by the
Company.
Restricted Cash
Restricted cash consists of cash set aside in escrow accounts as required by
several of the Company's leases and other financing arrangements. The current
portion of restricted cash related to the required deposits for the semiannual
interest payments on the KYP medium-term notes. These notes were repaid at the
end of 1995 (see Note N).
D. OPERATING LEASES
In March 1993, a combined affiliate of the Company entered into an agreement
with a non-affiliated entity to lease two long-term care facilities in Ohio
with 289 beds for a period of ten years. The lease agreement, which became
effective in June 1993, provides for fixed annual rental payments of $900,000.
At the end of the ten- year period, the Company has the option to acquire the
facilities for $8,500,000, or to pay a $500,000 termination fee and relinquish
the operation of the facilities to the lessor. On the effective date of the
lease, the subsidiary paid $1,200,000 to the lessor for a covenant not-to-
compete which remains in force through June 2003.
Effective October 1, 1994, a combined affiliate of the Company entered into
an agreement with a related party to lease a 100 bed long-term care facility
in Florida for a period of ten years. The lease agreement provides for annual
rental payments of $551,250 in the initial twelve-month period and annual
increases of 2% thereafter. The Company has the option to exercise two
consecutive five-year lease renewals. The Company also has the right to
purchase the facility at fair market value at any time after the fifth
anniversary of the commencement of the lease. The lease agreement also
required the Company to escrow funds equal to three months' base rent
($165,000). The lessor is required to make certain capital expenditures,
totalling $500,000, to the facility during the first three years of the lease.
Effective April 1, 1995, a combined affiliate of the Company entered into an
agreement with Meditrust to lease a 100-bed long-term care facility in Ohio
for a period of ten years. The lease agreement provides for annual rental
payments of $698,400 in the initial twelve-month period. The Company may also
be required to make additional rental payments beginning April 1, 1996 in an
amount equal to 5.0% of the difference between the facility's operating
revenues in each applicable year and the operating revenues in a twelve-month
base period which commenced on April 1, 1995. The annual additional rent
payment will not exceed $14,650. At the end of
F-11
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
the initial lease period, the Company has the option to exercise two
consecutive five-year lease renewals. The lease agreement also required the
Company to escrow funds equal to three months' base rent ($152,000). The
Company's obligations under the lease are collateralized by, among other
things, an interest in any property improvements made by the Company and by
the facility's accounts receivable. The Company also has the right to purchase
the facility at its fair market value on the eighth and tenth anniversary
dates of the commencement of the lease and at the conclusion of each lease
renewal. The Company is required to make certain capital expenditures,
totalling $150,000, to the facility.
Effective January 1, 1996, a combined affiliate of the Company entered into
an agreement with Meditrust to lease the seven facilities formerly owned by
KYP (see Note N). The lease agreement provides for annual rental payments of
$4,582,500 in the initial twelve-month period and annual rental increases of
$117,500 for the remainder of the lease term. The lease has an initial term of
ten years with two consecutive five-year renewal terms exercisable at the
Company's option. The lease agreement also required the Company to escrow
funds in an amount equal to three months' base rent ($1,146,000). The
Company's obligations under the lease are collateralized by, among other
things, an interest in any property improvements made by the Company and by
the related facilities' accounts receivable. In conjunction with the lease,
the Company was granted a right of first refusal and an option to purchase the
facilities as a group, which option is exercisable at the end of the eighth
year of the initial term and at the conclusion of each renewal term. The
purchase option is exercisable at the greater of the fair market value of the
facilities at the time of exercise or Meditrust's original investment.
The Meditrust leases contain cross-default and cross-collateralization
provisions. A default by the Company under one of these leases could adversely
affect a significant number of the Company's properties and result in a loss
to the Company of such properties. In addition, the leases permit Meditrust to
require the Company to purchase the facilities upon the occurrence of a
default.
Under the terms of each of the facility leases described above, the Company
is responsible for the payment of all real estate and personal property taxes,
as well as other reasonable costs required to operate, maintain, insure and
repair the facilities.
Future minimum rent commitments under the Company's non-cancelable operating
leases as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996.............................. $ 6,746,000
1997.............................. 6,875,000
1998.............................. 7,004,000
1999.............................. 7,133,000
2000.............................. 7,262,000
Thereafter........................ 34,647,000
------------
$ 69,667,000
============
</TABLE>
E. LONG-TERM DEBT
In October 1994, the Predecessor Entities (which are S corporations)
refinanced $29,189,000 of then outstanding bank debt, and as a result,
recorded a loss of $453,000. This loss included a payment of $384,000 upon the
termination of a related interest rate protection agreement, which was
required pursuant to the terms of the bank debt in order to effectively fix
the interest rate on such debt.
The retirement of this debt was financed by the concurrent borrowing of
$42,300,000 from Meditrust. The Meditrust debt requires monthly principal and
interest payments of $404,000 through October 1, 2004, at which
F-12
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
time the remaining unpaid principal balance of $36,318,000 is due. The
Meditrust debt bears interest at the annual rate of 10.65%. Additional
interest payments may also be required commencing on January 1, 1997 in an
amount equal to 0.3% of the difference between the operating revenues of the S
Corporations in each applicable year and the actual operating revenues of the
S Corporations during a twelve-month base period which commenced October 1,
1995. The Meditrust debt is cross-collateralized by the assets of the S
Corporations.
The loan agreement with Meditrust places certain restrictions on the S
Corporations; among them, the agreement restricts their ability to incur
additional debt or to make significant dispositions of assets. The S
Corporations are also required to maintain a debt service coverage ratio of at
least 1.2 to 1.0 (as defined in the loan agreement) and a current ratio of at
least 1.0 to 1.0. Management believes the S Corporations are in compliance
with these covenants.
The loan agreement required the Company to establish a debt service reserve
fund equal to three months' debt service and a renovation escrow account in
the amount of $197,000 to fund facility renovations identified in the
agreement. All of the renovation escrow funds will be released upon completion
of the required renovations.
As of December 31, 1995, substantially all of the required renovations have
been completed and the Company is in the process of obtaining the release of
the escrowed renovation funds. Accordingly, the funds have been classified as
unrestricted in the accompanying December 31, 1995 balance sheet.
The Meditrust loan agreement contains a prepayment penalty, which decreases
from 2.5% of the outstanding balance in the fourth year to none in the ninth
year (see Note M). Harborside Healthcare Limited Partnership ("HHLP"), a
combined affiliate of the Company, has entered into two guaranty agreements
with Meditrust on behalf of the S Corporations. Under the first agreement (the
"Guaranty"), HHLP has guaranteed a maximum of $2,780,000 of the Meditrust debt
if Meditrust demands payment under the Guaranty. The second agreement (the
"Environmental Indemnification Agreement") requires HHLP to make payments to
Meditrust upon the demand of the lender in order to fund the costs associated
with the clean-up of hazardous substances on the collateralized properties.
HHLP's maximum liability under the Environmental Indemnification Agreement is
limited to $4,500,000; however, certain matters identified in the
Environmental Indemnification Agreement are excluded from this limitation.
Payments made in excess of $1,720,000 under the Environmental Indemnification
Agreement would reduce the potential obligation of HHLP under the Guaranty. As
of December 31, 1995, the full amount of these guarantees remains in effect,
and management is not aware of any payments which are likely to be required in
the foreseeable future in connection with these agreements.
Riverside assumed a first mortgage note (the "Note") with a remaining
balance of $1,775,000 as part of the acquisition of a long-term care facility.
The Note requires the annual retirement of principal in the amount of $20,000.
The Company pays interest monthly at the rate of 14% per annum on the
outstanding principal amount until maturity in October 2010, when the
remaining unpaid principal balance of $1,325,000 is due. The Note is
collateralized by the property and equipment of Riverside's facility.
Interest expense charged to operations for the years ended December 31,
1993, 1994, and 1995 and the three months ended March 31, 1995 and 1996 was
$5,049,000, $5,048,000, $5,830,000, $1,457,000 and $1,246,000, respectively.
F-13
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
As of December 31, 1995, future long-term debt maturities associated with
the Company's debt are as follows:
<TABLE>
<S> <C>
1996............................. $ 428,000
1997............................. 472,000
1998............................. 523,000
1999............................. 579,000
2000............................. 642,000
Thereafter....................... 40,852,000
-----------
$43,496,000
===========
</TABLE>
Approximately $54 million of the Company's assets are subject to liens under
long-term debt or operating lease agreements.
F. INVESTMENT IN LIMITED PARTNERSHIP
In April 1993, an affiliate of the Company acquired a 75% partnership
interest in Bowie L.P., which developed a 120-bed long-term care facility in
Maryland that commenced operations on May 1, 1994. The remaining 25% interest
in Bowie L.P. is owned by a non-affiliated party. The Company records its
investment in Bowie L.P. on the equity method. Although the Company owns a
majority interest in Bowie L.P., the Company only maintains a 50% voting
interest and accordingly does not exercise control over the operations of
Bowie L.P In addition, the non-affiliated party has the option to purchase the
Company's partnership interest during the sixty-day period prior to the
seventh anniversary of the facility's opening and each subsequent anniversary
thereafter. If the option is exercised, the purchase price would be equal to
the fair market value of the Company's interest at the date on which the
option is exercised. The Company is entitled to 75% of the facility's net
income and manages this facility in return for a fee equal to 5.5% of the
facility's net revenues (effective September 1995). Prior to this date, the
management fee approximated $10,000 per month. The Company recorded $96,000,
$234,000, $35,000 and $111,000 in management fees from this management
contract for the years ended December 31, 1994 and 1995 and the three months
ended March 31, 1995 and 1996, respectively.
Bowie L.P. obtained a $4,377,000 construction loan from a bank to finance
the construction of the facility. Bowie L.P. also obtained a $1,000,000 line
of credit from the bank to finance pre-opening costs and working capital
requirements. On July 31, 1995, the line of credit converted to a term loan.
As of December 31, 1994 and 1995, Bowie L.P. owed the bank a principal amount
of $5,100,000 and $5,200,000, respectively, on these loans. Interest on the
loans is payable monthly at the bank's prime rate (8.5% at December 31, 1995)
plus 1%. These loans also limit Bowie L.P.'s ability to borrow additional
funds and to make acquisitions, dispositions and distributions. Additionally,
the loans contain covenants with respect to maintenance of specified levels of
net worth, working capital, occupancy and debt service coverage.
Bowie L.P.'s above loans are collateralized by each partner's partnership
interest as well as all of the assets of Bowie L.P. These loans are guaranteed
by an affiliate of the Company and additional collateral pledged by the non-
affiliated partner. The Bowie L.P. partnership agreement states that each
partner will contribute an amount in respect of any liability incurred by a
partner in connection with a guarantee of the partnership's debt so that the
partners each bear their proportionate share of the liability based on their
percentage ownership of the partnership.
F-14
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
The results of operations of Bowie L.P. are summarized below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------- ----------------------------
1994 1995 1995 1996
---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Net operating revenues.. $2,523,000 $7,595,000 $ 1,643,000 $ 1,976,000
Net operating expenses.. 2,840,000 7,238,000 1,628,000 1,982,000
Net loss................ (598,000) (152,000) (109,000) (170,000)
</TABLE>
The financial position of Bowie L.P. was as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------- AS OF MARCH 31,
1994 1995 1996
---------- ---------- ---------------
<S> <C> <C> <C>
Current assets......................... $1,019,000 $2,785,000 $2,910,000
Non-current assets..................... 5,507,000 5,045,000 4,946,000
Current liabilities.................... 1,491,000 2,227,000 2,485,000
Non-current liabilities................ 4,190,000 4,910,000 4,848,000
Partners' equity....................... 845,000 693,000 523,000
</TABLE>
On December 28, 1995, the Company advanced $1,255,000 to Bowie L.P. to
support additional facility working capital requirements by means of a demand
note bearing interest at 9.0% per annum.
G. PROPERTY AND EQUIPMENT
The Company's property and equipment are stated at cost and consist of the
following as of December 31:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Land................................................ $ 5,714,000 $ 2,994,000
Land improvements................................... 2,796,000 2,874,000
Leasehold improvements.............................. 54,000 450,000
Buildings and improvements.......................... 67,735,000 28,257,000
Equipment, furnishings and fixtures................. 10,898,000 5,872,000
----------- -----------
87,197,000 40,447,000
Less accumulated depreciation....................... 20,259,000 10,308,000
----------- -----------
$66,938,000 $30,139,000
=========== ===========
H. INTANGIBLE ASSETS
Intangible assets are stated at cost and consist of the following as of
December 31:
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Patient lists....................................... $ 1,805,000 $ 1,459,000
Assembled workforce................................. 1,328,000 930,000
Covenant not to compete............................. 2,617,000 1,838,000
Goodwill............................................ 1,123,000 --
Organization costs.................................. 150,000 256,000
Deferred financing costs............................ 1,719,000 2,157,000
----------- -----------
8,742,000 6,640,000
Less accumulated amortization....................... 5,130,000 3,590,000
----------- -----------
$ 3,612,000 $ 3,050,000
=========== ===========
</TABLE>
F-15
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
I. RETIREMENT PLANS
The Company maintains an employee 401(k) defined contribution plan. All
employees who have worked at least one thousand hours and completed one year
of continuous service are eligible to participate in the plan. The plan is
subject to the provisions of the Employee Retirement Income Security Act of
1974. Employee contributions to this plan may be matched at the discretion of
the Company. The Company contributed $40,000, $86,000 and $120,000 to the plan
in 1993, 1994 and 1995, respectively.
During September 1995, the Company established a Supplemental Executive
Retirement Plan (the "SERP") to provide benefits to key employees.
Participants may defer up to 25% of their compensation which is matched by the
Company at a rate of 50% (up to 10% of base salary). Vesting in the matching
portion occurs in January of the second year following the plan year in which
contributions were made.
J. CONTINGENCIES
The Company is involved in legal actions and claims in the ordinary course
of its business. It is the opinion of management, based on the advice of legal
counsel, that such litigation and claims will be resolved without material
effect on the Company's combined financial position, results of operations or
liquidity.
Beginning in 1994, the Company self-insures for health benefits provided to
a majority of its employees. The Company maintains stop-loss insurance such
that the Company's liability for losses is limited. The Company recognizes an
expense for estimated health benefit claims incurred but not reported at the
end of each accounting period.
Beginning in 1995, the Company self-insures for most workers' compensation
claims. The Company maintains stop-loss insurance such that the Company's
liability for losses is limited. The Company accrues for estimated workers'
compensation claims incurred but not reported at the end of each accounting
period.
K. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of each class of
financial instruments, for those instruments for which it is practicable to
estimate that value, and the estimated fair values of the financial
instruments are as follows:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short effective
maturity of these instruments.
Long-term Debt
The fair value of the Company's long-term debt is estimated based on the
current rates offered to the Company for similar debt. The carrying value of
the Company's long-term debt approximates its fair value as of December 31,
1994 and 1995.
L. PRO FORMA INCOME TAXES (UNAUDITED)
For financial reporting purposes, a pro forma provision for income taxes has
been reflected in each period included in the accompanying combined statements
of operations. The purpose of these pro forma provisions is to reflect the
state and federal income tax provisions that would have been recorded in the
years presented if the non-taxpaying Predecessor Entities included in the
combined financial statements had been operating as a consolidated taxpaying
entity. The pro forma income tax expense was computed utilizing 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.
F-16
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
Upon the implementation of the Reorganization Agreement, the Company will
adopt Statement of Financial Accounting Standards No. 109 ("SFAS 109"),
"Accounting for Income Taxes." The adoption of SFAS 109 will require the
Company to recognize deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of the Company's assets and liabilities. SFAS 109 requires
that deferred tax assets be reduced by the creation of a valuation allowance
if management believes that it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Adoption of SFAS 109 will
occur contemporaneous with the anticipated public offering and will result in
the recognition of an estimated net deferred tax asset of approximately
$500,000.
M. CAPITAL STOCK
Immediately prior to the completion of the Company's initial public offering
of Common Stock ("Offering"), the Reorganization Agreement will be
implemented. The Company intends to use approximately $25,000,000 of the net
proceeds of the Offering to retire an equal amount of its long-term debt and
approximately $1,700,000 to pay associated prepayment penalties. Had the early
retirement of debt occurred on January 1, 1995, the pro forma net income per
share, using 4,452,160 common and common equivalent shares, would have been
$0.31 for the year ended December 31, 1995. The pro forma amount assumes a
reduction in interest and amortization expense of $1,663,000 (net of related
tax expense) for the year ended December 31, 1995.
The Company intends to adopt a Long-Term Stock Incentive Plan ("Stock Plan")
prior to the initial public offering. The Stock Plan will authorize the
Company's Board of Directors or a committee appointed by the Board of
Directors to administer the Stock Plan and to grant certain employees of the
Company incentive stock options, nonqualified stock options, stock
appreciation rights, restricted stock, performance awards and other stock
based awards.
The Company also intends to adopt a non-employee directors stock option plan
("Directors Plan") prior to the initial public offering. The Directors Plan
will grant nonqualified stock options to purchase shares of the Company's
Common Stock as of the effective date of the Offering and thereafter at the
beginning of each calendar year. The exercise price of each option granted
will be the fair market value per share of the Company's Common Stock at the
date of grant. Options become exercisable on the first anniversary of the date
of grant and each option expires no later than ten years from the date of
grant.
The Company has an executive long-term incentive plan ("Executive Plan")
which grants an economic interest in the appreciation of the business above a
baseline valuation of $23,000,000 to certain senior level management personnel
upon the successful completion of an initial public offering at a minimum
retained equity valuation above $43,000,000. A pool of three percent of the
retained equity above $23,000,000 is to be reserved and allocated to the
eligible recipients. Assuming an equity valuation of $43,000,000 is achieved,
the minimum pool would be $600,000. In the event the retained equity is valued
at an amount greater than $43,000,000, the award amount would be increased
proportionately. The Executive Plan is effective for the two-year period
ending June 30, 1997.
On December 31, 1995, the S Corporations issued a 6% equity interest in the
S Corporations to the President of the Company amounting to $438,000 and a 5%
equity interest in the S Corporations to the president of an affiliate
amounting to $365,000. The issuance amounts represented the fair market value
of these interests at the date of issuance based on an independent appraisal
obtained by the Company. The payment for the issuance of these shares is due
within 90 days. Accordingly, the amounts receivable from these individuals
have been reflected as a contra-equity subscription receivable with no net
increase to stockholders' equity at December 31, 1995. Subsequent to year-end
and in connection with the execution of the President of the Company's 1996
employment agreement, the Company granted a special bonus to the President
equal to the cost of the shares issued. The bonus will be recorded as a 1996
compensation charge.
F-17
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
In February 1996, HHLP granted an option to purchase a 1.36% limited
partnership interest in HHLP to each of two members of senior management. The
exercise price per percentage limited partnership interest under each such
option is $239,525 per percentage interest, which represented the fair market
value of a 1% limited partnership interest in HHLP at the date of grant based
on an independent appraisal obtained by the Company. The options vest in equal
one-third portions on each anniversary of the date of grant over a three-year
period and expire ten years from the date of grant. The option grant contains
provisions for the pro rata conversion of these shares upon the completion of
an initial public offering.
N. GAIN ON SALE OF FACILITIES, NET
As discussed in Note B, in December 1995, a majority of the Unitholders
approved the sale (the "Transaction") of the seven long-term care facilities
owned by KYP to Meditrust for $47,000,000. The Transaction was effective
December 31, 1995 and a net gain of $4,869,000 was recorded.
A portion of the proceeds of the Transaction was used by KYP to repay the
outstanding balance of its Medium-Term Notes ($9,409,000), a related
prepayment penalty ($1,154,000) and transaction costs ($884,000). The original
principal amount of the Medium-Term Notes was $6,000,000 and interest on this
obligation accrued at 10.55% per annum through June 30, 1993. Commencing
December 31, 1993, KYP began making semiannual interest payments on the
original principal and the accrued interest. The principal and all deferred
interest were scheduled to be repaid in June 1998. As a result of the early
retirement of this debt, the Company recorded a loss of $1,502,000, which was
netted against the gain on the sale of the KYP facilities.
The terms of the KYP partnership agreement specified that HHCI would not
share in the gain associated with the sale of the facilities; as such, the
entire amount of the net gain has been allocated to the Unitholders, which is
included in the minority interest reflected in the Company's combined
statement of operations for the year ended December 31, 1995.
The determination of the net gain included the recognition of an estimated
liability of approximately $3,000,000 to Medicare and certain states' Medicaid
programs. This amount has been included with other estimated settlements due
to/from third-party payors as a component of accounts receivable. Under
existing regulations, KYP is required to repay these programs for certain
depreciation expense recorded by the KYP facilities and for which they
received reimbursement prior to the sale. Any payments assessed by these
programs to settle these obligations in excess of the funds withheld from the
proceeds of the sale of the facilities will be the responsibility of HHCI
without any recourse to the Unitholders. However, if the ultimate settlement
of these obligations results in a net amount due to KYP, this amount would be
distributed to the Unitholders.
The Transaction provides for the dissolution of KYP and the distribution of
the net proceeds of the Transaction to the Unitholders, which occurred in
March 1996. The Company's balance sheet as of December 31, 1995 includes the
cash to be distributed to the Unitholders as well the related distribution
payable of $33,493,000.
Concurrent with the closing of the Transaction, HHCI entered into an
agreement with Meditrust to lease the former KYP facilities (see Note D).
Unaudited pro forma results of operations of the Company for the years ended
December 31, 1994 and 1995 are presented below, assuming that the KYP
Facilities had been acquired by the Company as of January 1, 1994. The pro
forma results include the historical accounts of the Company and the minority
interest adjusted to reflect: (1) the elimination of the historical
depreciation and amortization amounts recorded by the KYP facilities, (2) the
elimination of historical interest expense on the Medium-Term Notes, (3) the
elimination of the historical income allocated to the minority interest and
(4) the recognition of the rental expense and amortization of closing costs
which would have been incurred by the Company. The pro
F-18
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
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.
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEARS ENDED DECEMBER 31, MONTHS ENDED
-------------------------------- MARCH 31,
1994 1995 1995
-------------------------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Total net revenues........... $ 86,376,000 $ 109,425,000 $23,777,000
Income (loss) before income
taxes....................... 835,000 1,231,000 (456,000)
Pro forma net income (loss).. 509,000 751,000 (278,000)
Pro forma net income (loss)
per common share using
4,452,160 common and common
equivalent shares........... $ 0.11 $ 0.17 $ (0.06)
</TABLE>
O. PENDING ACQUISITIONS
At December 31, 1995, Company funds in the amount of $3,000,000 were held in
escrow in connection with the acquisition of long-term care facilities. Of
this amount, $1,000,000 was refunded in January 1996 in conjunction with the
acquisition of six facilities as further described in Note Q. The remaining
$2,000,000 pertains to the purchase of a separate group of facilities, for
which negotiations have terminated and the deposit was returned in March 1996
(see Note P).
In November, 1995, the Company signed a letter of intent to purchase four
long-term care facilities in Ohio. The specific terms of the transaction are
still under negotiation (see Note R).
P. RELATED PARTY TRANSACTIONS
An affiliate which is a principal stockholder of the Company provides office
space, legal, tax, data processing and other administrative services to the
Company in return for a monthly fee. Total service charges under this
arrangement were $746,000, $759,000, $700,000, $177,000 and $185,000 for the
years ended December 31, 1993, 1994, and 1995 and the three months ended March
31, 1995 and 1996, respectively. As of December 31, 1995 and March 31, 1996,
the Company owed the stockholder $178,000 and $0, respectively for these and
other related services. Also, on December 28, 1995, the stockholder advanced
$2,000,000 to the Company to make an acquisition deposit on five long-term
care facilities. The advance was repaid in March 1996 (see Note O).
Q. SUBSEQUENT EVENTS
Effective January 1, 1996, a combined affiliate of the Company entered into
an agreement with Meditrust to lease six long-term care facilities with a
total of 537 licensed beds in New Hampshire. The lease agreement, which will
be treated as an operating lease, provides for annual rental payments of
$2,324,000 in the initial twelve-month period and annual rental increases of
$64,000 for the remainder of the lease term. The lease has an initial term of
ten years with two consecutive five-year renewal terms exercisable at the
Company's option. The lease agreement also required the Company to escrow
funds in an amount equal to three months' base rent ($581,000). In addition,
the lease agreement required the Company to establish a renovation escrow
account in the amount of $560,000 to fund facility renovations identified in
the agreement. All of the renovation escrow funds will be released upon
completion of the required renovations. The Company's obligations under the
lease are collateralized by, among other things, an interest in any property
improvements made by the Company and by the related facilities' accounts
receivable. In conjunction with the lease, the Company was granted a right of
first refusal and an option to purchase the facilities as a group, which is
exercisable at the end of the eighth year
F-19
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
of the initial term and at the conclusion of each renewal term. The purchase
option is exercisable at the greater of 90% of the fair market value of the
facilities at the time of exercise or Meditrust's original investment. In
connection with this lease, the Company received a cash payment of $3,685,000
from Meditrust representing a lease inducement which will be recorded as
deferred income and amortized over the ten-year initial lease term as a
reduction of rental expense. The Company incurred total transaction costs of
approximately $1,035,000 of which $206,000 had been incurred and capitalized
as of December 31, 1995.
Unaudited pro forma results of the Company for the three months ended March
31, 1995 are presented below assuming that the New Hampshire Facilities had
been acquired by the Company as of January 1, 1995. The pro forma results
include the historical accounts of the Company adjusted to include the
historical results of the New Hampshire Facilities and to reflect the
following adjustments: (1) the elimination of historical rent expense,
management fees, depreciation and amortization expense and interest expense
recorded by the New Hampshire Facilities, (2) the recognition of rent expense,
amortization of deferred financing costs, general and administrative expenses
and real estate taxes which would have been incurred by the Company if the New
Hampshire Facilities had been leased beginning on 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.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
1995
-------------
(UNAUDITED)
<S> <C>
Total net revenues.......................................... $29,193,000
Loss before income taxes.................................... (196,000)
Pro forma net loss.......................................... (120,000)
Pro forma net loss per common share
using 4,452,160 common and
common equivalent shares................................... (0.03)
</TABLE>
R. OHIO TRANSACTION (UNAUDITED)
During May 1996, the Company entered into an agreement to lease four long-
term care facilities in Ohio for an initial term of five years which is
expected to commence in the third quarter of 1996. The Ohio Transaction will
be accounted for as a capital lease as a result of the bargain purchase option
granted at the end of the lease term. The annual aggregate base rent will be
$5,000,000. The Company has agreed to make an $8,000,000 non-refundable
deposit for the option to purchase the four facilities at the end of the lease
term at a fixed cost of $57,125,000. If the Company chooses to exercise this
option, the $8,000,000 deposit will be applied towards the purchase price. Of
the $8,000,000, $5,000,000 will be paid at or prior to the closing of the
lease agreement and the remainder will be paid upon the closing of the
purchase or termination of the lease.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholder
Sowerby Enterprises
R.R. 2, Box 312C, Spring Hill Road
Peterborough, NH 03458
We have audited the accompanying combined balance sheets of Sowerby
Enterprises (see Note 1) for the years ended December 31, 1993, 1994 and 1995
and the related combined statements of income, retained earnings and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Sowerby
Enterprises for the years ended December 31, 1993, 1994 and 1995 and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
Leverone & Company
Billerica, Massachusetts
February 9, 1996
F-21
<PAGE>
SOWERBY ENTERPRISES
COMBINED BALANCE SHEETS
AT DECEMBER 31,
----------------
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
ASSETS
<S> <C> <C> <C>
Current Assets
Cash................................... $ 1,259,991 $ 1,172,962 $ 1,474,885
Patient Related Receivables (Note 1)... 684,281 830,653 925,892
Prepaid Expenses and Other............. 41,020 27,792 60,477
Due from Affiliate (Note 2)............ 727,514 687,533 455,000
----------- ----------- -----------
Total Current Assets................. 2,712,806 2,718,940 2,916,254
----------- ----------- -----------
Property and Equipment (Note 1)
Land................................... 125,000 125,000 125,000
Building............................... 1,850,000 1,850,000 1,850,000
Building Improvements.................. 606,631 847,836 829,528
Furniture, Fixtures and Equipment...... 1,483,995 1,556,676 1,499,036
Motor Vehicles......................... 84,111 140,633 140,171
----------- ----------- -----------
4,149,737 4,520,145 4,443,735
Less: Accumulated Depreciation....... (1,716,586) (1,955,685) (2,009,266)
----------- ----------- -----------
Net Property and Equipment........... 2,433,151 2,564,460 2,434,469
----------- ----------- -----------
Other Assets
Intangible Assets (Note 1)............. 48,667 38,363 28,059
----------- ----------- -----------
Total Assets......................... $ 5,194,624 $ 5,321,763 $ 5,378,782
=========== =========== ===========
</TABLE>
See Accompanying Notes to Combined Financial Statements.
F-22
<PAGE>
SOWERBY ENTERPRISES
COMBINED BALANCE SHEETS
AT DECEMBER 31,
----------------
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C> <C>
Current Liabilities
Note Payable--Current Portion (Note 3)... $ 33,980 $ 33,954 $ 26,600
Mortgage Payable--Current Portion (Note
3)...................................... 86,400 80,000 80,000
Obligations Under Capital Leases--Current
Portion
(Note 4)................................ 56,400 58,464 15,223
Accounts Payable......................... 282,496 221,124 234,317
Accrued Rent (Note 2).................... 565,000 250,000 --
Accrued Compensation and Benefits........ 839,719 812,974 903,367
---------- ---------- ----------
Total Current Liabilities.............. 1,863,995 1,456,516 1,259,507
---------- ---------- ----------
Long-Term Debt
Notes Payable--Net of Current Portion
(Note 3)................................ 139,526 105,128 77,092
Mortgage Payable (Note 3)................ 1,996,431 1,922,810 1,843,423
Obligations under Capital Leases--Net of
Current Portion (Note 4)................ 73,388 15,223 --
Loans From Stockholder (Note 2).......... 705,000 730,000 655,000
Loan Payable--Affiliate (Note 2)......... 345,000 370,000 411,000
---------- ---------- ----------
Total Long-Term Debt................... 3,259,345 3,143,161 2,986,515
---------- ---------- ----------
Total Liabilities...................... 5,123,340 4,599,677 4,246,022
---------- ---------- ----------
Stockholder's Equity
Common Stock--No Par Value
Authorized--300 Shares
Issued and Outstanding--100 Shares...... 92,000 92,000 92,000
Additional Paid-in-Capital............... 49,831 49,831 49,831
Retained Earnings (Deficit) (Exhibit C).. (10,547) 640,255 1,050,929
---------- ---------- ----------
131,284 782,086 1,192,760
Less: Treasury Stock at Cost
49 Shares............................. (60,000) (60,000) (60,000)
---------- ---------- ----------
Total Stockholder's Equity............. 71,284 722,086 1,132,760
---------- ---------- ----------
Total Liabilities and Stockholders'
Equity................................ $5,194,624 $5,321,763 $5,378,782
========== ========== ==========
</TABLE>
See Accompanying Notes to Combined Financial Statements
F-23
<PAGE>
SOWERBY ENTERPRISES
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net Patient Service Revenue............. $19,342,515 $21,271,939 $21,956,010
----------- ----------- -----------
OPERATING EXPENSES
Facility Operating Expenses........... 14,621,845 15,942,680 16,837,294
Rent (Notes 2 & 5).................... 2,734,000 2,526,000 2,382,000
Depreciation.......................... 210,346 240,299 262,889
Management Fee (Note 2)............... 1,460,400 1,726,500 1,832,000
Loss on Disposal of Fixed Assets...... -- -- 33,539
Amortization.......................... 10,305 10,305 10,305
----------- ----------- -----------
Total Operating Expenses............ 19,036,896 20,445,784 21,358,027
----------- ----------- -----------
Operating Income.................... 305,619 826,155 597,983
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest Expense...................... (189,395) (193,204) (199,313)
Interest Income....................... 25,961 38,912 38,609
Other................................. 2,429 2,006 --
----------- ----------- -----------
Total Other Income (Expense)........ (161,005) (152,286) (160,704)
----------- ----------- -----------
Net Income Before Provision for Income
Tax.................................. 144,614 673,869 437,279
Provision for State Income Taxes (Note
1)................................... (15,946) (23,067) (26,605)
----------- ----------- -----------
Net Income.............................. $ 128,668 $ 650,802 $ 410,674
=========== =========== ===========
</TABLE>
See Accompanying Notes to Combined Financial Statements
F-24
<PAGE>
SOWERBY ENTERPRISES
COMBINED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ----------
<S> <C> <C> <C>
Accumulated Adjustments Account
Balance Beginning.......................... $(638,489) $(404,132) $ (94,010)
Taxable Income............................. 223,254 274,519 96,271
Interest Income............................ 25,961 38,912 38,609
Non-Deductible Expenses.................... (14,858) (3,309) (2,124)
--------- --------- ----------
Balance Ending............................. (404,132) (94,010) 38,746
--------- --------- ----------
Accumulated Earnings and Profits
Subchapter C Corporation Income............ (96,082) (96,082) (96,082)
--------- --------- ----------
Tax Timing Adjustments
Balance Beginning.......................... 595,465 489,776 830,456
Tax Deferred Income........................ (105,689) 340,680 277,918
--------- --------- ----------
Balance Ending............................. 489,776 830,456 1,108,374
--------- --------- ----------
Other Retained Earnings
Balance Ending............................. (109) (109) (109)
--------- --------- ----------
Total Retained Earnings (Deficit)............ $ (10,547) $ 640,255 $1,050,929
========= ========= ==========
</TABLE>
See Accompanying Notes to Combined Financial Statements
F-25
<PAGE>
SOWERBY ENTERPRISES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income............................... $ 128,668 $ 650,802 $ 410,674
Non-Cash Items Included in Net Income:
Depreciation and Amortization.......... 220,651 250,604 273,194
Loss on Retirement of Assets........... -- -- 33,539
Changes In:
Patient Related Receivables............ (34,112) (146,373) (95,239)
Prepaid Expenses....................... 164 13,228 (32,685)
Due from Affiliate..................... (1,974) 39,981 232,533
Accounts Payable....................... 31,750 (61,372) 13,193
Accrued Rent........................... 115,000 (315,000) (250,000)
Accrued Expenses....................... 246,016 (26,745) 90,393
---------- ---------- ----------
Net Cash Flows Provided By Operating Ac-
tivities................................ 706,163 405,125 675,602
---------- ---------- ----------
Cash Flows From Investing Activities
Additions to Property and Equipment...... (337,663) (371,608) (174,388)
Proceeds From Disposal of Property and
Equipment............................... -- -- 7,950
---------- ---------- ----------
Net Cash Flows Used In Investing Activi-
ties.................................... (337,663) (371,608) (166,438)
---------- ---------- ----------
Cash Flows From Financing Activities
Payments on Bank Debt.................... (111,856) (114,445) (114,777)
Payments of Capital Lease Obligations.... (43,490) (56,101) (58,464)
Payments to Stockholder.................. (185,000) 25,000 (75,000)
Loans From Affiliate..................... 75,000 25,000 41,000
Additions to Capital Lease Obligations... 73,854 -- --
---------- ---------- ----------
Net Cash Flows Used In Financing Activi-
ties.................................... (191,492) (120,546) (207,241)
---------- ---------- ----------
Net Increase (Decrease) in Cash............ 177,008 (87,029) 301,923
Cash--Beginning of Year.................... 1,082,983 1,259,991 1,172,962
---------- ---------- ----------
CASH--END OF YEAR.......................... $1,259,991 $1,172,962 $1,474,885
========== ========== ==========
Supplemental Disclosure Of Cash Flow Infor-
mation....................................
Cash Payment for Interest................ $ 189,395 $ 193,204 $ 199,313
========== ========== ==========
Cash Payment for Taxes................... $ 1,132 $ 37,850 $ 26,400
========== ========== ==========
</TABLE>
See Accompanying Notes to Combined Financial Statements
F-26
<PAGE>
SOWERBY ENTERPRISES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Sowerby Enterprises operates a group of six nursing homes with a total of
537 beds throughout New Hampshire. The combined financial statements include
the accounts of Westwood Healthcare Center, Inc., Crestwood Healthcare Center,
Inc., Milford Nursing Home, Inc., Northwood Healthcare Center, Inc., Applewood
Healthcare Center, Inc. and Pheasant Wood Nursing Home, Inc. A summary of the
Company's significant accounting policies follows.
Nature of the Business
The combined Companies are licensed proprietary health care providers,
organized under corporate charter in the State of New Hampshire. Their
services are available to qualified in-state and out-of-state private and
welfare recipients in accordance with the State of New Hampshire Department of
Human Services Principles of Reimbursement.
Patient Revenues and Accounts Receivable
Patient service revenue is reported at the estimated net realizable amounts
from residents, third-party payors and others for services rendered. Revenue
under third-party payor agreements is subject to audit and retroactive
adjustment. Provisions for estimated third-party payor settlements are
provided in the period the related services are rendered. Differences between
the estimated amounts accrued and interim and final settlements are reported
in operations in the year of settlement.
Accounts Receivable and Revenue Recognition
The combined Companies are on the specific charge off method of accounting
for bad debts, charging bad accounts to expense as management deems them
worthless. Collection of accounts written off in prior periods is treated as
income in the period of collection.
Cash and Cash Equivalents
Cash and cash equivalents include investments in highly liquid debt
instruments with a maturity of three months or less.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets. Assets
lives range from 4 to 20 years. Depreciation expense for the years ended
December 31, 1993, 1994 and 1995 was $210,346, $240,299 and $262,889,
respectively.
Income Taxes
The Companies, with the consent of their stockholder, have elected under the
Internal Revenue Code to be taxed as an "S' corporation. In lieu of Federal
corporate income taxes, the stockholder of the "S' corporation is taxed on the
taxable income of the Company. Therefore, no provision for Federal income
taxes has been included in these financial statements. The provision for State
income taxes consists of the current income taxes due to the State of New
Hampshire since New Hampshire does not recognize "S' Corporation status.
Intangible Assets
Amortization of intangibles is calculated by the straight-line method.
Start-up costs are amortized over sixty (60) months. Closing costs incurred in
securing the mortgages are amortized over 22 years, the term of the mortgage.
F-27
<PAGE>
SOWERBY ENTERPRISES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
Amortization expense for the years ended December 31, 1993, 1994 and 1995
was $10,305.
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Unamortized Start-up Costs.......................... $33,039 $23,819 $14,599
Unamortized Closing Costs........................... 15,628 14,544 13,460
------- ------- -------
Total Intangible Assets........................... $48,667 $38,363 $28,059
======= ======= =======
</TABLE>
Concentration of Credit Risk
The Companies invest excess cash in debt instruments of a financial
institution with strong credit ratings that maintain safety and liquidity. The
Companies have not experienced any losses on cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Reclassification
Certain previously reported amounts have been reclassified to conform with
the current period presentation. There was no change in profit arising from
these changes.
NOTE 2--RELATED PARTY TRANSACTIONS
The sole stockholder and principal officer of the combined Companies
personally owns the real estate used by several of the facilities. Rent
accrued at December 31, 1993 and 1994 amounted to $565,000 and $250,000,
respectively. No rent was payable to the sole stockholder at December 31,
1995. Rent expense for the years ended December 31, 1993, 1994 and 1995
amounted to $2,734,000, $2,526,000 and $2,382,000, respectively.
Management fees are paid to a related management corporation and amounted to
$1,460,000, $1,726,500 and $1,832,000 for the years ended December 31, 1993,
1994 and 1995, respectively. The combined Companies and the related management
company are under the common ownership of Dwight D. Sowerby.
Amounts due from affiliate represent over-funding of the self-insured health
insurance program controlled through a related management company and loans to
the related management company. No terms for interest have been made. For the
years ended December 31, 1993, 1994 and 1995 the amount due from affiliate
amounted to $727,514, $687,533 and $455,000, respectively. Loans to affiliate
made by Pheasant Wood Nursing Home amounted to $675,000, $675,000 and $455,000
for the years ended December 31, 1993, 1994 and 1995, respectively.
Loan Payable--Affiliate, represents monies advanced to the Company from a
related management organization. For the years ended December 31, 1993, 1994
and 1995 the loan payable to affiliate amounted to $345,000, $370,000 and
$411,000, respectively.
Amounts advanced to the combined Companies by its sole stockholder for the
years ended December 31, 1993, 1994 and 1995 amounted to $705,000, $730,000
and $655,000, respectively.
F-28
<PAGE>
SOWERBY ENTERPRISES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
NOTE 3--LONG-TERM DEBT
Long-term debt at December 31, 1993, 1994 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Note payable to a Bank, in monthly
installments of $834 including interest at
9%. Final payment due November 1995,
collateralized by a motor vehicle............ $ 17,514 $ 8,754 $ --
First Mortgage, Peterborough Savings Bank, due
December 2008, secured by building and
equipment. Interest is adjusted yearly each
June, rates at December 31, 1995, 1994 and
1993 were 9.42%, 8.73% and 6.90%,
respectively................................. 2,082,831 $2,002,810 1,923,423
Note Payable, Peterborough Savings Bank, due
in monthly installments of $3,045 including
interest at 1% above prime (9.75%, 9.5% and
7% at December 31, 1995, 1994 and 1993,
respectively), refinanced on January 10,
1992, final payment due January 1999. This
note is secured by all furniture and
fixtures..................................... 155,992 130,328 103,692
---------- ---------- ----------
Total Long-Term Debt........................ 2,256,337 2,141,892 2,027,115
Less: Current Portion ...................... 120,380 113,954 106,600
---------- ---------- ----------
Total Long-Term Debt--Net of Current
Portion.................................... $2,135,957 $2,027,938 $1,920,515
========== ========== ==========
</TABLE>
On January 1, 1996 all long-term debt was repaid in full in a transaction
related to the sale of the company's assets, see Note 7.
NOTE 4--CAPITAL LEASE COMMITMENTS
The combined Companies lease computer equipment under long-term capital
leases. During the year ended December 31, 1995, rentals under long-term lease
obligations were $66,285 of which $58,464 was recorded as principal and $7,821
as interest. Future obligations over the terms of the Corporation's long-term
leases as of December 31, 1995 are:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -------
<S> <C>
1996................................................................ $16,000
Less: Amounts Representing Interest............................... (777)
-------
15,223
Less: Current Maturities of Capitalized Lease Obligations......... (15,223)
-------
Capitalized Lease Obligations, Less Current Maturities.............. $ --
=======
</TABLE>
The computer equipment is recorded at a cost of $195,301 with related
accumulated depreciation of $117,498.
NOTE 5--OPERATING LEASE ARRANGEMENTS
The Northwood Healthcare Center, Inc. facility leases its real estate under
a ten year lease which began in June of 1992. The lease calls for minimum
annual lease payments amounting to $1,080,000 due on the first day
F-29
<PAGE>
SOWERBY ENTERPRISES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
of each month with additional lease payments sufficient to pay all mortgage
payments including payments to reserves for betterments, insurance, taxes and
necessary repairs. Per a regulatory agreement signed with the United States
Department of Housing and Urban Development, the agreement is subject and
subordinate to the mortgage security note with Reilly Mortgage Group, Inc. The
mortgage note is for 40 years commencing in September 1991 in the amount of
$7,469,800 as amended on August 19, 1993 and again on April 29, 1994.
Principal and interest in the amount of $51,336 are due and payable monthly.
The interest rate at December 31, 1995 was 7.875%.
On January 1, 1996, this note was assumed by Medi Trust of Bedford, Inc., in
a transaction related to the sale of the company.
NOTE 6--401(K) PROFIT SHARING PLAN
The combined Companies maintain a 401(K) Profit Sharing Plan. Under the
plan, employees eligible to participate are permitted to make salary reduction
contributions equal to a percentage of annual salary up to 15%. The Plan
allows for a discretionary company matching contribution in an amount equal to
50% of contributions made by the employee, up to a maximum of 5% of the
employee's salary. For the year ended December 31, 1995 the Company did not
make a contribution to the plan and for the years ended December 31, 1993 and
1994 the company contributed $28,628 and $87,756, respectively.
NOTE 7--SUBSEQUENT EVENT--SALE OF BUSINESS
During July of 1995, the combined Companies entered into an agreement with
KHI Corporation to sell substantially all of the assets of the Corporations.
The sale was completed on January 1, 1996.
NOTE 8--CONTINGENCIES
The combined Companies are a guarantor of certain debt of its sole
stockholder totalling $1,385,130. This debt is secured by various business
assets of the Company and a second mortgage on the certain real estate owned
by Pheasant Wood Nursing Home, Inc. This debt was repaid on January 1, 1996 in
a transaction related to the sale of the Company's assets.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
Partners
Beachwood Care Center, Westbay Manor
Company, Westbay Manor II Development
Company, Royalview Manor Company,
and Royalview Manor Development Company
(all Ohio Partnerships)
Cleveland, Ohio
We have audited the combined balance sheets of Beachwood Care Center,
Westbay Manor Company, Westbay Manor II Development Company, Royalview Manor
Company, and Royalview Manor Development Company (all Ohio partnerships), as
of December 31, 1994 and 1995 and the related combined statements of income,
partners' equity and cash flows for the years ended December 31, 1993, 1994
and 1995. These combined financial statements are the responsibility of the
Partnerships' management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Beachwood
Care Center, Westbay Manor Company, Westbay Manor II Development Company,
Royalview Manor Company, and Royalview Manor Development Company as of
December 31, 1995 and 1994, and the results of its combined operations,
changes in partners' equity and cash flows for the years ended December 31,
1995, 1994 and 1993, in conformity with generally accepted accounting
principles.
Howard, Wershbale & Co.
Beachwood, Ohio
March 15, 1996
F-31
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY, ROYALVIEW MANOR
COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
COMBINED BALANCE SHEETS
----------------
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 6,741,168 $ 6,879,695 $ 8,186,746
Receivables:
Residents.......................... 1,874,206 2,214,225 1,829,377
Estimated settlements from
government programs............... 42,300 66,400 146,200
Note receivable, related party....... 50,000 -- --
Prepaid expenses and other current
assets.............................. 123,194 209,184 190,470
----------- ----------- -----------
Total current assets............. 8,830,868 9,369,504 10,352,793
Restricted investments................. 1,389,382 1,268,721 1,112,168
Property and equipment, net............ 16,283,603 15,522,011 15,331,275
Deferred costs, net.................... 598,584 560,239 554,177
----------- ----------- -----------
Total assets..................... $27,102,437 $26,720,475 $27,350,413
=========== =========== ===========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Current maturities:
Mortgage notes payable............. $ 277,328 $ 297,877 $ 317,073
Note payable, bank................. 300,000 -- --
Accounts payable..................... 1,329,158 1,929,787 1,556,390
Accrued employee compensation and
benefits............................ 1,268,061 1,282,970 1,276,931
Accrued interest..................... 134,067 131,345 130,886
Other accrued liabilities............ 595,782 560,004 509,996
Estimated settlements due government
programs............................ 792,500 395,700 296,100
Due to affiliated management compa-
nies................................ 1,335,384 691,220 1,227,666
----------- ----------- -----------
Total current liabilities........ 6,032,280 5,288,903 5,315,042
----------- ----------- -----------
Long-term debt:
Mortgage notes payable, net of cur-
rent portion........................ 18,700,446 18,267,603 18,172,626
Note payable, bank, net of current
portion............................. 75,000 -- --
Loans and interest payable, related
parties............................. 695,552 401,984 406,957
----------- ----------- -----------
19,470,998 18,669,587 18,579,583
----------- ----------- -----------
Total liabilities................ 25,503,278 23,958,490 23,894,625
Partners' equity....................... 1,599,159 2,761,985 3,455,788
----------- ----------- -----------
$27,102,437 $26,720,475 $27,350,413
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-32
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY, ROYALVIEW MANOR
COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
COMBINED STATEMENTS OF INCOME
----------------
<TABLE>
<CAPTION>
THREE
YEAR ENDED DECEMBER 31, MONTHS ENDED
----------------------------------- MARCH 31,
1993 1994 1995 1996
----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenue:
Net resident service reve-
nue........................ $28,724,617 $29,103,836 $32,165,648 $8,242,306
Other....................... 179,746 180,129 151,040 29,317
----------- ----------- ----------- ----------
Total operating revenue... 28,904,363 29,283,965 32,316,688 8,271,623
----------- ----------- ----------- ----------
Expenses:
Operating expenses.......... 21,664,216 23,005,764 24,660,055 6,342,664
Management fees to affili-
ates....................... 2,373,530 2,320,226 2,663,818 742,390
Depreciation and amortiza-
tion....................... 851,849 875,071 881,749 203,478
Interest.................... 1,977,252 1,863,098 1,626,695 398,091
----------- ----------- ----------- ----------
Total expenses............ 26,866,847 28,064,159 29,832,317 7,686,623
----------- ----------- ----------- ----------
Income from operations........ 2,037,516 1,219,806 2,484,371 585,000
Investment earnings........... 275,445 285,778 440,395 108,803
----------- ----------- ----------- ----------
Net income.................... $ 2,312,961 $ 1,505,584 $ 2,924,766 $ 693,803
=========== =========== =========== ==========
</TABLE>
See notes to financial statements.
F-33
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY, ROYALVIEW MANOR
COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
COMBINED STATEMENTS OF PARTNERS' EQUITY
----------------
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1992................ $1,215,908 $ 1,365,918 $ 2,581,826
Net income................................ 448,238 1,864,723 2,312,961
Distributions............................. (424,708) (1,275,292) (1,700,000)
---------- ----------- -----------
Balance, December 31, 1993................ 1,239,438 1,955,349 3,194,787
---------- ----------- -----------
Net income................................ 486,425 1,019,159 1,505,584
Distributions............................. (448,710) (2,652,502) (3,101,212)
---------- ----------- -----------
Balance, December 31, 1994................ 1,277,153 322,006 1,599,159
---------- ----------- -----------
Net income................................ 627,169 2,297,597 2,924,766
Distributions............................. (622,439) (1,288,301) (1,910,740)
Contributions............................. -- 148,800 148,800
---------- ----------- -----------
Balance, December 31, 1995................ 1,281,883 1,480,102 2,761,985
---------- ----------- -----------
Net income (unaudited).................... 273,741 420,062 693,803
---------- ----------- -----------
Balance, March 31, 1996 (unaudited)....... $1,555,624 $ 1,900,164 $ 3,455,788
========== =========== ===========
</TABLE>
See notes to financial statements.
F-34
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY, ROYALVIEW MANOR
COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
COMBINED STATEMENTS OF CASH FLOWS
----------------
<TABLE>
<CAPTION>
THREE
YEAR ENDED DECEMBER 31, MONTHS ENDED
------------------------------------- MARCH 31,
1993 1994 1995 1996
----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net income............. $ 2,312,961 $ 1,505,584 $ 2,924,766 $ 693,803
Adjustments to recon-
cile net income to net
cash provided by oper-
ating activities:
Depreciation and amor-
tization.............. 851,849 875,071 881,749 203,478
----------- ----------- ----------- ----------
3,164,810 2,380,655 3,806,515 897,281
Change in receivables
and estimated settle-
ments from/due govern-
ment programs......... 2,604,649 (467,324) (436,168) 205,448
(Increase) decrease in
prepaid expenses and
other current assets.. 52,337 (44,584) (85,990) 18,714
Increase (decrease) in
accounts payable...... (148,926) (203,896) 275,878 (373,397)
Increase in accrued em-
ployee compensation
and benefits.......... 298,465 100,941 14,909 (6,039)
Decrease in accrued in-
terest................ (1,449) (23,719) (2,722) (459)
Increase (decrease) in
other
accruedliabilities.... 117,965 (2,829) (35,778) (50,008)
Increase (decrease) due
to affiliated manage-
ment companies........ 57,262 (53,982) (644,164) 536,446
----------- ----------- ----------- ----------
Net cash provided by
operating activities.. 6,145,113 1,685,262 2,892,480 1,227,986
----------- ----------- ----------- ----------
Investing activities:
Additions to property
and equipment......... (30,615) (296,475) (81,812) (6,680)
(Increase) decrease in
note receivable....... -- (50,000) 50,000 --
----------- ----------- ----------- ----------
Net cash used for fi-
nancing activities.... (30,615) (346,475) (31,812) (6,680)
----------- ----------- ----------- ----------
Financing activities:
Payments of note pay-
able.................. (225,000) (300,000) (375,000) --
Payments of mortgage
notes payable......... (177,775) (212,064) (412,294) (75,000)
Distributions to part-
ners.................. (1,700,000) (3,101,212) (1,910,740) --
Net decrease (increase)
in restricted cash.... (228,588) 381,718 120,661 156,553
Contribution from part-
ner................... -- -- 148,800 --
Decrease in loans and
interest, related par-
ties.................. 14,304 (175,021) (293,568) 4,192
Increase in deferred
costs................. -- (20,348) -- --
----------- ----------- ----------- ----------
Net cash used for fi-
nancing activities.... (2,317,059) (3,426,927) (2,722,141) 85,745
----------- ----------- ----------- ----------
Net increase (decrease)
in cash and cash equiv-
alents................. 3,797,439 (2,088,140) 138,527 1,307,051
Cash and cash equiva-
lents, beginning....... 5,031,869 8,829,308 6,741,168 6,879,695
----------- ----------- ----------- ----------
Cash and cash equiva-
lents, ending.......... $ 8,829,308 $ 6,741,168 $ 6,879,695 $8,186,746
=========== =========== =========== ==========
</TABLE>
See notes to financial statements.
F-35
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT
COMPANY, ROYALVIEW MANOR COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
----------------
1. DESCRIPTION OF PARTNERSHIPS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of Partnerships:
Beachwood Care Center, Westbay Manor Company, Westbay Manor II Development
Company (all limited partnerships) and Royalview Manor Company (a general
partnership) are organized as Ohio partnerships for the purpose of operating
nursing facilities under Section 232 of the National Housing Act. The
Partnerships located in Cleveland, Ohio, operate four nursing facilities
consisting of 692 beds. Royalview Manor Development Company, organized as an
Ohio limited partnership, leases its nursing facility to Royalview Manor
Company. The entities are collectively referred to as the "Partnerships" in
these combined financial statements.
Principles of combination:
The Partnerships were combined based on common ownership. All material
intercompany transactions and balances have been eliminated.
Unaudited Interim Financial Data:
The interim financial data at March 31, 1996 and for the three months then
ended included herein are unaudited and, in the opinion of management, reflect
all adjustments (consisting of only normal recurring adjustments) necessary
for a fair presentation of financial position and the results of operations
and cash flows for such interim period.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements, and the reported amounts of revenue and expenses during
the reporting period. Revisions in estimates are recorded in the period in
which the facts which require the revisions become known.
Cash and cash equivalents:
Cash and cash equivalents consist of highly liquid investments with
maturities of three months or less at the date of their acquisition by the
Partnerships. Included in cash and cash equivalents are interest bearing
advances to an affiliate's joint investment account, which is primarily
invested in overnight repurchase agreements. Cash held and invested by the
affiliate, amounted to $6,705,524 at December 31, 1994, $6,793,307 at December
31, 1995 and $7,881,625 at March 31, 1996. For purposes of the statements of
cash flows, the Partnerships consider cash held by the affiliate to be cash
equivalents.
Resident service revenue/accounts receivable:
Resident service revenue is recorded at established billing rates as
services are rendered. Reductions are currently provided for as contractual
adjustments representing the difference between established billing rates and
amounts advanced under the Medicaid and Medicare programs.
Estimated amounts management believes will result from audits and
settlements by the appropriate governmental authority in the determination of
final reimbursement rates are included in these statements. Revisions in
estimates are reflected in the period in which the facts which require the
revisions become known. Net resident service revenue increased as a result of
such adjustments by $116,000 in 1993, decreased by $251,700 in 1994, increased
by $439,000 in 1995 and $176,000 in the three months ended March 31, 1996.
F-36
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY,
ROYALVIEW MANOR COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
----------------
Two of the Partnerships have filed Medicare routine cost limit exceptions
for the years ended 1991 through 1993 with the Medicare Intermediary. If
granted, these exceptions would retroactively increase the Partnerships'
Medicare reimbursement rates. The exception requests require approval by both
the Intermediary and the Health Care Financing Administration (HCFA). The
Partnerships' will record these amounts to income when approval is obtained.
In the opinion of management, amounts received, if any, could be material to
the financial statements.
In addition, based on the Medicare routine cost limit exceptions filed for
1991 through 1993 by the two Partnerships and an interim Medicare routine cost
limit exception filed by another Partnership for the year ended December 31,
1994, the Partnerships' 1994 and 1995 Medicare reimbursement rates were
adjusted by the Intermediary during 1995 to include an estimated amount for
1994 and 1995 exception limitations. The Partnerships have recorded these
amounts in revenue in the 1995 financial statements less an estimate of
amounts considered overadvanced using the guidance under Statement of
Financial Accounting Standards (SFAS) No. 5, "Accounting for Contingencies".
Revisions in these estimates which could be material to the financial
statements, will be reflected in the period the rates are final settled by the
Intermediary.
Accounts receivable, residents are due both from residents and governmental
agencies. Accounts receivable from governmental agencies are recorded net of
credit balances due to those agencies since legal right of setoff exists. The
Partnerships provide an allowance for billing adjustments and bad debts
relating to accounts receivable balances. The allowance amounted to $20,000 at
December 31, 1994 and 1995 and March 31, 1996.
Restricted investments:
Included in restricted investments are certificates of deposit and
marketable debt securities consisting of government securities. These
securities are classified as held-to-maturity and are carried at amortized
cost, which approximates market value at December 31, 1994 and 1995 and March
31, 1996.
Property and equipment:
The assets are recorded at cost and depreciated using the straight-line and
accelerated methods over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Land improvements...................................................... 20
Building and improvements.............................................. 30-32
Furniture, fixtures and equipment...................................... 5-10
</TABLE>
Deferred costs:
Deferred costs include financing and organization costs. Deferred financing
costs resulted from charges incurred in obtaining the mortgage notes payable
and are being amortized using the straight-line method over the terms of the
mortgages. Organization costs are being amortized using the straight-line
method over five years.
F-37
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY,
ROYALVIEW MANOR COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
----------------
Income taxes:
The Partnerships are not subject to federal and state income taxes. Instead,
the partners are taxed on their share of the Partnerships' taxable income,
whether or not distributed. Therefore, no provision for income taxes has been
made in these combined financial statements.
2. MEDICARE AND MEDICAID REIMBURSEMENT:
Three of the Partnerships received a portion of their net resident service
revenue from the Medicare and Ohio Medicaid programs. Combined Medicare and
Medicaid revenue was approximately 66% in 1993 and 1994, 67% in 1995, and 68%
in the three months ended March 31, 1996 of total combined net resident
service revenue.
Collection of accounts receivable in the normal course of business is
dependent on payment by the Medicare and Medicaid programs. Net combined
amounts included in accounts receivable and estimated settlements due from/to
third party payors amounted to approximately $827,400, $905,400 and $1,042,700
at December 31, 1994, 1995, and March 31, 1996, respectively.
3. RESTRICTED INVESTMENTS:
Restricted investments consisted of the following at December 31, 1994 and
1995:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
---------- ----------
<S> <C> <C>
Mortgage escrow deposits.............................. $ 276,611 $ 211,450
Replacement reserve................................... 985,312 1,057,271
Other................................................. 127,459 --
---------- ----------
$1,389,382 $1,268,721
========== ==========
</TABLE>
Included in restricted investments are amounts invested in certificates of
deposit totalling $362,255, and $443,974, and government securities totalling
$473,540 and $522,645 at December 31, 1994 and 1995, respectively. At December
31, 1995 government securities mature within one year.
4. DEFERRED COSTS:
Deferred costs consisted of the following at December 31, 1994 and 1995.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Deferred financing costs............................... $ 842,139 $ 842,139
Organization costs..................................... 109,410 109,410
--------- ---------
951,549 951,549
Less accumulated amortization.......................... (352,965) (391,310)
--------- ---------
$ 598,584 $ 560,239
========= =========
</TABLE>
F-38
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY,
ROYALVIEW MANOR COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
----------------
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31, 1994 and
1995:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
----------- -----------
<S> <C> <C>
Land and improvements............................. $ 2,507,813 $ 2,515,513
Buildings and improvements........................ 17,987,730 17,912,730
Furniture, fixtures and equipment................. 2,606,978 2,640,534
----------- -----------
23,102,521 23,068,777
Less accumulated depreciation and amortization.... 6,818,918 7,546,766
----------- -----------
$16,283,603 $15,522,011
=========== ===========
</TABLE>
6. NOTE PAYABLE, BANK:
A Partnership had a revolving line of credit amounting to $1,000,000 with
interest at the bank's prime plus 1% which was converted to a note payable
effective April, 1993. The note required monthly installments of $25,000 plus
interest through April, 1996. The interest rate at December 31, 1994 was 9.5%.
The loan was collateralized by the accounts receivable of the Partnership and
guaranteed by certain partners of the Partnership. The note payable amounted
to $375,000 at December 31, 1994 which was repaid during 1995.
7. MORTGAGE NOTES PAYABLE:
Property and equipment are pledged as collateral on mortgage notes payable,
which are insured by the FHA and have the following terms:
<TABLE>
<S> <C>
Original amount.............................................. $20,335,500
Monthly payments............................................. $156,453
Interest rates............................................... 6.45% to 9.7%
</TABLE>
The mortgage notes payable mature at various dates as follows:
<TABLE>
<CAPTION>
BALANCE,
PARTNERSHIP MATURITY DATE DECEMBER 31, 1995
----------- ---------------- -----------------
<S> <C> <C>
Beachwood Care Center.................... December 1, 2030 $10,909,165
Westbay Manor Company.................... October 1, 2010 2,346,298
Westbay Manor II Development Company..... July 1, 2013 2,155,206
Royalview Manor Development Company...... June 1, 2013 3,154,811
-----------
$18,565,480
===========
</TABLE>
During 1994, certain Partnerships entered into mortgage modification
agreements reducing the interest rates and principal and interest payments.
F-39
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY,
ROYALVIEW MANOR COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
----------------
Future principal payment requirements of the mortgages at December 31, 1995
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996......................................................... $ 297,877
1997......................................................... 319,981
1998......................................................... 343,768
1999......................................................... 369,350
2000......................................................... 396,887
Later Years.................................................. 16,837,617
-----------
$18,565,480
===========
</TABLE>
Beachwood Care Center's mortgage note payable is held by an affiliated
company.
Under agreements with the mortgage lenders and FHA, the Partnerships are
required to make monthly escrow deposits for taxes, insurance and replacement
of Partnership assets, and are subject to restrictions for their release and
as to operating policies and distributions to partners. These deposits are
included in restricted investments in the accompanying combined financial
statements. Certain of the Partnerships' mortgages contain prepayment
penalties decreasing annually at various dates through September, 1998.
The liability of the Partnerships under the mortgage notes payable is
limited to the underlying value of the real estate collateral, plus other
amounts deposited with the lenders.
Based on borrowing rates currently available to the Partnerships for FHA
insured loans with similar terms and maturities, the approximate fair value of
the mortgages is $20,930,800 at December 31, 1995.
8. RELATED PARTY TRANSACTIONS:
Affiliated companies perform admitting, administrative and other services in
their capacity as managing agents of the facilities. The management companies
earn a 7% base management fee and, if applicable, an incentive management fee.
The management companies earned fees of $2,373,530 in 1993, $2,320,226 in
1994, $2,663,818 in 1995, and $742,390 in the three months ended March 31,
1996. Amounts due to the affiliated management companies totalled $1,335,384,
$691,220 and $1,227,666, at December 31, 1994 and 1995, and March 31, 1996,
respectively.
The Partnerships were advanced funds from partners of the Partnerships. At
December 31, 1994 and 1995 and March 31, 1996, amounts due to the related
parties totalled $695,552, $401,984, and $406,957, respectively, which
included accrued interest totalling $428,236, $211,497, and $216,470,
respectively.
During 1994, a partner was advanced $50,000. The advance was non-interest
bearing and was received during 1995.
A Partnership leases corporate and medical office facilities to an
affiliated company under a five-year operating lease expiring January 1, 1997.
The lease requires monthly payments of $11,000. Total rental income received
from the affiliated company amounted to $132,000 in 1993, 1994 and 1995 and
$33,000 in the three months ended March 31, 1996. Future minimum lease
receipts under the noncancelable operating lease are $132,000 to be received
in the year ending December 31, 1996.
F-40
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY,
ROYALVIEW MANOR COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
----------------
9. SUBSEQUENT EVENT:
During May of 1996, the Partnerships entered into an agreement to lease
their four nursing facilities to an affiliate of Harborside Healthcare
Corporation ("Harborside") for an initial term of five years which is expected
to commence on July 1, 1996. During the first six months of the final year of
the initial term, Harborside may exercise an option to purchase the four
facilities for $57,125,000. Under certain conditions the lease may be extended
for up to two additional years, during which time Harborside must obtain
financing and complete the acquisition. The annual aggregate base rent will be
$5,000,000 during the initial term and $5,500,000 during the extension term,
if any. Harborside has agreed to pay $8,000,000 for its option to purchase the
facilities, which will be applied toward the purchase price. Of this amount,
$5,000,000 will be paid at or prior to the closing of the lease agreement and
the remainder will be paid upon the closing of the purchase or termination of
the lease.
F-41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Bowie Center Limited Partnership:
We have audited the accompanying balance sheets of Bowie Center Limited
Partnership (the "Partnership") as of December 31, 1994 and 1995, and the
related statements of operations and partners' equity and cash flows for the
period from April 7, 1993 (date of inception) through December 31, 1993 and
the years ended December 31, 1994 and 1995. These financial statements are the
responsibility of the General Partners of the Partnership. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by the General Partners of the Partnership, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bowie Center Limited
Partnership as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for the period from April 7, 1993 (date of
inception) through December 31, 1993 and the years ended December 31, 1994 and
1995 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 19, 1996
F-42
<PAGE>
BOWIE CENTER LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(IN THOUSANDS OF DOLLARS)
----------------
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 87 $ 286
Accounts receivable, net of allowance for doubtful accounts of
$89 in 1994 and $389 in 1995.................................. 818 2,322
Prepaid expenses and other..................................... 95 93
------ ------
Total current assets......................................... 1,000 2,701
Property and equipment, net...................................... 4,917 4,678
Intangible assets, net........................................... 590 367
------ ------
Total assets................................................. $6,507 $7,746
====== ======
LIABILITIES
Current liabilities:
Current maturities of long-term debt........................... $ 123 $ 249
Accounts payable............................................... 265 233
Employee compensation and benefits............................. 173 276
Other accrued liabilities...................................... 19 67
Payable to related party....................................... 80 --
Demand note payable to affiliate............................... -- 1,255
------ ------
Total current liabilities.................................... 660 2,080
Long-term debt................................................... 5,002 4,973
------ ------
Total liabilities............................................ 5,662 7,053
Commitments and contingencies (Note H)
PARTNERS' EQUITY
Partners' equity................................................. 845 693
------ ------
Total liabilities and partners' equity....................... $6,507 $7,746
====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-43
<PAGE>
BOWIE CENTER LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS AND PARTNERS' EQUITY
FOR THE PERIOD FROM APRIL 7, 1993 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1993
AND FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
(IN THOUSANDS OF DOLLARS)
----------------
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Revenues:
Net patient service revenues........................... $ -- $2,515 $7,574
Other patient related services......................... -- 8 21
------ ------ ------
Total revenues....................................... -- 2,523 7,595
------ ------ ------
Expenses:
Facility operating..................................... -- 2,407 6,485
Depreciation and amortization.......................... -- 353 537
Interest............................................... -- 286 518
Management fees to an affiliate........................ -- 80 214
------ ------ ------
Total expenses....................................... -- 3,126 7,754
------ ------ ------
Loss from operations..................................... -- (603) (159)
Investment income........................................ -- 5 7
------ ------ ------
Net loss............................................. -- (598) (152)
Contributions............................................ 1,327 116 --
Partners' equity, beginning of period.................... -- 1,327 845
------ ------ ------
Partners' equity, end of period.......................... $1,327 $ 845 $ 693
====== ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-44
<PAGE>
BOWIE CENTER LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM APRIL 7, 1993 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1993
AND THE YEARS ENDED DECEMBER 31, 1994 AND 1995
(IN THOUSANDS OF DOLLARS)
----------------
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Operating activities:
Net loss.......................................... $ -- $ (598) $ (152)
Adjustments to reconcile net loss to net cash
provided by (used by)
operating activities:
Depreciation and amortization..................... -- 353 537
------- ------- -------
-- (245) 385
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable...... -- (818) (1,504)
(Increase) decrease in prepaid expenses and
other.......................................... (2) (93) 2
Increase (decrease) in accounts payable......... 439 (174) (32)
Increase in employee compensation and benefits.. 2 171 103
Increase (decrease) in payable to related
party.......................................... 3 77 (80)
Increase (decrease) in other accrued
liabilities.................................... 170 (151) 48
------- ------- -------
Net cash provided by (used by) operating
activities................................. 612 (1,233) (1,078)
------- ------- -------
Investing activities:
Additions to property and equipment............... (3,192) (1,916) (75)
Transfers (to) from restricted funds.............. (291) 291 --
Additions to intangible assets.................... (15) (722) --
------- ------- -------
Net cash used by investing activities....... (3,498) (2,347) (75)
------- ------- -------
Financing activities:
Contributions..................................... 1,327 116 --
Proceeds from construction loan................... 1,569 2,800 --
Principal payments on long-term debt.............. -- (13) (149)
Demand note payable to affiliate.................. -- -- 1,255
Borrowings on line of credit...................... -- 754 246
------- ------- -------
Net cash provided by financing activities... 2,896 3,657 1,352
------- ------- -------
Net increase in cash and cash equivalents........... 10 77 199
Cash and cash equivalents, beginning of period...... -- 10 87
------- ------- -------
Cash and cash equivalents, end of period............ $ 10 $ 87 $ 286
======= ======= =======
Supplemental disclosure:
Interest paid..................................... $ -- $ 286 $ 474
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-45
<PAGE>
BOWIE CENTER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
----------------
A.ORGANIZATION
Bowie Center Limited Partnership (the "Partnership") was formed on April 7,
1993 (date of inception) to develop and operate a 120 bed nursing facility
(the "facility") in Bowie, Maryland. The facility commenced operations on
April 30, 1994. Harborside Healthcare Limited Partnership ("HHLP") was formed
to acquire and operate healthcare facilities and to provide related healthcare
management services for affiliates of The Berkshire Group Limited Partnership
and its subsidiaries. HHLP holds a 74.25% limited partnership interest in the
Partnership, while an affiliate of HHLP holds a 0.75% general partnership
interest in the Partnership. The remaining 24.75% limited partner interest and
0.25% general partner interest are held by Madison Manor, Inc., an affiliate
of Dimensions Health Corporation, a non-profit corporation which owns and
operates two acute care hospitals and related enterprises.
Profits and losses of the Partnership are allocated to the partners in
accordance with their percentage of ownership. Certain items of income, gain,
loss, deduction, and credit are allocated to the partners in accordance with
Section 4.3.2 of the partnership agreement.
The Partnership is required to make quarterly cash distributions to the
partners in amounts equal to the partners' tax liabilities arising from their
respective shares of the Partnership's net income. The partnership agreement
also calls for distributions to the partners based on the Partnership's
achievement of certain quarterly cash flow objectives as defined in the
partnership agreement.
B.SIGNIFICANT ACCOUNTING POLICIES
The Partnership uses the following accounting policies for financial
reporting purposes:
Cash Equivalents
The Partnership includes all liquid investments with maturities of three
months or less from the date of acquisition in cash and cash equivalents.
Net Patient Service Revenues
Net patient service revenues payable by patients at the facility are
recorded at established billing rates. Net patient service revenues to be
reimbursed by contracts with third-party payors, primarily the Medicare and
Medicaid programs, are recorded at the amount estimated to be realized under
these contractual arrangements. Revenues from Medicare and Medicaid are
generally based on reimbursement of the reasonable direct and indirect costs
of providing services to program participants or a prospective payment system.
The Partnership separately estimates revenues due from each third party with
which it has a contractual arrangement and records anticipated settlements
with these parties in the contractual period during which services were
rendered. The amounts actually reimbursable under Medicare and Medicaid are
determined by filing cost reports which are then audited and generally
retroactively adjusted by the payor. Legislative changes to state or federal
reimbursement systems may also retroactively affect recorded revenues. Changes
in estimated revenues due in connection with Medicare and Medicaid may be
recorded by the Partnership subsequent to the year of origination and prior to
final settlement based on improved estimates. Such adjustments and final
settlements with third party payors, which could materially and adversely
affect the Partnership, are reflected in operations at the time of the
adjustment or settlement.
F-46
<PAGE>
BOWIE CENTER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
----------------
B.SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Concentrations
A significant portion of the Partnership's revenues are derived from the
Medicare and Medicaid programs. There have been, and the Partnership expects
that there will continue to be, a number of proposals to limit reimbursement
allowable to long-term care facilities under these programs. The Partnership
cannot predict at this time whether any of these proposals will be adopted, or
if adopted and implemented, what effect such proposals would have on the
Partnership. Approximately 81% and 77% of the Partnership's net patient
service revenues in 1994 and 1995, respectively, are from the Partnership's
participation in the Medicare and Medicaid programs. As of December 31, 1994
and 1995, $760,743 and $2,261,295 respectively, of net accounts receivable
were due from the Medicare and Medicaid programs.
Provision for Doubtful Accounts
Bad debt expense of $89,000 and $300,000 is included in facility operating
expenses for the year ended December 31, 1994 and 1995, respectively.
Individual patient accounts deemed to be uncollectible are written off against
the allowance for doubtful accounts.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the General Partners to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the period reported.
Actual results could differ from those estimates. Estimates are used when
accounting for the collectibility of receivables, depreciation and
amortization, employee benefit plans and contingencies.
Income Taxes
The Partnership is not liable for federal or state income taxes because the
Partnership's income or loss is allocated to the partners for income tax
purposes. If the Partnership's tax returns are examined by the Internal
Revenue Service or a state taxing authority and such an examination results in
a change in Partnership taxable income or loss, such change will be reported
to the partners.
Property and Equipment
Property and equipment are stated at cost. Expenditures that extend the
lives of affected assets are capitalized, while maintenance and repairs are
charged to expense as incurred. Upon retirement or sale of an asset the cost
of the asset and any related accumulated depreciation are removed from the
balance sheet, and any resulting gain or loss is included in net income.
Depreciation expense is estimated using the straight-line method. These
estimates are calculated using the following estimated useful lives:
<TABLE>
<S> <C>
Land improvements.............................................. 8-40 years
Buildings and improvements..................................... 5-40 years
Equipment, furnishings and fixtures............................ 5-15 years
</TABLE>
F-47
<PAGE>
BOWIE CENTER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
----------------
Intangible Assets
Costs incurred in obtaining the Partnership's long-term debt are being
amortized over the life of the loan. Pre-opening costs for the facility are
being amortized on a straight-line basis over a two-year period beginning with
the facility's commencement of operations.
Assessment of Long-Lived Assets
Effective for the year ended December 31, 1995 the Partnership has adopted
the provisions of Statement of Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." Accordingly, the Partnership periodically reviews the carrying value of
its long-lived assets (primarily property and equipment and intangible assets)
to assess the recoverability of these assets; any impairments would be
recognized in operating results if a diminution in value considered to be
other than temporary were to occur. The adoption of this Statement had no
impact on the Partnership's results of operations for the year ended December
31, 1995. As part of this assessment, the Partnership reviews the expected
future net operating cash flows from its facility.
C.LONG-TERM DEBT
The Partnership obtained a $4,377,000 construction loan from a bank to fund
the construction of the facility. Monthly principal payments of approximately
$5,000 began in September 1994 with the balance of $4,061,000 due in September
1999. As of December 31, 1994, the full amount of the construction loan had
been used. In connection with this loan, the Partnership capitalized interest
of $30,000 and $91,000 during the period from April 7, 1993 (date of
inception) through December 31, 1993 and year ended December 31, 1994,
respectively. In addition to the construction loan, the Partnership also
obtained a $700,000 line of credit from the bank to finance certain pre-
opening costs and initial working capital requirements. During 1994, the
Partnership increased the maximum amount of the line of credit to $1,000,000.
The Partnership borrowed $246,000 under this line of credit in 1995, bringing
the total amount owed under this facility to the $1,000,000 maximum. In July,
1995, the line of credit converted to a term loan. Monthly principal payments
of approximately $16,000 plus interest began in August 1995; a balance of
$262,000 will be due in July 1999.
Interest on each of these loans is at the bank's prime rate (8.50% at
December 31, 1995) plus 1%. Among other requirements, these loans limit the
Partnership's borrowings, acquisitions, dispositions and distributions.
Additionally, the maintenance of specified levels of net worth, working
capital, occupancy at the nursing facility and debt service coverage are also
requirements of the loans. Management believes the Partnership is in
compliance with the loan covenants.
The loans are collateralized by each partner's partnership interest as well
as by all of the assets of the Partnership. Additionally, the loans described
above are supported by the guarantee of HHLP as well as collateral pledged by
the unaffiliated partner. The Partnership agreement states that any liability
incurred by a partner in connection with a guarantee of the Partnership's debt
is limited to that partner's proportionate share of the liability based on its
percentage ownership of the Partnership.
Long-term debt consists of the following at December 31, 1994 and 1995 (in
thousands of dollars):
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Construction loan.......................................... $4,359 $4,305
Line of Credit............................................. 754 906
Capital lease obligation................................... 12 11
------ ------
Total.................................................... $5,125 $5,222
====== ======
</TABLE>
F-48
<PAGE>
BOWIE CENTER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
----------------
The scheduled repayment of long-term debt is as follows (in thousands of
dollars):
<TABLE>
<S> <C>
1996............................................................... $ 249
1997............................................................... 255
1998............................................................... 261
1999............................................................... 4,457
------
Total............................................................ $5,222
======
</TABLE>
D.MANAGEMENT FEES AND EXPENSE REIMBURSEMENTS DUE TO AFFILIATES
Under the terms of a management agreement, HHLP manages the facility in
return for a monthly fee of $10,000, which commenced in May, 1994. When the
facility reached a normal occupancy level in September 1995, the fee was
changed to an amount equal to 5.5% of the facility's net revenues. The
management agreement also defines certain expense reimbursements which the
Partnership pays to affiliated entities for accounting, computer, travel,
legal and payroll expenses incurred on its behalf. These charges amounted to
$29,000 and $51,000 in 1994 and 1995, respectively. These costs have been
charged to operating expenses.
E.PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist of the following (in
thousands):
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Land improvements......................................... $ 694 $ 694
Buildings and improvements................................ 3,932 3,940
Equipment, furnishings and fixtures....................... 497 564
------ ------
5,123 5,198
Less: accumulated depreciation and amortization........... 206 520
------ ------
$4,917 $4,678
====== ======
F.INTANGIBLE ASSETS
Intangible assets are stated at cost and consist of the following (in
thousands):
1994 1995
------ ------
Loan costs................................................ $ 433 $ 433
Pre-opening costs......................................... 304 304
------ ------
737 737
Less: accumulated amortization............................ 147 370
------ ------
$ 590 $ 367
====== ======
</TABLE>
G.RETIREMENT PLAN
Employees of the Partnership may participate in an employee 401(k) defined
contribution plan along with employees of other entities affiliated with HHLP.
All employees of the facility who have worked at least one thousand hours and
completed one year of continuous service are eligible to participate in the
plan. The plan is subject to the provisions of the Employee Retirement Income
Security Act of 1974. The Partnership did not make any contributions to the
plan in 1993, 1994 or 1995.
F-49
<PAGE>
BOWIE CENTER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
----------------
H.CONTINGENCIES
The Partnership is involved in legal actions and claims in the ordinary
course of its business. It is the opinion of the General Partners, based on
the advice of legal counsel, that such litigation and claims will be resolved
without material effect on the Partnership's financial position, results of
operations or liquidity.
I.DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of each class of
financial instruments, for those instruments for which it is practicable to
estimate that value, and the estimated fair values of the financial
instruments are as follows:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short effective
maturity of these instruments.
Long-term Debt
The fair value of the Partnership's long-term debt is estimated based on the
current rates offered to the Partnership for similar debt. The carrying value
of the Partnership's long-term debt approximates its fair value as of December
31, 1994 and 1995.
J.DEMAND NOTE PAYABLE TO AFFILIATE
On December 28, 1995, HHLP advanced $1,255,000 to fund working capital
requirements of the Partnership by means of a demand note bearing interest at
9.0% per annum.
F-50
<PAGE>
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- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRIT-
ER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RE-
LATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURI-
TIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CON-
TAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
The Company.............................................................. 14
The Reorganization....................................................... 14
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Dilution................................................................. 16
Capitalization........................................................... 17
Pro Forma Combined Financial Information................................. 18
Selected Combined Financial and Operating Data........................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 29
Business................................................................. 39
Management............................................................... 60
Certain Transactions..................................................... 68
Stock Ownership of Directors, Executive Officers and Principal Holders... 70
Description of Capital Stock............................................. 71
Shares Eligible for Future Sale.......................................... 73
Underwriting............................................................. 75
Legal Matters............................................................ 76
Experts.................................................................. 76
Additional Information................................................... 77
Index to Financial Statements............................................ F-1
</TABLE>
----------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDI-
TION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UN-
DERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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3,600,000 SHARES
[LOGO]
COMMON STOCK
----------------
PROSPECTUS
----------------
NATWEST SECURITIES LIMITED
DEAN WITTER REYNOLDS INC.
, 1996
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