UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------
FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------- ----------------------------
Commission file number 01-14358
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Harborside Healthcare Corporation
- --------------------------------------------------------------------------------
Delaware 04-3307188
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State or jurisdiction of (IRS employer identification no.)
incorporation or organization)
470 Atlantic Avenue, Boston, Massachusetts 02210
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(Address of principal executive offices) (Zip Code)
(617) 556-1515
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
----- -----
Number of shares of common stock, par value $0.01 per share outstanding as of
November 4, 1997: 8,005,165.
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Table of Contents
Page
Part I. Financial Information
Condensed Consolidated Balance Sheets
December 31, 1996 and September 30, 1997 3
Condensed Consolidated Statements of Operations
For the Three Months and Nine Months Ended
September 30, 1996 and 1997 4
Condensed Consolidated Statements of Changes
in Stockholders Equity for the Nine Months
Ended September 30, 1997 5
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1996 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II Other Information 17
Signatures 18
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
- ------
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 9,722 11,934
Accounts receivable, net of allowances for doubtful
accounts of $1,860 and $2,102, respectively 22,984 28,315
Prepaid expenses and other 3,570 6,694
Demand note due from limited partnership 1,369 -
Deferred income taxes 1,580 1,580
--------- --------
Total current assets 39,225 48,523
Restricted cash 3,751 4,095
Investment in limited partnership 256 128
Property and equipment, net 95,187 94,753
Intangible assets, net 3,004 7,383
Deferred income taxes 376 376
--------- ---------
Total assets $ 141,799 $ 155,258
========= =========
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 169 $ 182
Current portion of capital lease obligation 3,744 3,847
Accounts payable 6,011 4,323
Employee compensation and benefits 8,639 9,875
Other accrued liabilities 2,177 5,650
Accrued interest 19 172
Current portion of deferred income 368 605
Income taxes payable 1,272 831
--------- --------
Total current liabilities 22,399 25,485
Long-term portion of deferred income 2,948 3,718
Long-term portion of capital lease obligation 53,533 52,665
Long-term debt 18,039 23,666
--------- --------
Total liabilities 96,919 105,534
--------- --------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 30,000,000 shares
authorized, 8,000,000 and 8,005,165 shares
issued and outstanding, respectively 80 80
Additional paid-in capital 48,340 48,397
Retained earnings (3,540) 1,247
--------- ---------
Total stockholders' equity 44,880 49,724
--------- ---------
Total liabilities and stockholders' equity $ 141,799 $ 155,258
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Combined prior to June 14, 1996)
(Unaudited)
(dollars in thousands, except per share amounts)
----------
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
--------------------------- ----------------------------
1996 1997 1996 1997
---- ----- ---- ----
<S> <C> <C> <C> <C>
Total net revenues $ 45,903 $ 57,964 $117,706 $155,640
-------- -------- -------- --------
Expenses:
Facility operating 36,622 46,556 94,548 124,073
General and administrative 1,985 2,756 5,415 7,479
Service charges paid to affiliate 161 177 526 531
Special compensation and other - - 1,716 -
Depreciation and amortization 915 989 2,030 2,871
Facility rent 2,565 3,031 7,663 8,340
-------- -------- --------- --------
Total expenses 42,248 53,509 111,898 143,294
-------- -------- --------- --------
Income from operations 3,655 4,455 5,808 12,346
Other:
Interest expense, net 1,383 1,614 3,193 4,370
Income (loss) on investment in
limited partnership (40) 68 327 129
-------- -------- --------- --------
Income before income taxes
and extraordinary loss 2,312 2,773 2,288 7,847
Income taxes 902 1,081 502 3,060
-------- -------- --------- --------
Income before extraordinary loss 1,410 1,692 1,786 4,787
Extraordinary loss on early retirement
of debt, net of taxes of $843 - - (1,318) -
-------- -------- --------- --------
-
Net income $ 1,410 $ 1,692 $ 468 $ 4,787
======== ======== ========= ========
Net income per share $ 0.18 $ 0.21 $ 0.60
======== ======== ========
Pro forma data:
Historical income before income
taxes and extraordinary loss $ 2,288
Pro forma income taxes 492
--------
Pro forma income before
extraordinary loss 1,796
Extraordinary loss, net (1,318)
---------
Pro forma net income $ 478
=========
Pro forma net income per share:
Pro forma income before
extraordinary loss $ 0.31
Extraordinary loss, net 0.23
---------
Pro forma net loss $ 0.08
=========
Weighted average number of
common and common equivalent shares
used in per share computations 8,016,000 8,044,000 5,852,000 8,032,000
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(dollars in thousands)
----------
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings Total
----- ------- -------- -----
<S> <C> <C> <C> <C>
Stockholders' equity, December 31, 1996 $ 80 $48,340 $(3,540) $44,880
Exercise of stock options -- 57 -- 57
Net income for the nine months ended
September 30, 1997 -- -- 4,787 4,787
------- ------- ------- -------
Stockholders' equity, September 30, 1997 $ 80 $48,397 $ 1,247 $49,724
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Combined prior to June 14, 1996)
(Unaudited)
(dollars in thousands)
For the nine months
ended September 30,
-------------------
1996 1997
-------- --------
Operating activities:
Net income $ 468 $ 4,787
Adjustments to reconcile net income
to net cash provided by operating activities:
Minority interest 234 --
Extraordinary loss, net 1,318 --
Depreciation of property and equipment 1,770 2,568
Amortization of intangible assets 260 303
Amortization of deferred income (271) (291)
Loss from investment in limited partnership 327 129
Amortization of loan costs and fees 87 66
Deferred interest (86) --
Common stock grant 225 --
Accretion of interest on capital lease obligation 710 2,185
Other 1 --
-------- --------
5,043 9,747
Changes in operating assets and liabilities:
(Increase) in accounts receivable (11,126) (5,331)
(Increase) in prepaid expenses and other (3,845) (3,124)
(Increase) in deferred income taxes (400) --
Increase (decrease) in accounts payable 1,564 (1,688)
Increase in employee compensation and benefits 4,444 1,236
Increase (decrease) in accrued interest (6) 153
Increase in other accrued liabilities 1,327 3,473
Increase (decrease) in income taxes payable 902 (441)
-------- --------
Net cash provided (used) by operating activities (2,097) 4,025
-------- --------
Investing activities:
Additions to property and equipment (3,711) (2,134)
Additions to intangibles (1,009) (4,749)
Transfers to restricted cash, net (687) (344)
Repayment of demand note -- 1,369
Net cash used by investing activities (5,407) (5,858)
Financing activities:
Issuance of long-term debt -- 5,775
Payment of long-term debt (25,248) (135)
Debt prepayment penalty (1,517) --
Principal payments of capital lease obligation (873) (2,950)
Note payable to an affiliate (2,000) --
Receipt of cash in connection with lease 3,685 1,298
Exercise of stock options -- 57
Dividend distribution (140) --
Distribution to minority interest (33,727) --
Purchase of equity interests 803 --
Proceeds of initial public offering, net 37,731 --
-------- --------
Net cash provided (used) by financing activities (21,286) 4,045
-------- --------
Net increase (decrease) in cash and cash equivalents (28,790) 2,212
Cash and cash equivalents, beginning of period 40,157 9,722
-------- --------
Cash and cash equivalents, end of period $ 11,367 $ 11,934
======== ========
Supplemental Disclosure:
Interest paid $ 3,173 $ 2,561
======== ========
Income taxes paid $ -- $ 3,501
======== ========
Noncash investing and financing activities:
Property and equipment additions by capital lease $ 57,625
======== ========
The accompanying notes are an integral part of the condensed
condated financial statements.
6
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Combined prior to June 14, 1996)
(Unaudited)
A. General
The accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report or Form 10-K for the year ended December
31, 1996. In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the Company's financial position as of
September 30, 1997, the results of its operations for the three-month and
nine-month periods ended September 30, 1997 and 1996 and its cash flows for the
nine-month periods ended September 30, 1997 and 1996. The results of operations
for the three-month and nine-month periods ended September 30, 1997 are not
necessarily indicative of the results which may be expected for the full year.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" included elsewhere in this report.
B. Basis of Presentation
The Company was incorporated as a Delaware corporation on March 19, 1996 and was
formed as a holding company, in anticipation of an initial public offering (the
"Offering", to combine under the control of a single corporation the operations
of various business entities (the "Predecessor Entities") which were all under
the majority control of several related stockholders. Immediately prior to the
Offering, the Company executed an agreement (the "Reorganization Agreement")
which resulted in the transfer of ownership of the Predecessor Entities to the
Company prior to completion of the Offering in exchange for 4,400,000 shares of
the Company's common stock. The Company's financial statements for periods prior
to the Offering have been prepared by combining the historical financial
statements of the Predecessor Entities, similar to a pooling of interests
presentation. On June 14, 1996, the Company completed the issuance of 3,600,000
shares of common stock through the Offering resulting in net proceeds to the
Company (after deducting underwriters' commissions and other offering expenses)
of $37,160,000. The consolidated financial statements include the accounts of
Harborside Healthcare Corporation and its wholly-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
C. Investment in Limited Partnership
The Company holds a 75% partnership interest in Bowie Center Limited Partnership
(the "Partnership") which the Company accounts for using the equity method.
Although the Company owns a majority interest in the Partnership, the Company
only holds a 50% voting interest in the Partnership and accordingly, it does not
exercise control over the operations of the Partnership.
The results of operations of the Partnership are summarized below:
For the nine months ended
-------------------------
September 30,
1996 1997
----------- -----------
Net operating revenues $ 6,047,000 $ 6,258,000
Net operating expenses 5,992,000 6,036,000
Net income (loss) (437,000) (172,000)
The financial position of the Partnership is as follows:
As of September 30, 1997
------------------------
Current assets $2,821,000
Non-current assets 4,771,000
Current liabilities 1,237,000
Non-current liabilities 6,184,000
Partners' equity 171,000
continued
7
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Combined prior to June 14, 1996)
(Unaudited)
D. Special Compensation and Other
During the first nine months of 1996, the Company incurred $1,716,000 of
non-recurring expenses associated with its corporate reorganization and its
initial public offering. Substantially all of these non-recurring expenses
related to special compensation arrangements with key members of management in
connection with the reorganization of the Company's ownership structure which
preceded the completion of its initial public offering.
E. Income Taxes
Prior to the implementation of the Reorganization Agreement, the Predecessor
Entities (primarily partnerships and subchapter S corporations) operated under
common control but were not directly subject to federal or state income taxes
and, accordingly, no provision for income taxes was made in the Company's
historical financial statements prior to the implementation date of the
Reorganization Agreement. A pro forma income tax expense has been reflected for
each period presented prior to the reorganization date, as if the Company had
always owned the Predecessor Entities. The pro forma income tax expense was
computed using an estimated effective tax rate of 39%. The rate was derived by
using the statutory federal income tax rate of 34% plus an average of the
various state statutory income tax rates (net of federal benefits) where the
Company operates.
With the implementation of the Reorganization Agreement, the Company inherited
the tax basis of the Predecessor Entities and recognized a deferred tax asset of
$400,000. This amount resulted from the expected future tax consequences of
temporary differences between the carrying amounts of the transferred assets and
liabilities used for financial reporting purposes and the inherited tax bases
and was reflected as an income tax benefit in the three month period ended June
30, 1996.
F. Acquisitions
As of July 1, 1997, the Company acquired the assets of Access Rehabilitation
("Access"), a therapy company with headquarters in the Boston, Massachusetts
area and servicing long-term care facilities in Florida, Massachusetts and Rhode
Island. The Company acquired approximately $2,100,000 of accounts receivable and
recognized approximately $2,186,000 of goodwill in connection with this
acquisition.
As of August 1, 1997, the Company acquired four long-term care facilities with
401 beds in the Boston area. The Company financed this acquisition through an
operating lease with a real estate investment trust (the "REIT"). The lease
provides for annual rental payments of $1,576,000 in the initial twelve-month
period and annual increases based on the changes in the consumer price index
thereafter. The lease has an initial term of ten years and eight consecutive
five-year renewal terms at the Company's option. 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 initial
lease 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.
As of September 1, 1997, the Company acquired three long-term care facilities
with 341 beds in the Dayton, Ohio area (the "Dayton Facilities"). The Company
financed this acquisition through a synthetic leasing facility provided by the
Company's bank group (see Note H).
As of July 1, 1996, a subsidiary of the Company began leasing four long-term
care facilities in Ohio (the "Ohio Facilities").
8
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Combined prior to June 14, 1996)
(Unaudited)
F. Acquisitions (continued)
The following unaudited pro forma condensed consolidated statement of earnings
presents the condensed results of operations of the Company after giving effect
to the acquisition of the Ohio Facilities and the Massachusetts Facilities for
the nine month periods ended September 30, 1996 and 1997, as if these
acquisitions had occurred as of January 1, 1996. The pro forma financial results
are not necessarily indicative of the actual results of operations which might
have occurred or of the results of operations which may occur in the future.
For the nine months
ended September 30, 1996
------------------------
1996 1997
---- ----
Total net revenues $ 148,524 $ 166,742
Income before income taxes and extraordinary loss 3,295 8,531
Pro forma net income before extraordinary loss 2,410 5,205
Pro forma net income 1,092 5,205
Pro forma net income per common share
using 5,852,000 and 8,032,000 common
and common common equivalent shares $ 0.19 $ 0.65
G. Long-term debt
In April of 1997, the Company obtained a three-year $25,000,000 revolving credit
facility (the "Credit Facility") from a commercial bank. On August 28, 1997, the
Company amended the Credit Facility to add three additional banks as parties to
the Credit Facility, extend the maturity date and made certain additional
amendments to the terms of the agreement. Borrowings under this facility are
collateralized by patient accounts receivable and certain other assets. The
facility matures in September 2002 and provides for prime or LIBOR interest rate
options. As of September 30, 1997, the interest rate for amounts outstanding
under this facility was approximately 7.3%. The Credit Facility contains
covenants which, among other things, require the Company to maintain certain
financial ratios and imposes certain limitations or prohibitions on the
Company's ability to incur indebtedness, pay dividends, make investments or
dispose of assets. As of September 30, 1997, $5,600,000 was outstanding on the
facility and was classified as long-term debt.
H. Synthetic Leasing Facility
On August 28, 1997, the Company obtained a $25,000,000 synthetic leasing
facility (the "Leasing Facility") from the same group of banks which provided
the credit facility. The Company used most of the funds available through the
Leasing Facility to acquire the Dayton Facilities in September 1997.
Acquisitions made through the Leasing Facility are accounted for financial
reporting purposes as operating leases with an initial lease term of five years.
Annual rent for properties acquired through the Leasing Facility is determined
based on the purchase price of the facilities acquired and an interest rate
factor which can be based on LIBOR, or at the Company's option, the agent bank's
prime rate. As of September 30, 1997, the interest rate for amounts outstanding
under this facility was approximately 7.3%. The Company has the right to
purchase faciliites acquired through the Leasing Facility for an amount equal to
the purchase price paid by the banks at the date of acquisition. If the Company
does not exercise its right to acquire properties acquired through the Leasing
Facility, the Company has agreed to guarantee most of the purchase price paid by
the banks.
continued
9
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements including those concerning
Management's expectations regarding future financial performance and future
events. These forward-looking statements involve significant risk and
uncertainties, including those described herein and included under "Special Note
Regarding Forward-Looking Statements" below. Actual results may differ
materially from those anticipated by such forward-looking statements.
OVERVIEW Harborside Healthcare provides high quality long-term care, subacute
care and other specialty medical services in four principal regions: the
Southeast, the Midwest, New England and the Mid-Atlantic. As of September 30,
1997, the Company operated 38 facilities (13 owned and 25 leased) with a total
of 4,606 licensed beds. Additionally, the Company manages two facilities with
178 licensed beds. The Company provides traditional skilled nursing care, a wide
range of subacute care programs (such as orthopedic, CVA/stroke, cardiac,
pulmonary and wound care), as well as distinct programs for the provision of
care to Alzheimer's and hospice patients. In addition, the Company provides
rehabilitation therapy at Company- operated and non-affiliated facilities. As of
September 30, 1997, the Company provided rehabilitation therapy services to
patients at 93 non-affiliated long-term care facilities. The Company seeks to
position itself as the long-term care provider of choice to managed care and
other private referral sources in its target markets by achieving a strong
regional presence and by providing a full range of high quality, cost effective
nursing and specialty medical services.
The Company was created in March 1996, in anticipation of an initial public
offering (the "Offering"), in order to combine under its control the operations
of various long-term care facilities and ancillary businesses (the "Predecessor
Entities") which had operated since 1988. The Company completed the Offering on
June 14, 1996 and issued 3,600,000 shares of common stock at $11.75 per share.
The owners of the Predecessor Entities contributed their interests in such
Predecessor Entities to the Company and received 4,400,000 shares of the
Company's common stock.
The Company's financial statements for periods prior to the Offering have been
prepared by combining the historical financial statements of the Predecessor
Entities, similar to a pooling of interests presentation. The Company's
financial statements prior to the date of the Offering do not include a
provision for Federal or state income taxes because the Predecessor Entities
(primarily partnerships and subchapter S corporations) were not directly subject
to Federal or state income taxation. The Company's consolidated financial
statements for periods prior to the date of the Offering include a pro forma
income tax expense for each period presented, as if the Company had always owned
the Predecessor Entities. See Note E to the financial statements included
elsewhere in this report.
One of the Predecessor Entities was the general partner of the Krupp Yield Plus
Limited Partnership ("KYP"), which owned seven facilities (the "Seven
Facilities") until December 31, 1995. The Company held a 5% interest in KYP
while the remaining 95% was owned by the limited partners of KYP (the
"Unitholders"). Effective December 31, 1995, KYP sold the Seven Facilities and a
subsidiary of the Company began leasing the facilities from the buyer. Prior to
December 31, 1995 the accounts of KYP were included in the Company's
consolidated financial statements and the interest of the Unitholders was
reflected as minority interest. In March of 1996, a liquidating distribution was
paid to the Unitholders.
The following table sets forth the number of facilities owned and leased by the
Company and the number of licensed beds operated by the Company:
As of September 30,
------------------------------
Facilities: 1996 1997
----- ----
Owned (1) 13 13
Lease 17 25
----- -----
Total (2) 30 38
===== =====
Licensed beds:
Owned (1) 1,720 1,720
Leased 1,980 2,886
----- -----
Total (2) 3,700 4,606
===== =====
(1) Includes the Larkin Chase Center, which is owned by Bowie Center Limited
Partnership, a joint venture in which the Company has a 75% ownership
interest and a non-affiliated investor has a 25% ownership interest.
(2) In 1997, excludes 2 managed facilities with 178 licensed beds.
10
<PAGE>
The following table sets forth certain operating data for the periods indicated:
<TABLE>
<CAPTION>
For the three months For the nine months ended
ended September 30, September 30,
--------------------------- ---------------------------
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Patient days:
Private and other 92,863 100,782 243,476 276,943
Medicare 29,807 31,978 77,024 98,946
Medicaid 182,277 215,999 470,359 586,364
--------- --------- --------- ---------
Total 304,947 348,759 790,859 962,253
========= ========= ========= =========
Average Occupancy rate (1) 92.6% 92.0% 92.5% 91.9%
Total net revenues:
Private and other 35.1% 35.8% 36.0% 34.3%
dicare 25.9% 23.8% 26.1% 26.9%
Medicaid 39.0% 40.4% 37.9% 38.8%
--------- --------- --------- ---------
Total 100.0% 100.0% 100.0% 100.0%
========= ========= ========= =========
<FN>
(1) "Average occupancy rate" is computed by dividing the number of billed bed
days by the total number of available licensed bed days during each of the
periods indicated.
</FN>
</TABLE>
RESULTS OF OPERATIONS
The Company's total net revenues include net patient service revenues and
rehabilitation therapy service revenues from contracts with non-affiliated
long-term care facilities. Private net patient service revenues are recorded at
established per diem billing rates. Net patient service revenues to be
reimbursed under contracts with third-party payers, primarily the Medicare and
Medicaid programs, are recorded at amounts estimated to be realized under these
contractual arrangements.
The Company's facility operating expenses consist primarily of payroll and
employee benefits related to nursing, housekeeping and dietary services provided
to patients, as well as maintenance and administration of the facilities. Other
significant facility operating expenses include the cost of rehabilitation
therapy services, medical and pharmacy supplies, food, utilities, insurance and
taxes. The Company's facility operating expenses also include the general and
administrative costs associated with the operation of the Company's
rehabilitation therapy business. The Company's general and administrative
expenses include all costs associated with its regional and corporate
operations.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
TOTAL NET REVENUES. Total net revenues increased by $12,061,000 or 26.3%, from
$45,903,000 in the third quarter of 1996 to $57,964,000 in the third quarter of
1997. This increase resulted primarily from the acquisition of the Harford
Gardens facility on March 1, 1997, the four Massachusetts facilities on August
1,1997 and the three Dayton, Ohio facilities on September 1, 1997; the
generation of revenues from rehabilitation therapy services provided to
additional non-affiliated long-term care facilities; and increased net patient
service revenues per patient day at the Company's "same store" facilities. Of
such increase, $1,954,000 or 16.2% of the increase resulted from the operation
of the Harford Gardens facility, $3,149,000 or 26.1% of the increase resulted
from the operation of the Massachusetts facilities and $1,104,000 or 9.2% of the
increase resulted from the operation of the Dayton, Ohio facilities. The Company
began providing rehabilitation therapy services at non-affiliated long-term care
facilities during 1995. Revenues generated by providing rehabilitation therapy
services at non-affiliated long-term care facilities increased by $2,751,000,
from $2,946,000 in the third quarter of 1996 to $5,697,000 in the third quarter
of 1997. The remaining $3,103,000 or 25.7% of such increase, is largely
attributable to higher average net patient service revenues per patient day at
the Company's "same store" facilities and primarily due to increased levels of
care provided to patients with medically complex conditions. Average net patient
service revenues per patient day at "same store" facilities increased from
$130.98 during the third quarter of 1996 to $138.64 during the third quarter of
1997. Partially offsetting this increase was a reduction in occupancy at "same
store" facilities from 92.6% during the third quarter of 1996 to 91.8% during
the third quarter of 1997. The average occupancy rate at all of the Company's
facilities decreased from 92.6% during the third quarter of 1996 to 92.0% during
the third quarter of 1997. The Company's quality mix of private, Medicare and
insurance revenues was 61.0% for the three months ended September 30, 1996 as
compared to 59.6% in the same period of 1997. The decrease in the quality mix
percentage was primarily due to the acquisition of the Harford Gardens,
Massachusetts and Dayton, Ohio facilities.
11
<PAGE>
FACILITY OPERATING EXPENSES. Facility operating expenses increased by
$9,934,000, or 27.1%, from $36,622,000 in the third quarter of 1996 to
$46,556,000 in the third quarter of 1997. The operation of Harford Gardens
accounted for $1,458,000, or 14.7% of this increase, the operation of the
Massachusetts facilities accounted for $2,324,000 or 23.4% and the operation of
the Dayton, Ohio facilities accounted for $731,000 or 7.4%. Operating expenses
associated with additional non-affiliate therapy contracts increased by
$2,418,000, accounting for 24.3% of the total increase. The remainder of the
increase in facility operating expenses, $3,003,000, is due to increases in the
costs of labor, medical supplies and rehabilitation therapy services purchased
from third parties at "same store" facilities.
GENERAL AND ADMINISTRATIVE; SERVICE CHARGES PAID TO AFFILIATE. General and
administrative expenses increased by $771,000, or 38.8% from $1,985,000 in the
third quarter of 1996 to $2,756,000 in the third quarter of 1997. This increase
resulted from the acquisition of the new facilities resulting in the expansion
of regional and corporate support, and additional travel, consulting and systems
development expenses associated with the Company's growth. The Company
reimburses an affiliate for rent and other expenses related to its corporate
headquarters as well as for certain data processing and administrative services
provided to the Company. During the third quarter of 1996, such reimbursements
totaled $161,000 compared to $177,000 during the third quarter of 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$915,000 in the third quarter of 1996 to $989,000 in the third quarter of 1997
primarily as a result of building improvements and investment in new computers
and software.
FACILITY RENT. Facility rent expense for the third quarter increased by $466,000
from $2,565,000 in 1996 to $3,031,000 in 1997. The increase in rent expense is
the result of the acquisition of new facilities in 1997.
INTEREST EXPENSE, NET. Interest expense, net, increased from $1,383,000 in the
third quarter of 1996 to $1,614,000 in the third quarter of 1997. This net
increase is primarily due to additional interest expense resulting from the
acquisition of Access Rehabilitation on July 1, 1997.
LOSS ON INVESTMENT IN LIMITED PARTNERSHIP. The Company accounts for its
investment in Bowie Center Limited Partnership using the equity method. The
Company recorded income of $40,000 in the third quarter of 1996 as compared to
loss of $68,000 during the third quarter of 1997 in connection with this
investment.
INCOME TAX BENEFIT. Income tax expense increased from $902,000 in the third
quarter of 1996 to $1,081,000 in the third quarter of 1997.
NET INCOME. Net income was $1,410,000 in the third quarter of 1996 as compared
to income of $1,692,000 in the third quarter of 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997 TOTAL NET REVENUES. Total net revenues increased by $37,934,000 or 32.2%,
from $117,706,000 for the first nine months of 1996 to $155,640,000 for the
first nine months of 1997. This increase resulted primarily from the acquisition
of the four Ohio Facilities on July 1, 1996; the Harford Gardens facility on
March 1, 1997, the four Massachusetts facilities on August 1,1997 and the three
Dayton, Ohio facilities on September 1, 1997; and the generation of revenues
from rehabilitation therapy services provided to additional non-affiliated
long-term care facilities and increased net patient service revenues per patient
day at the Company's "same store" facilities. Of such increase, $17,624,000 or
46.5% of the increase resulted from the operation of the Ohio Facilities (during
the period prior to July 1, 1997, at which time they became part of the Asame
store@ facilities); $4,281,000 or 11.3% of the increase resulted from the
operation of the Harford Gardens facility; $3,149,000 or 8.3% of the increase
resulted from the operation of the Massachusetts facilities; and $1,104,000 or
2.9% of the increase resulted from the operation of the Dayton, Ohio facilities.
Revenues generated by providing rehabilitation therapy services at
non-affiliated long-term care facilities increased by $4,935,000, from
$7,530,000 for the first nine months of 1996 to $12,465,000 for the first nine
months of 1997. The remaining $6,841,000, or 18.0% of such increase, is largely
attributable to higher average net patient service revenues per patient day at
the Company's "same store" facilities, primarily resulting from increased levels
of care provided to patients with medically complex conditions. Average net
patient service revenues per patient day at "same store" facilities increased
from $126.55 during the first nine months of 1996 to $134.60 during the first
nine months of 1997. Partially offsetting this increase was a reduction in
occupancy at "same store" facilities from 92.5% during the first nine months of
1996 to 91.3% during the first nine months of 1997. The average occupancy rate
at all of the Company's facilities decreased from 92.5% during the first nine
months of 1996 to 91.9% during the first nine months of 1997. The Company's
quality mix of private, Medicare and insurance revenues was 62.1% for the nine
months ended September 30, 1996 as compared to 61.2% in the same period of 1997.
The slight decrease in the quality mix percentage was primarily due to the
acquisition of new facilities.
12
<PAGE>
FACILITY OPERATING EXPENSES. Facility operating expenses increased by
$29,525,000, or 31.2%, from $94,548,000 for the first nine months of 1996 to
$124,073,000 for the first nine months of 1997. The operation of the Ohio
Facilities accounted for $13,186,000, or 44.7% (during the period prior to July
1, 1997, at which time they became part of the "same store" facilities) of this
increase, the operation of Harford Gardens accounted for $3,205,000, or 10.9% of
this increase, the operation of the Massachusetts facilities accounted for
$2,324,000 or 7.9% of this increase and the operation of the Dayton, Ohio
facilities accounted for $731,000 or 2.5%. of this increase. Operating expenses
associated with additional non-affiliate therapy contracts accounted for
$4,486,000, or 15.2% , of the total increased in costs. The remainder of the
increase in facility operating expenses, $5,593,000, is primarily due to
increases in the costs of labor, medical supplies and rehabilitation therapy
services purchased from third parties at "same store" facilities.
GENERAL AND ADMINISTRATIVE; SERVICE CHARGES PAID TO AFFILIATE. General and
administrative expenses increased by $2,064,000, or 38.1%, from $5,415,000 for
the first nine months of 1996 to $7,479,000 for the first nine months of 1997.
This increase resulted from the acquisition of new facilities resulting in the
expansion of regional and corporate support, and additional travel, consulting
and systems development expenses associated with the Company's growth. The
Company reimburses an affiliate for rent and other expenses related to its
corporate headquarters as well as for certain data processing and administrative
services provided to the Company. During the first nine months of 1996, such
reimbursements totaled $526,000 compared to $531,000 in 1997.
SPECIAL COMPENSATION AND OTHER. In connection with the Offering and corporate
reorganization, the Company recorded $1,716,000 of non-recurring charges for the
first nine months of 1996. Of this amount, $1,524,000 consisted of compensation
earned by key members of management as a result of the successful Offering and
the corporate restructuring which preceded the Offering.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$2,030,000 for the first nine months of 1996 to $2,871,000 for the first nine
months of 1997 primarily as a result of the acquisition of the Ohio facilities
on July 1, 1996.
FACILITY RENT. Facility rent expense for the first nine months increased by
$677,000 from $7,663,000 in 1996 to $8,340,000 in 1997. The increase in rent
expense is due to the acquisition of new facilities.
INTEREST EXPENSE, NET. Interest expense, net, increased from $3,193,000 for the
first nine months of 1996 to $4,370,000 for the first nine months of 1997. This
net increase is primarily due to additional interest expense resulting from the
acquisition of Access Rehabilitation on July 1, 1997.
LOSS ON INVESTMENT IN LIMITED PARTNERSHIP. The Company accounts for its
investment in Bowie Center Limited Partnership using the equity method. The
Company recorded a loss of $327,000 for the first nine months of 1996 as
compared to a loss of $129,000 during the first nine months of 1997 in
connection with this investment.
EXTRAORDINARY LOSS ON EARLY RETIREMENT OF DEBT. During the second quarter of
1996, the Company repaid $25,000,000 of long-term debt using proceeds from the
Offering. In connection with this early repayment, the Company recorded an
extraordinary loss of $2,161,000 ($1,318,000, net of related tax benefit) as the
result of a prepayment penalty paid to the lender and the write-off of deferred
financing costs.
INCOME TAX BENEFIT. Income tax expense increased from $502,000 for the first
nine months of 1996 to $3,060,000 for the first nine months of 1997. Prior to
the date of the Offering, the Company's financial statements do not include a
provision for Federal or state income taxes because the Predecessor Entities
were not subject to Federal or state income taxation. The contribution of the
Predecessor Entities interests as part of the Company's corporate reorganization
caused the Company to recognize a non-recurring tax benefit of $400,000 during
the second quarter of 1996 as a result of inherited book-tax differences.
NET INCOME. Net income was $468,000 for the first nine months of 1996 as
compared to $4,787,000 for the first nine months of 1996.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and acquisitions growth
through a combination of mortgage financing and operating leases. Leased
facilities are leased from either the seller of the facilities or from a real
estate investment trust which has purchased the facilities from the seller. In
addition, in 1996 the Company financed the acquisition of the Ohio Facilities
from the seller by means of a lease which is accounted for as a capital lease
for financial reporting purposes. The Company's existing facility leases
generally require it to make monthly lease payments, establish escrow funds to
serve as debt service reserve accounts, and pay all property operating costs.
The Company generally negotiates leases which provide for extensions beyond the
initial lease term and an option to purchase the leased facility. The Company
expects that various forms of leasing arrangements will continue to provide it
with an attractive form of financing to support its growth. In April of 1997,
the Company obtained a three-year $25 million revolving credit facility from a
commercial bank. Borrowings under this facility will be used to provide working
capital for existing operations and acquisitions and to finance a portion of
future acquisitions. During September 1997, the Company increased the number of
commercial banks party to its revolving credit facility from one to four,
amended certain terms of the revolving credit facility (including financial
covenants) and extended its maturity date through September 1, 2002.
Additionally, the Company also arranged a $25,000,000 synthetic leasing facility
with the same group of commercial banks. The leasing facility will be used to
finance the acquisition of long-term care facilities. Substantially all of the
$25,000,000 commitment was used in connection with the acquisition of the Dayton
facilities. The Company expects to expand its credit facilities as the need
arises. 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, the Company commenced
construction of a ninety-bed addition and a rehabilitation therapy area during
the third quarter of 1997. The costs of this project are estimated to be
approximately $4,200,000. The Company has been and will continue to be dependent
on third-party financing to fund its acquisition strategy, and there can be no
assurances that such financing will be available to the Company on acceptable
terms, or at all. The Company expects that cash on hand and generated through
operations, as well as funds available through the credit facilities will be
sufficient to meet its operating requirements through the remainder of 1997.
At September 30, 1997, the Company had three mortgage loans outstanding for
$18,248,000 and $5,600,000 in advances from its long-term revolving credit
facility. One mortgage loan had an outstanding principal balance of $16,512,000
of which $15,140,000 is due at maturity in 2004. This loan 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 four mortgaged facilities and
actual revenues during a twelve-month base period. The Company's other mortgage
loans, which are encumbered by specific facilities, had aggregate principal
balances of $1,736,000 at September 30, 1997, of which $1,338,000 is due in
2010.
The Company's operating activities during the first nine months of 1996 used net
cash of $2,097,000 as compared to generating net cash of $4,025,000 in 1997, an
increase of $6,122,000. Most of the increase in cash provided by operations was
the result of increased net income combined with relatively smaller increases in
accounts receivable.
Net cash used by investing activities was $5,407,000 during the first nine
months of 1996 as compared to $5,858,000 used in 1997. The primary use of
invested cash during these periods related to additions to property and
equipment ($3,711,000 in 1996 compared to $2,134,000 in 1997), additions to
intangible assets ($1,009,000 in 1996 compared to $4,749,000 in 1997) and the
repayment of demand note in 1997 of $1,369,000.
Net cash provided used by financing activities was $21,286,000 in 1996 as
compared to $4,045,000 provided in 1997. The early retirement of debt and the
incurrence of a related prepayment penalty required the use of $26,517,000 in
1996. During the first nine months of 1996, the Company received $37,731,000 in
net proceeds from the Offering and a cash payment of $3,685,000 from the
landlord in connection with the leasing of the New Hampshire Facilities. During
1996 the Company also received $803,000 from the sale of equity interests to an
officer and a director of the Company. In March of 1996 a liquidating
distribution of $33,727,000 was paid to the Unitholders. During 1997, the
Company borrowed $5,600,000 from its revolving credit facility, most of which
was used to finance the acquisition of Access Rehabilitation, made principal
payments of $2,950,000 on its capital lease obligation and received cash
payments totaling $1,298,000 from its landlords in connection with the lease of
the Massachusetts and Dayton Facilities.
14
<PAGE>
SEASONALITY
The Company's earnings generally fluctuate from quarter to quarter. This
seasonality is related to a combination of factors which include the timing and
amount of Medicaid rate increases, seasonal census cycles, and the number of
days in a given fiscal quarter.
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.
15
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q, including information set forth under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations", constitute "Forward-Looking Statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The
Company desires to take advantage of certain "safe harbor" provisions of the
Reform Act and is including this special note to enable the Company to do so.
Forward-looking statements included in this Form 10-Q, or hereafter included in
other publicly available documents filed with the Securities and Exchange
Commission, reports to the Company's stockholders and other publicly available
statements issued or released by the Company involve known and unknown risks,
uncertainties, and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ materially from
the future results, performance (financial or operating) or achievements
expressed or implied by such forward-looking statements. The Company believes
the following important factors could cause such a material difference to occur:
1. The Company's ability to grow through the acquisition and development of
long-term care facilities or the acquisition of ancillary businesses.
2. The Company's ability to identify suitable acquisition candidates, to
consummate or complete construction projects, or to profitably operate or
successfully integrate enterprises into the Company's other operations.
3. The occurrence of changes in the mix of payment sources utilized by the
Company's patients to pay for the Company's services.
4. The adoption of cost containment measures by private pay sources such as
commercial insurers and managed care organizations, as well as efforts by
governmental reimbursement sources to impose cost containment measures.
5. Changes in the United States healthcare system, including changes in
reimbursement levels under Medicaid and Medicare, and other changes in
applicable government regulations that might affect the profitability of
the Company.
6. The Company's continued ability to operate in a heavily regulated
environment and to satisfy regulatory authorities, thereby avoiding a
number of potentially adverse consequences, such as the imposition of
fines, temporary suspension of admission of patients, restrictions on the
ability to acquire new facilities, suspension or de-certification from
Medicaid or Medicare programs, and in extreme cases, revocation of a
facility's license or the closure of a facility, including as a result of
unauthorized activities by employees.
7. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth through acquisition and
development, as well as internal growth.
8. Changes in certificate of need laws that might increase competition in the
Company's industry, including, particularly, in the states in which the
Company currently operates or anticipates operating in the future.
9. The Company's ability to staff its facilities appropriately with qualified
healthcare personnel, including in times of shortages of such personnel
and to maintain a satisfactory relationship with labor unions.
10. The level of competition in the Company's industry, including without
limitation, increased competition from acute care hospitals, providers of
assisted and independent living and providers of home healthcare and
changes in the regulatory system in the state in which the Company
operates that facilitate such competition.
11. The continued availability of insurance for the inherent risks of
liability in the healthcare industry.
12. Price increases in pharmaceuticals, durable medical equipment and other
items.
13. The Company's reputation for delivering high-quality care and its ability
to attract and retain patients, including patients with relatively high
acuity levels.
14. Changes in general economic conditions, including changes that pressure
governmental reimbursement sources to reduce the amount and scope of
healthcare coverage.
The foregoing review of significant factors should not be construed as
exhaustive or as an admission regarding the adequacy of disclosures previously
made by the Company.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On August 1, 1997 the Company acquired four long-term care
facilities with 401 beds in the Boston, Massachusetts area. The
Company financed this acquisition through an operating lease with a
real estate investment trust. The Combined Financial Reports for
Cushman Management Associates, Inc. (the acquired entity) are
included as Exhibit 99.1 to this report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
10.1 First Amendment to Revolving Credit Agreement among
Harborside Healthcare Corporation and the other
Borrowers specified therein, the Lenders party
therto and Chase Manhattan Bank, as Administrative
Agent, dated as of August 1, 1997
10.2 Second Amendment to Revolving Credit Agreement among
Harborside Healthcare Corporation and the other
Borrowers specified therein, the Lenders party
therto and Chase Manhattan Bank, as Administrative
Agent, dated as of August 28, 1997
27.1 Financial Data Schedule
99.1 Financial Statements of Cushman Management
Associates and Affiliates
(b) Reports on 8-K
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Harborside Healthcare Corporation
By: /s/ Stephen L. Guillard
------------------------------------------------
Stephen L. Guillard
Chairman, President, and Chief Executive Officer
By: /s/ William H. Stephan
------------------------------------------------
William H. Stephan
Senior Vice President and Chief Financial Officer
DATE: November 14, 1997
18
Exhibit 10.1
FIRST AMENDMENT TO
CREDIT AGREEMENT
This FIRST AMENDMENT TO CREDIT AGREEMENT ("Amendment") is dated as of
August 1, 1997, by and among Harborside Healthcare Corporation ("HHC"), and the
other entities listed on SCHEDULE I hereto, as joint and several borrowers (each
a "BORROWER" and collectively the "BORROWERS"), the LENDERS party hereto
("Lenders"), and THE CHASE MANHATTAN BANK, as Administrative Agent for the
lenders party hereto and any successors or assigns (the "Agent"), and amends the
Credit Agreement entered into as of April 14, 1997 (the "Credit Agreement"), by
and among the Borrowers, the Agent and the Lenders. The capitalized terms which
are not defined in this Amendment shall have their respective meanings specified
in the Credit Agreement.
WHEREAS, the Borrowers, the Agent and the Lenders desire to amend the
Credit Agreement as hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration the receipt and sufficiency of which is hereby
acknowledged, the parties hereby amend the Credit Agreement as follows:
Section 1. SCHEDULE I; ADDITIONAL BORROWER. SCHEDULE I attached to the
Credit Agreement is hereby amended by deleting such SCHEDULE I in its entirety
and substituting therefor the SCHEDULE I attached to this Amendment. As a result
of such change, effective the date of this Amendment, Harborside Properties
Trust I ("HPT") and Harborside Massachusetts Limited Partnership ("HM") shall
become additional Borrowers under the Credit Agreement and shall become bound by
this Amendment, the Credit Agreement and all other documents executed in
connection therewith as if it were a signatory to such documents.
Section 2. EFFECTIVENESS; CONDITION TO EFFECTIVENESS. This Amendment shall
become effective as of the date first set forth above, upon execution hereof by
the Borrowers, the Agent and the Lenders and satisfaction of the following
condition:
(a) SECURITY AGREEMENT. The Borrowers shall have delivered to the Agent
the First Amendment to the Security Agreement dated as of the date hereof
executed by certain of the Borrowers in favor of the Agent.
(b) NOTE PLEDGE AGREEMENT. HPT shall have delivered to the Agent the Note
Pledge Agreement dated as of the date hereof executed by HPT in favor of
the Agent.
(c) FINANCING STATEMENTS. HPT and HM shall have delivered to the Agent
financing statements pursuant to the First Amendment to the Security
Agreement.
(d) PLEDGE. Certain of the Borrowers shall have delivered to the Agent
that certain letter agreement, substantially in the form of EXHIBIT A
attached hereto, pledging the shares of HPT and HM pursuant to the terms
of that certain Pledge Agreement dated as of April 14, 1997 executed by
certain of the Borrowers in favor of the Agent.
1
<PAGE>
Section 3. REPRESENTATIONS AND WARRANTIES. The Borrowers hereby confirm to
the Agent the representations and warranties of the Borrowers set forth in
Article III of the Credit Agreement as of the date hereof, as if set forth
herein in full.
Section 4. NO DEFAULT. The Borrowers hereby acknowledge that no Default
or Event of Default has occurred under the Credit Agreement.
Section 5. NO OTHER CHANGES. Except as amended by this Amendment, the
Credit Agreement remains in full force and effect.
Section 6. COUNTERPARTS. This Amendment may be executed in any number of
counterparts each of which shall be an original with the same effect as if all
of the signatures to this Amendment were upon the same instrument.
Section 7. MISCELLANEOUS. This Amendment shall be governed by and
construed and enforced under the laws of the State of New York.
[remainder of page left blank]
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
HARBORSIDE HEALTHCARE CORPORATION
By
-----------------------------------
Name: William H. Stephan
Title: Senior Vice President and
Chief Financial Officer
BAY TREE NURSING CENTER CORP.
BELMONT NURSING CENTER CORP.
COUNTRYSIDE CARE CENTER CORP.
HARBORSIDE HEALTH I CORPORATION
HARBORSIDE TOLEDO CORP.
KHI CORPORATION
OAKHURST MANOR NURSING CENTER CORP.
ORCHARD RIDGE NURSING CENTER CORP.
SUNSET POINT NURSING CENTER CORP.
WEST BAY NURSING CENTER CORP.
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE OF CLEVELAND LIMITED
PARTNERSHIP
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
3
<PAGE>
HARBORSIDE HEALTHCARE ADVISORS
LIMITED PARTNERSHIP
By: KHI Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE HEALTHCARE BALTIMORE
LIMITED PARTNERSHIP
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE HEALTHCARE LIMITED
PARTNERSHIP
By: KHI Corp.
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE HEALTHCARE NETWORK
LIMITED PARTNERSHIP
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
4
<PAGE>
HARBORSIDE NEW HAMPSHIRE LIMITED
PARTNERSHIP
By: Harborside Toledo Corp.
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE OF OHIO LIMITED PARTNERSHIP
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE REHABILITATION LIMITED
PARTNERSHIP
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE TOLEDO LIMITED PARTNERSHIP
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
5
<PAGE>
HHCI LIMITED PARTNERSHIP
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
RIVERSIDE RETIREMENT LIMITED
PARTNERSHIP
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE PROPERTIES TRUST I
By
-----------------------------------
Name: Stephen Guillard, in his
capacity as trustee and not
individually
By
-----------------------------------
Name: William H. Stephan, in his
capacity as trustee and not
individually
HARBORSIDE MASSACHUSETTS LIMITED
PARTNERSHIP
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name:
Title:
6
<PAGE>
THE CHASE MANHATTAN BANK, individually
and as Agent
By
-----------------------------------
Name:
Title:
7
<PAGE>
SCHEDULE I
BORROWERS:
Bay Tree Nursing Center Corp.
Belmont Nursing Center Corp.
Countryside Care Center Corp.
Harborside of Cleveland Limited Partnership
Harborside Health I Corporation
Harborside Healthcare Advisors Limited Partnership
Harborside Healthcare Baltimore Limited Partnership
Harborside Healthcare Corporation
Harborside Healthcare Limited Partnership
Harborside Healthcare Network Limited Partnership
Harborside New Hampshire Limited Partnership
Harborside of Ohio Limited Partnership
Harborside Rehabilitation Limited Partnership
Harborside Toledo Limited Partnership
Harborside Toledo Corp.
HHCI Limited Partnership
KHI Corporation
Oakhurst Manor Nursing Center Corp.
Orchard Ridge Nursing Center Corp.
Riverside Retirement Limited Partnership
Sunset Point Nursing Center Corp.
West Bay Nursing Center Corp.
Harborside Properties Trust I
Harborside Massachusetts Limited Partnership
8
Exhibit 10.2
SECOND AMENDMENT TO
CREDIT AGREEMENT
This SECOND AMENDMENT TO CREDIT AGREEMENT ("Amendment") is dated as of
August 28, 1997, by and among Harborside Healthcare Corporation ("HHC"), and the
other entities listed on SCHEDULE I hereto, as joint and several borrowers (each
a "BORROWER" and collectively the "BORROWERS"), the LENDERS party hereto
("Lenders"), and THE CHASE MANHATTAN BANK, as Administrative Agent for the
lenders party hereto and any successors or assigns (the "Agent"), and amends the
Credit Agreement entered into as of April 14, 1997 (the "Credit Agreement"), by
and among the Borrowers, the Agent and the Lenders, as amended by the First
Amendment to Credit Agreement dated as of August 1, 1997 by and among the
Borrowers, the Agent and the Lenders. The capitalized terms which are not
defined in this Amendment shall have their respective meanings specified in the
Credit Agreement.
WHEREAS, The Sumitomo Bank, Limited, The First National Bank of Maryland
and Bank of Montreal are hereby becoming Lenders under the Credit Agreement;
WHEREAS, the Borrowers, the Agent and the Lenders desire to amend the
Credit Agreement as hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration the receipt and sufficiency of which is hereby
acknowledged, the parties hereby amend the Credit Agreement as follows:
Section 1. SECTION 1.01 to the Credit Agreement shall be amended by
deleting the definitions for "Alternate Base Rate", "Applicable Rate",
"Borrowing Base", "Consolidated EBITDAR", "Consolidated Fixed Coverage Ratio",
"Consolidated Leverage Ratio", "Eligible Real Estate", "Maturity Date", "Prime
Rate", "Qualified Appraisal", "Rent", "Required Lenders" and "Statutory Reserve
Rate" in their entirety and substituting therefor the following definitions:
"ALTERNATE BASE RATE" means, for any day, a rate per annum equal to
the Prime Rate in effect on such day plus the Applicable Rate. Any change
in the Alternate Base Rate due to a change in the Prime Rate, shall be
effective from and including the effective date of such change in the
Prime Rate.
"APPLICABLE RATE" means, for any day, with respect to any Eurodollar
Loan or ABR Loan, as the case may be, the applicable percentage per annum
as set forth below opposite the Consolidated Leverage Ratio:
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Consolidated Applicable
Leverage Eurodollar Applicable
RATIO RATE ABR RATE
Greater than or
equal to: 5.00:1.00 1.75% 0.50%
Greater than or
equal to: 4.00:1.00 1.50% 0.25%
but less than: 5.00:1.00
Greater than or
equal to: 3.00:1.00 1.00% 0.00%
but less than: 4.00:1.00
Less than: 3.00:1.00 0.75% 0.00%
Upon delivery of the Compliance Certificate by HHC to Agent pursuant to
Section 4.02(d) and Section 5.01(c), the Applicable ABR Rate and the
Applicable Eurodollar Rate shall automatically be adjusted in accordance
with such Compliance Certificate, such adjustment to become effective on
the next succeeding Business Day following the receipt by the Agent of
such Compliance Certificate; PROVIDED, in the event a Compliance
Certificate is not delivered within five (5) days after the date such
Compliance Certificate is required to be delivered pursuant to Section
5.01(c), then until delivery of such Compliance Certificate, the
Applicable ABR Rate shall be .50% per annum and the Applicable Eurodollar
Rate shall be 1.75% per annum; PROVIDED FURTHER that if a Compliance
Certificate erroneously indicates an applicable rate more favorable to the
Borrowers than would be afforded by the actual calculation of the
Consolidated Leverage Ratio, the Borrowers shall promptly pay such
additional interest as shall correct for such error.
"BORROWING BASE" means, at the date of the most recent Borrowing
Base Certificate required to be furnished pursuant to Section 2.02(e)
hereof, (A) the sum of (i) 75% of the Eligible Accounts and (ii) 75% of
the Designated Value of Eligible Real Estate, less (B) all obligations and
liabilities of the Lessor, Lessee and Borrowers to any of the Lease Agent
or the Lease Lenders, arising out of or in connection with the amounts
then due and payable on the Tranche A Loans and the Tranche B Loans (each
as defined in the Lease Facility Documents) and the aggregate amount
outstanding Investor Contribution and all amounts due and payable on
account of the Investor Yield (as defined in the Lease Facility
Documents), including, without limitation, all unpaid principal of and
interest on any and all such obligations.
"CONSOLIDATED EBITDAR" shall mean for each twelve month period
ending on the last day of the accounting period covered by the
consolidated financial statements of HHC and its Subsidiaries, and
delivered pursuant to Section 5.1, the sum of (a) Consolidated Net Income
(but excluding any extraordinary losses or nonrecurring expenses, in each
case only to the extent that such amount was otherwise included in the
determination of applicable Consolidated Net Income), PLUS (b) interest
expense, PLUS (c) taxes deducted in calculating Consolidated Net Income,
PLUS (d) depreciation, PLUS (e) amortization, PLUS (f) Rent, in each case
of HHC and its Subsidiaries on a consolidated basis determined in
accordance with GAAP.
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"CONSOLIDATED FIXED COVERAGE RATIO" shall mean for each twelve month
period ending on the last day of the accounting period covered by the
consolidated financial statements of HHC and its Subsidiaries, and
delivered pursuant to Section 5.1, the ratio of (i) Consolidated EBITDAR
for such period, to (ii) (a) Rental Payments, PLUS (b) the sum of interest
and principal payments due in respect of Indebtedness for such period of
HHC and its Subsidiaries on a consolidated basis determined in accordance
with GAAP (for purposes hereof the rental payments due with respect to the
capital lease obligation associated with HHC's four facilities acquired on
July 1, 1996 in the Cleveland, Ohio area (the "Ohio Capital Lease
Obligation") shall be included as Rental Payments and not as payments due
in respect of Indebtedness).
"CONSOLIDATED LEVERAGE RATIO"shall mean for each twelve month period
ending on the last day of the accounting period covered by the
consolidated financial statements of HHC and its Subsidiaries, and
delivered pursuant to Section 5.1, the ratio of (A) (i) Indebtedness, PLUS
(ii) LC Exposure, PLUS (iii) Capital Lease Obligations (excluding the Ohio
Capital Lease Obligation), PLUS (iv) the product of eight (8) times Rental
Payments PLUS (v) the dollar amount of any Pro Forma Rental Payment
Adjustment, to (B) Pro Forma Consolidated EBITDAR.
"ELIGIBLE REAL ESTATE" means (A) the real property owned by any of
the Borrowers with respect to which (i) the Administrative Agent, for the
benefit of the Lenders, has a first priority mortgage, and (ii) the
Administrative Agent and HHC have jointly designated as Eligible Real
Estate (for purposes of this clause (A)(ii), the Administrative Agent and
HHC have designated Harborside Healthcare-Toledo, Harborside
Healthcare-Ocala, and Harborside Healthcare-Gulf Coast as Eligible Real
Estate), plus (B) the real property owned by Lessor with respect to which
the Lease Agent, for the benefit of the Lease Lenders, has a first
priority mortgage pursuant to the Lease Facility Documents.
"MATURITY DATE" means September 1, 2002.
"PRIME RATE" means (a) the highest of (1) the rate of interest
publicly announced by the Agent as its prime rate in effect at its
principal office in New York City (this rate is not intended to be the
lowest rate charged by the Agent to its borrowers), and (2) the Federal
Funds Effective Rate from time to time in effect plus 0.5%; each change in
the Prime Rate shall be effective from and including the date such change
is publicly announced as being effective (the Prime Rate not being
intended to be the lowest rate of interest charged by the Administrative
Agent in connection with extensions of credit to debtors).
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"QUALIFIED APPRAISAL" means an appraisal of the fair market value of
any portion of the Eligible Real Estate, which appraisal meets each of the
following requirements: (i) such appraisal was prepared by a nationally
recognized reputable appraiser acceptable to the Administrative Agent,
(ii) unless otherwise determined by the Administrative Agent in its sole
discretion, the date of such appraisal is not more than twelve (12) months
prior to the date such appraisal is being used to determine the Designated
Value of such Eligible Real Estate, (iii) such appraisal has been assigned
to the Administrative Agent by the preparer thereof, and (iv) the scope
and basis of such appraisal is satisfactory to the Administrative Agent in
its sole discretion and comply with the Financial Institutions Reform,
Recovery and Enforcement Act of 1989.
"RENT" shall mean for each twelve month period ending on the last
day of the accounting period covered by the consolidated financial
statements of HHC and its Subsidiaries, and delivered pursuant to Section
5.1, the dollar amount of rent expense recognized in the aforementioned
consolidated financial statements, but shall not include the amount
required to be paid in connection with the Ohio Capital Lease Obligation
or amounts required to be paid in respect of maintenance, repairs, income
taxes, insurance, assessments or other similar charges.
"REQUIRED LENDERS" means, at any time, Lenders having Revolving
Credit Exposures and unused Commitments representing 66 2/3% of the sum of
the total Revolving Credit Exposures and unused Commitments at such time.
"STATUTORY RESERVE RATE" means a fraction (expressed as a decimal),
the numerator of which is the number one and the denominator of which is
the number one minus the aggregate of the highest maximum reserve
percentages (including any marginal, special, emergency or supplemental
reserves) expressed as a decimal established by the Board to which any
Lender is subject, with respect to the Adjusted LIBO Rate, for
eurocurrency funding (currently referred to as "Eurocurrency Liabilities"
in Regulation D of the Board). Such reserve percentages shall include
those imposed pursuant to such Regulation D. Eurodollar Loans shall be
deemed to constitute eurocurrency funding and to be subject to such
reserve requirements without benefit of or credit for proration,
exemptions or offsets that may be available from time to time to any
Lender under such Regulation D or any comparable regulation. The Statutory
Reserve Rate shall be adjusted automatically on and as of the effective
date of any change in any reserve percentage.
Section 2. SECTION 1.01 to the Credit Agreement shall be further amended
by adding the following definitions:
"COMMITMENT FEE RATE" means, for any day, the applicable percentage
per annum as set forth below opposite the Consolidated Leverage Ratio:
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Consolidated Commitment
Leverage Fee
RATIO RATE
Greater than or
equal to: 5.00:1.00 0.375%
Greater than or
equal to: 4.00:1.00 0.25%
but less than: 5.00:1.00
Greater than or
equal to: 3.00:1.00 0.25%
but less than: 4.00:1.00
Less than: 3.00:1.00 0.20%
Upon delivery of the Compliance Certificate by HHC to Agent pursuant to
Section 4.02(d) and Section 5.01(c), the Commitment Fee Rate shall
automatically be adjusted in accordance with such Compliance Certificate,
such adjustment to become effective on the next succeeding Business Day
following the receipt by the Agent of such Compliance Certificate;
PROVIDED, in the event a Compliance Certificate is not delivered within
five (5) days after the date such Compliance Certificate is required to be
delivered pursuant to Section 5.01(c), then until delivery of such
Compliance Certificate, the applicable Commitment Fee Rate shall be 0.375%
per annum; PROVIDED FURTHER that if a Compliance Certificate erroneously
indicates an applicable rate more favorable to the Borrowers than would be
afforded by the actual calculation of the Consolidated Leverage Ratio, the
Borrowers shall promptly pay such additional interest as shall correct for
such error.
"COMPLIANCE CERTIFICATE" means a certificate delivered to the Agent
and the Lenders by HHC, as agent for the Borrowers, pursuant to Sections
4.02(d) and 5.01(c).
"LC FEE RATE" means, for any day, with respect to any Letter of
Credit, the applicable percentage per annum as set forth below opposite
the Consolidated Leverage Ratio:
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Consolidated
Leverage LC Fee
RATIO RATE
Greater than or
equal to: 5.00:1.00 1.25%
Greater than or
equal to: 4.00:1.00 1.00%
but less than: 5.00:1.00
Greater than or
equal to: 3.00:1.00 1.00%
but less than: 4.00:1.00
Less than: 3.00:1.00 1.00%
Upon delivery of the Compliance Certificate by HHC to Agent pursuant to
Section 4.02(d) and Section 5.01(c), the LC Fee Rate shall automatically
be adjusted in accordance with such Compliance Certificate, such
adjustment to become effective on the next succeeding Business Day
following the receipt by the Agent of such Compliance Certificate;
PROVIDED, in the event a Compliance Certificate is not delivered within
five (5) days after the date such Compliance Certificate is required to be
delivered pursuant to Section 5.01(c), then until delivery of such
Compliance Certificate, the applicable LC Fee Rate shall be 1.25% per
annum; PROVIDED FURTHER that if a Compliance Certificate erroneously
indicates an applicable rate more favorable to the Borrowers than would be
afforded by the actual calculation of the Consolidated Leverage Ratio, the
Borrowers shall promptly pay such additional interest as shall correct for
such error.
"LEASE AGENT" shall have the meaning set forth in the definition of
"Lease Facility Documents."
"LEASE LENDERS" shall have the meaning set forth in the definition
of "Lease Facility Documents."
"LESSOR" means HHC 1997-1 Trust.
"LEASE FACILITY DOCUMENTS" means (i) that certain Credit Agreement
dated as of the date hereof among Lessor, the lenders party thereto (the
"Lease Lenders") and The Chase Manhattan Bank, as Agent for the Lease
Lenders and any successors or assigns (the "Lease Agent"), (ii) that
certain Guaranty Agreement executed as of the date hereof by the Borrowers
in favor of the Lease Agent and the Lease Lenders, (iii) that certain
Participation Agreement dated as of the date hereof among HHC as Lessee,
Lessor, BMO Leasing (U.S.), Inc. and the Lease Agent, (iv) that certain
Lease Agreement dated as of the date hereof between Lessor and HHC as
Lessee, and (v) any and all other documents executed in connection with
each of the foregoing agreements.
"PRO FORMA CONSOLIDATED EBITDAR" shall mean for each twelve month
period ending on the last day of the accounting period covered by the
consolidated financial statements of HHC and its Subsidiaries, and
delivered pursuant to Section 5.1, the sum
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of (a) Consolidated Net Income (but excluding any extraordinary losses or
nonrecurring expenses, in each case only to the extent that such amount
was otherwise included in the determination of applicable Consolidated Net
Income), PLUS (b) interest expense, PLUS (c) taxes deducted in calculating
Consolidated Net Income, PLUS (d) depreciation, PLUS (e) amortization,
PLUS (f) Rent, in each case of HHC and its Subsidiaries on a consolidated
basis determined in accordance with GAAP, PLUS (g) any applicable Pro
Forma EBITDAR Adjustment.
"PRO FORMA EBITDAR ADJUSTMENT" shall mean the dollar amount of the
pro forma adjustment to the historical consolidated financial statements
of HHC and its Subsidiaries for each twelve month period ending on the
last day of the accounting period covered by the financial statements
delivered pursuant to Section 5.1 and resulting from one or more
acquisitions completed by HHC and its Subsidiaries in the aforementioned
accounting period on a date other than the first day of the given
accounting period. Such Pro Forma EBITDAR Adjustment to be equal to the
net adjustment to income before interest expense, income taxes,
depreciation, amortization and rent and to be prepared substantially in
conformity with the guidelines for preparation of pro forma financial
statements included in filings with the Securities and Exchange Commission
and in a manner acceptable to Lenders.
"PRO FORMA RENTAL PAYMENT ADJUSTMENT" shall mean the dollar amount
of the pro forma adjustment to the historical Rental Payments of HHC and
its Subsidiaries for each twelve month period ending on the last day of
the accounting period covered by the financial statements delivered
pursuant to Section 5.1 and resulting from one or more acquisitions
completed by HHC and its Subsidiaries in the aforementioned accounting
period on a date other than the first day of the given accounting period.
Such Pro Forma Rental Payment Adjustment to be equal to (A) the annualized
dollar amount of fixed rental payments which HHC or its Subsidiaries are
required to make by the terms of the aforementioned acquisitions, but
shall not include amounts required to be paid in respect in maintenance,
repairs, income taxes, insurance, assessments or other similar charges,
less (B) the amount of Rental Payments which HHC or its Subsidiaries have
already paid during the accounting period under the terms of the
aforementioned acquisition.
"RENTAL PAYMENTS" shall mean for each twelve month period ending on
the last day of the accounting period covered by the consolidated
financial statements of HHC and its Subsidiaries, and delivered pursuant
to Section 5.1, the dollar amount of the fixed payments which HHC or its
Subsidiaries are required to make by the terms of any lease to its
landlords during the aforementioned twelve month period, including the
amount required to be paid in connection with the Ohio Capital Lease
Obligation, but shall not include amounts required to be paid in respect
of maintenance, repairs, income taxes, insurance, assessments or other
similar charges.
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"SECURITY DOCUMENTS" means, collectively, the Real Estate Security
Documents, that certain Security Agreement executed by certain of the
Borrowers in favor of the Agent dated as of April 14, 1997, that certain
A/R Security Agreement executed by certain of the Borrowers in favor of
the Agent dated as of April 14, 1997, that certain Pledge Agreement
executed by certain of the Borrowers in favor of the Agent dated as of
April 14, 1997 and those certain Accounts Receivable Intercreditor
Agreements executed by certain of the Meditrust Entities and the Agent,
each as from time to time amended or supplemented, and any and all other
documents executed in connection with each of the foregoing agreements or
this Agreement with respect to any collateral.
Section 3. SECTION 1.01 to the Credit Agreement shall be further amended
by deleting the reference to "40%" in the first sentence of the definition of
"Change of Control" and substituting therefor "30%".
Section 4. AMENDMENT OF SECTION 2.02. Subsection 2.02(c) of the Credit
Agreement is hereby amended by deleting such subsection in its entirety and
substituting therefor the following:
(c) At the commencement of each Interest Period for any Eurodollar
Revolving Borrowing, such Borrowing shall be in an aggregate amount of
$1,000,000 or an integral multiple of $100,000 in excess thereof. At the
time that each ABR Revolving Borrowing is made, such Borrowing shall be in
an aggregate amount that is an integral multiple of $100,000; PROVIDED
that an ABR Revolving Borrowing may be in an aggregate amount that is
equal to the entire unused balance of the total Commitments or that is
required to finance the reimbursement of an LC Disbursement as
contemplated by Section 2.05(e). Each Swingline Loan shall be in an amount
that is an integral multiple of $100,000. Borrowings of more than one Type
and Class may be outstanding at the same time; PROVIDED that there shall
not at any time be more than a total of ten (10) Eurodollar Revolving
Borrowings outstanding.
Section 5. AMENDMENT OF ARTICLE II. The Credit Agreement is hereby amended
by adding the following SECTION 2.20 to Article II:
SECTION 2.20. MATURITY DATE. The Maturity Date for all or a portion of the
Loans may be extended at the request of the Borrowers for an additional period
of two (2) years subject to the written consent of all Lenders in their sole
discretion. A request for an extension can be made not more than fifteen months
and not less than twelve months prior to the Maturity Date.
Section 6. AMENDMENT OF SECTION 2.05. Subsection 2.05(b) of the Credit
Agreement is hereby amended by deleting such subsection in its entirety and
substituting therefor the following:
(b) NOTICE OF ISSUANCE, AMENDMENT, RENEWAL, EXTENSION; CERTAIN
CONDITIONS. To request the issuance of a Letter of Credit (or the
amendment, renewal
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or extension of an outstanding Letter of Credit), HHC, as agent for the
Borrowers, shall hand deliver or telecopy (or transmit by electronic
communication, if arrangements for doing so have been approved by the
Issuing Bank) to the Issuing Bank and the Administrative Agent (reasonably
in advance of the requested date of issuance, amendment, renewal or
extension) a notice requesting the issuance of a Letter of Credit, or
identifying the Letter of Credit to be amended, renewed or extended, the
date of issuance, amendment, renewal or extension, the date on which such
Letter of Credit is to expire (which shall comply with paragraph (c) of
this Section), the amount of such Letter of Credit, the name and address
of the beneficiary thereof and such other information as shall be
necessary to prepare, amend, renew or extend such Letter of Credit. If
requested by the Issuing Bank, HHC, as agent for the Borrowers, also shall
submit a letter of credit application on the Issuing Bank's standard form
in connection with any request for a Letter of Credit. A Letter of Credit
shall be issued, amended, renewed or extended only if (and upon issuance,
amendment, renewal or extension of each Letter of Credit the Borrowers
shall be deemed to represent and warrant that), after giving effect to
such issuance, amendment, renewal or extension (i) the LC Exposure shall
not exceed $7,500,000 and (ii) the sum of the total Revolving Credit
Exposures at such time shall not exceed the lesser of (i) the total
Commitments at such time, and (ii) the Borrowing Base at such time.
Section 7. AMENDMENT OF SECTION 2.11. Subsections 2.11(a) and 2.11(b) of
the Credit Agreement are hereby amended by deleting such subsections in their
entirety and substituting therefor the following:
(a) The Borrowers, jointly and severally agree to pay to the
Administrative Agent for the account of each Lender a facility fee which
shall accrue at the Commitment Fee Rate on the daily average unused
portion of the facility until the later of the termination of the
Commitment or until the entire Revolving Credit Exposure has been paid or
terminated in full. Accrued facility fees shall be payable in arrears on
the last day of March, June, September and December of each year and on
the date on which the Commitments terminate, commencing on the first such
date to occur after the date hereof; PROVIDED that any facility fees
accruing after the date on which the Commitments terminate shall be
payable on demand. All facility fees shall be computed on the basis of a
year of 360 days and shall be payable for the actual number of days
elapsed (including the first day but excluding the last day).
(b) The Borrowers agree (i) to pay to the Administrative Agent, for
the account of each Lender, on the date of issuance of each Letter of
Credit and on the anniversary of each Letter of Credit an annual letter of
credit fee, calculated at the LC Fee Rate, on the face amount of each
Letter of Credit, (ii) to pay to the Issuing Bank, for its own account, an
annual fronting fee in an amount equal to 0.125% of the face amount of
each Letter of Credit, and (iii) to pay to the Issuing Bank, the Issuing
Bank's standard fees with respect to the issuance, amendment, renewal or
extension of any Letter of Credit or processing of drawings thereunder
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Section 8. AMENDMENT OF SECTION 3.07. Section 3.07 of the Credit Agreement
is hereby amended by deleting such section in its entirety and substituting
therefor the following:
Section 3.07 COMPLIANCE WITH LAWS AND AGREEMENTS. Each Borrower and
its Subsidiaries is in compliance with all laws, regulations and orders of
any Governmental Authority applicable to it or its property and all
indentures, agreements and other instruments binding upon it or its
property, except where the failure to do so, individually or in the
aggregate, could not reasonably be expected to result in a Material
Adverse Effect. No Default has occurred and is continuing. Each Borrower
and its Subsidiaries has such operating licenses that are material to the
condition (financial or otherwise), business or operations of the Borrower
and its Subsidiaries and each such operating license, when issued, was
issued for a period of twelve months or longer.
Section 9. AMENDMENT OF SECTION 5.01. Subsection 5.01(c) of the Credit
Agreement is hereby amended by deleting such subsection in its entirety and
substituting therefor the following:
(c) concurrently with any delivery of financial statements under
clause (a) or (b) above, (i) a certificate of a Financial Officer of the
Borrowers certifying as to whether a Default has occurred and, if a
Default has occurred, specifying the details thereof and any action taken
or proposed to be taken with respect thereto, (ii) a Compliance
Certificate setting forth reasonably detailed calculations demonstrating
compliance with Sections 6.09, 6.10 and 6.11 and (iii) a certificate of a
Financial Officer of the Borrowers stating whether any change in GAAP or
in the application thereof, which are applicable to HHC or its financial
statements, has occurred since the date of the audited financial
statements referred to in Section 3.04 and, if any such change has
occurred, specifying the effect of such change on the financial statements
accompanying such certificate;
Section 10. AMENDMENT OF SECTION 6.01.
(a) Section 6.01 of the Credit Agreement is hereby amended by the addition
of the following:
(i) Indebtedness created under the Lease Facility Documents. (j)
Indebtedness to any Lender under interest rate swap agreements or
similar interest rate protection or hedging agreements in an
aggregate amount not to exceed $4,000,000.
(b) Section 6.01 of the Credit Agreement is hereby further amended by
deleting the last full paragraph of Section 6.01.
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Section 11. AMENDMENT OF SECTION 6.02. Section 6.02 of the Credit
Agreement is hereby amended by the addition of the following:
(f) any Lien securing the Indebtedness permitted under Section 6.01(i).
Section 12. AMENDMENT OF SECTION 6.04. Subsection 6.04(e) of the Credit
Agreement is hereby amended by deleting such subsection in its entirety and
substituting therefor the following:
(e) acquisitions by any Borrower as long as (i) the Board of
Directors of the acquiring Borrower (or at the Board's discretion, such
Borrower's Executive Committee of its Board of Directors) has approved the
proposed acquisition, (ii) the Administrative Agent is notified at least
three business days in advance of the consummation of such acquisition if
more than $5,000,000 of Loans are to be borrowed hereunder and used in
connection with the completion of such acquisition, (iii) immediately
before and immediately after such acquisition no Default or Event of
Default will occur or exist, (iv) thirty days prior to the consummation of
such acquisition, the Borrowers provide the most recent audited annual
financial statements for the entity being acquired (PROVIDED, that the
requirements of this clause (iv) shall apply only if the purchase price
for such acquisition exceeds $15,000,000 and a majority of such purchase
price will be financed using Loans borrowed under this Agreement), (v)
such acquisition is consistent with the Borrowers current acquisition
strategy set forth on SCHEDULE 6.04 hereto, and (vi) if such acquisition
involves the formation or acquisition by any Borrower of any Person that
becomes a Subsidiary or as a result of or in connection with such
acquisition, such Subsidiary shall execute such security agreements,
mortgages, pledge agreements, financing statements, intercreditor
agreements and such other documents as are requested by the Administrative
Agent and shall become bound by this Agreement and such other documents
executed in connection herewith (PROVIDED, that the requirements of this
clause (vi) shall not apply if, but only to the extent, that such
Subsidiary is or at the time of such acquisition becomes a party to any
agreement for borrowed funds Indebtedness or operating lease agreement
with any third party that prohibits the Administrative Agent from
obtaining a Lien on the assets or capital stock of or other beneficial
interests in such Subsidiary). Notwithstanding anything to the contrary in
any of the Operative Agreements, in the event that any such Subsidiary is
not required to satisfy the requirements of clauses 6.04(e)(vi) above due
to operation of the proviso to 6.04(e)(vi) above, and such Subsidiary does
not grant to the Agent a first security interest in all of its accounts
receivable then or thereafter existing or arising, then such Subsidiary
shall not be included in Holding's consolidated group in determining
compliance with any financial covenants set forth in Sections 6.09, 6.10
and 6.11 hereof;
Section 13. AMENDMENT OF SECTION 6.08. Section 6.08 of the Credit
Agreement is hereby amended by deleting such section in its entirety and
substituting therefor the following:
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Section 6.08 RESTRICTIVE AGREEMENTS. The Borrowers will not, and
will not permit any of its Subsidiaries to, directly or indirectly, enter
into, incur or permit to exist any agreement or other arrangement that
prohibits, restricts or imposes any condition upon (a) the ability of the
Borrowers or any Subsidiary to create, incur or permit to exist any Lien
upon any of its property or assets, or (b) the ability of any Subsidiary
to pay dividends or other distributions with respect to any shares of its
capital stock or to make or repay loans or advances to the Borrowers or
any other Subsidiary or to Guarantee Indebtedness of the Borrowers or any
other Subsidiary, or (c) the ability of the Borrowers to grant to the
Lenders or the Agent any Lien upon any of the Borrowers' property or
assets, (except that this clause (c) shall not apply to the incurrence of
purchase money obligations permitted under Section 6.01(e)); PROVIDED that
(i) the foregoing shall not apply to restrictions and conditions imposed
by law or by this Agreement, (ii) the foregoing shall not apply to
restrictions and conditions existing on the date hereof identified on
Schedule 6.08 (but shall apply to any extension or renewal of, or any
amendment or modification expanding the scope of, any such restriction or
condition), (iii) the foregoing shall not apply to customary restrictions
and conditions contained in agreements relating to the sale of a
Subsidiary pending such sale, provided such restrictions and conditions
apply only to the Subsidiary that is to be sold and such sale is permitted
hereunder, (iv) clause (a) of the foregoing shall not apply to
restrictions or conditions imposed by any agreement relating to secured
Indebtedness permitted by this Agreement if such restrictions or
conditions apply only to the property or assets securing such
Indebtedness, (v) clause (a) of the foregoing shall not apply to customary
provisions in leases restricting the assignment thereof, and (vi) the
foregoing shall not apply to the restrictions imposed by the Meditrust
Entities in those certain agreements in effect on the date hereof.
Section 14. AMENDMENT OF SECTION 6.10. Section 6.10 is hereby amended by
deleting such section in its entirety and substituting therefor the following:
Section 6.10 LEVERAGE RATIO. The Borrowers shall not permit the
Consolidated Leverage Ratio to exceed during any period described below
the ratio set forth opposite such period:
RATIO PERIOD
5.50-to-1.00 August 1, 1997 through October 31, 2000
4.5-to-1.00 November 1, 2000 and thereafter
Section 15. AMENDMENT OF SECTION 6.11. Section 6.11 is hereby amended by
deleting such section in its entirety and substituting therefor the following:
Section 6.11NET WORTH. The Borrowers shall maintain at all times
minimum Consolidated Net Worth of not less than the sum of (i) $46,000,000
PLUS (ii) 50% of Consolidated Net Income for each fiscal period beginning
after March 31, 1997, PLUS
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(iii) all cash net proceeds actually received by the Borrowers after March
31, 1997 from the issuance of equity interests.
Section 16. AMENDMENT OF ARTICLE VII. Article VII of the Credit Agreement
is hereby amended by the addition of the following:
(p) the Borrowers or any Subsidiary shall fail to make any payment
(whether of principal or interest and regardless of amount) when and as
the same shall become due and payable under any Lease Facility Document.
(q) an Event of Default (as defined in the Lease Facility Documents)
shall have occurred under any of the Lease Facility Documents.
Section 17. AMENDMENT OF ARTICLE VIII. Article VIII of the Credit
Agreement is hereby amended by deleting the last sentence in the third full
paragraph in its entirety and substituting therefor the following:
The Administrative Agent shall be deemed not to have knowledge of
any Default, other than a payment Default, unless and until written notice
thereof is given to the Administrative Agent by the Borrowers or a Lender,
and the Administrative Agent shall not be responsible for or have any duty
to ascertain or inquire into (i) any statement, warranty or representation
made in or in connection with this Agreement, (ii) the contents of any
certificate, report or other document delivered hereunder or in connection
herewith, (iii) the performance or observance of any of the covenants,
agreements or other terms or conditions set forth herein, (iv) the
validity, enforceability, effectiveness or genuineness of this Agreement
or any other agreement, instrument or document, or (v) the satisfaction of
any condition set forth in Article IV or elsewhere herein, other than to
confirm receipt of items expressly required to be delivered to the
Administrative Agent.
Section 18. AMENDMENT OF SECTION 9.02. Section 9.02(b) of the Credit
Agreement is hereby amended by the addition of the following:
(vi) release any guarantee or any collateral without the prior written
consent of each Lender.
Section 19. AMENDMENT OF SECTION 9.04. Section 9.04(b) of the Credit
Agreement is hereby amended by deleting the second proviso in the first sentence
of Section 9.04(b) in its entirety and substituting therefor the following:
PROVIDED FURTHER that any consent of the Borrowers otherwise required
under this paragraph shall not be required if an Event of Default has
occurred and is continuing.
13
<PAGE>
Section 20. CONSENT. The Agent and the Lenders hereby consent to the
execution by any of the Borrowers of any of the Lease Facility Documents.
Section 21. COLLATERAL. The Borrowers, the Agent and the Lenders hereby
acknowledge and agree that effective as of the date hereof the collateral
securing the obligations of the Borrowers to the Agent and the Lenders pursuant
to the Credit Agreement and the Security Documents also secures the obligations
of the Borrowers to the Lease Agent and the Lease Lenders under the Lease
Facility Documents.
Section 22. SCHEDULE I; ADDITIONAL BORROWER. SCHEDULE I attached to the
Credit Agreement is hereby amended by deleting such SCHEDULE I in its entirety
and substituting therefor the SCHEDULE I attached to this Amendment. As a result
of such change, effective the date of this Amendment, Harborside of Dayton
Limited Partnership, Harborside Acquisition Limited Partnership I, Harborside
Acquisition Limited Partnership II, Harborside Acquisition Limited Partnership
III, Harborside Acquisition Limited Partnership IV, Harborside Acquisition
Limited Partnership V, Harborside Acquisition Limited Partnership VI, Harborside
Acquisition Limited Partnership VII, Harborside Acquisition Limited Partnership
VIII, Harborside Acquisition Limited Partnership IX and Harborside Acquisition
Limited Partnership X (collectively "New Borrowers") shall become additional
Borrowers under the Credit Agreement and shall become bound by this Amendment,
the Credit Agreement and all other documents executed in connection therewith as
if it were a signatory to such documents.
Section 23. SCHEDULE 2.01. SCHEDULE 2.01 attached to the Credit Agreement
is hereby amended by deleting such SCHEDULE 2.01 in its entirety and
substituting therefor the SCHEDULE 2.01 attached to this Amendment.
Section 24. EFFECTIVENESS; CONDITION TO EFFECTIVENESS. This Amendment
shall become effective as of the date first set forth above, upon execution
hereof by the Borrowers, the Agent and the Lenders and satisfaction of the
following conditions:
(a) SECURITY AGREEMENT. The Borrowers shall have delivered to the Agent
the Second Amendment to Security Agreement dated as of the date hereof
executed by certain of the Borrowers in favor of the Agent.
(b) A/R SECURITY AGREEMENT. The Borrowers shall have delivered to the
Agent the First Amendment to A/R Security Agreement dated as of the date
hereof executed by certain of the Borrowers in favor of the Agent.
(c) PLEDGE AGREEMENT. The Borrowers shall have delivered to the Agent the
First Amendment to Pledge Agreement dated as of the date hereof executed
by certain of the Borrowers in favor of the Agent.
(d) FINANCING STATEMENTS. The New Borrowers shall have delivered to the
Agent financing statements pursuant to the Second Amendment to the
Security Agreement.
14
<PAGE>
Section 25. REPRESENTATIONS AND WARRANTIES. The Borrowers hereby confirm
to the Agent the representations and warranties of the Borrowers set forth in
Article III of the Credit Agreement as of the date hereof, as if set forth
herein in full.
Section 26. NO DEFAULT. The Borrowers hereby acknowledge that no Default
or Event of Default has occurred under the Credit Agreement.
Section 27. NO OTHER CHANGES. Except as amended by this Amendment, the
Credit Agreement remains in full force and effect.
Section 28. COUNTERPARTS. This Amendment may be executed in any number of
counterparts each of which shall be an original with the same effect as if all
of the signatures to this Amendment were upon the same instrument.
Section 29. MISCELLANEOUS. This Amendment shall be governed by and
construed and enforced under the laws of the State of New York.
[remainder of page left blank]
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
HARBORSIDE HEALTHCARE CORPORATION
By
-----------------------------------
Name: William H. Stephan
Title: Senior Vice President and
Chief Financial Officer
BAY TREE NURSING CENTER CORP.
BELMONT NURSING CENTER CORP.
COUNTRYSIDE CARE CENTER CORP.
HARBORSIDE HEALTH I CORPORATION
HARBORSIDE TOLEDO CORP.
KHI CORPORATION
OAKHURST MANOR NURSING CENTER CORP.
ORCHARD RIDGE NURSING CENTER CORP.
SUNSET POINT NURSING CENTER CORP.
WEST BAY NURSING CENTER CORP.
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE OF CLEVELAND LIMITED
PARTNERSHIP
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE HEALTHCARE ADVISORS
LIMITED PARTNERSHIP
By: KHI Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
16
<PAGE>
HARBORSIDE HEALTHCARE BALTIMORE
LIMITED PARTNERSHIP
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE HEALTHCARE LIMITED
PARTNERSHIP
By: KHI Corp.
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE HEALTHCARE NETWORK
LIMITED PARTNERSHIP
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE NEW HAMPSHIRE LIMITED
PARTNERSHIP
By: Harborside Toledo Corp.
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
17
<PAGE>
HARBORSIDE OF OHIO LIMITED PARTNERSHIP
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE REHABILITATION LIMITED
PARTNERSHIP
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE TOLEDO LIMITED PARTNERSHIP
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HHCI LIMITED PARTNERSHIP
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
RIVERSIDE RETIREMENT LIMITED
PARTNERSHIP
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
18
<PAGE>
HARBORSIDE PROPERTIES TRUST I
By
-----------------------------------
Name: Stephen Guillard, in his
capacity as trustee and not
individually
By
-----------------------------------
Name: William H. Stephan, in his
capacity as trustee and not
individually
HARBORSIDE MASSACHUSETTS LIMITED
PARTNERSHIP
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE OF DAYTON LIMITED
PARTNERSHIP
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP I
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
19
<PAGE>
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP II
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP III
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP IV
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP V
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
20
<PAGE>
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP VI
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP VII
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP VIII
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP IX
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
21
<PAGE>
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP X
By: Harborside Health I Corporation
Its General Partner
By
-----------------------------------
Name: William H. Stephan
Title: Treasurer
22
<PAGE>
THE CHASE MANHATTAN BANK, individually
and as Agent
By
-----------------------------------
Name:
Title:
THE SUMITOMO BANK, LIMITED
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF MARYLAND
By:
-----------------------------------
Name:
Title:
BANK OF MONTREAL
By:
-----------------------------------
Name:
Title:
23
<PAGE>
SCHEDULE I
BORROWERS:
Bay Tree Nursing Center Corp.
Belmont Nursing Center Corp.
Countryside Care Center Corp.
Harborside of Cleveland Limited Partnership
Harborside Health I Corporation
Harborside Healthcare Advisors Limited Partnership
Harborside Healthcare Baltimore Limited Partnership
Harborside Healthcare Corporation
Harborside Healthcare Limited Partnership
Harborside Healthcare Network Limited Partnership
Harborside New Hampshire Limited Partnership
Harborside of Ohio Limited Partnership
Harborside Rehabilitation Limited Partnership
Harborside Toledo Limited Partnership
Harborside Toledo Corp.
HHCI Limited Partnership
KHI Corporation
Oakhurst Manor Nursing Center Corp.
Orchard Ridge Nursing Center Corp.
Riverside Retirement Limited Partnership
Sunset Point Nursing Center Corp.
West Bay Nursing Center Corp.
Harborside Properties Trust I
Harborside Massachusetts Limited Partnership
Harborside of Dayton Limited Partnership
Harborside Acquisition Limited Partnership I
Harborside Acquisition Limited Partnership II
Harborside Acquisition Limited Partnership III
Harborside Acquisition Limited Partnership IV
Harborside Acquisition Limited Partnership V
Harborside Acquisition Limited Partnership VI
Harborside Acquisition Limited Partnership VII
Harborside Acquisition Limited Partnership VIII
Harborside Acquisition Limited Partnership IX Harborside
Acquisition Limited Partnership X
24
<PAGE>
SCHEDULE 2.01
Commitment Percentages
<TABLE>
<CAPTION>
Commitment Maximum Amount of Revolving
LENDER PERCENTAGE CREDIT EXPOSURE
<S> <C> <C>
The Chase Manhattan Bank ........ 36% $9,000,000
Bank of Montreal ................ 26% $6,500,000
The Sumitomo Bank, Limited ...... 19% $4,750,000
The First National Bank ......... 19% $4,750,000
of Maryland
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the balance
sheet and statement of operations and is qualified in its entirety to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 11,934
<SECURITIES> 0
<RECEIVABLES> 30,417
<ALLOWANCES> (2,102)
<INVENTORY> 20,256<F1>
<CURRENT-ASSETS> 48,523
<PP&E> 94,753
<DEPRECIATION> 0
<TOTAL-ASSETS> 155,258
<CURRENT-LIABILITIES> 25,485
<BONDS> 80,049<F2>
0
0
<COMMON> 80
<OTHER-SE> 49,644<F3>
<TOTAL-LIABILITY-AND-EQUITY> 155,258
<SALES> 0
<TOTAL-REVENUES> 155,640
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 143,294
<LOSS-PROVISION> (129)<F4>
<INTEREST-EXPENSE> 4,370
<INCOME-PRETAX> 7,847
<INCOME-TAX> 3,060
<INCOME-CONTINUING> 4,787
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,787
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.60
<FN>
<F1>Includes the following assets: prepaid expenses and other of $6,694,
deferred income taxes--current of $1,580, deferred income taxes--long-term of
$376, restricted cash of $4,095, investment in limited partnership of $128, and
intangible assets, net of $7,383.
<F2>Includes the following long-term liabilities: deferred income of $3,718,
capital lease obligation of $52,665, and long-term debt of $23,666.
<F3>Includes the following equity accounts: additional paid-in capital of
$48,397 and retained earnings of $1,247.
<F4>Includes loss on investment in limited partnership of $129.
</FN>
</TABLE>
EXHIBIT 99.1
CUSHMAN MANAGEMENT ASSOCIATES, INC.
AND AFFILIATES
COMBINED FINANCIAL REPORTS
FOR THE YEAR ENDED
DECEMBER 31, 1996
1
<PAGE>
[LETTERHEAD OF LANDA & ALTSHER, P.C.]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Cushman Management Associates, Inc.
and Affiliates
Topsfield, Massachusetts
We have audited the accompanying combined balance sheet of Cushman
Management Associates, Inc. and Affiliates as of December 31, 1996, and the
related combined statements of income and owners' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides 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
Cushman Management Associates, Inc. and Affiliates as of December 31, 1996, and
the combined results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/Landa & Altsher
------------------
October 22, 1997
<PAGE>
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
COMBINED BALANCE SHEET AS OF DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash .................................................................. $ 1,607
Accounts receivable - net of allowance for doubtful
accounts of $ 75 .................................................... 2,004
Prepaid expenses and other ............................................ 159
Total current assets ................................................ 3,770
PROPERTY, PLANT AND EQUIPMENT, net ..................................... 3,490
INTANGIBLE ASSETS, net ................................................. 6
=======
TOTAL ASSETS ........................................................... $ 7,266
=======
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Current maturities on long-term debt ................................. $ 61
Accounts payable ..................................................... 443
Employee compensation and benefits ................................... 755
Other accrued liabilities ............................................ 136
Accrued interest ..................................................... 72
Due to related parties ............................................... 35
Income taxes payable ................................................. 244
Total current liabilities .......................................... 1,746
LONG-TERM DEBT, net of current maturities .............................. 1,320
TOTAL LIABILITIES ...................................................... 3,066
-------
OWNERS' EQUITY:
Common stock, 17,500 shares authorized without par value,
2,000 shares issued and 1,970 outstanding with 30 held in treasury 310
Additional paid-in capital ........................................ 172
Retained earnings and partners' capital ............................ 3,738
4,220
Less - treasury stock, at cost ..................................... (20)
Total owners' equity ............................................... 4,200
=======
TOTAL LIABILITIES AND OWNERS' EQUITY .................................... $ 7,266
=======
</TABLE>
See accompanying notes to financial statements
2
<PAGE>
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
COMBINED STATEMENT OF OPERATIONS AND OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
TOTAL NET REVENUE ...................... $19,368
-------
EXPENSES:
Facility operating .................. 14,313
General and administrative .......... 2,250
Depreciation and amortization ....... 322
-------
Total expenses .................... 16,885
-------
INCOME FROM OPERATIONS ................. 2,483
OTHER:
Interest expense, net ............... 92
-------
INCOME BEFORE INCOME TAXES ............. 2,391
INCOME TAXES ........................... 241
-------
NET INCOME ............................. 2,150
OWNERS' EQUITY - BEGINNING OF YEAR ..... 4,200
LESS - DISTRIBUTIONS TO OWNERS ......... (2,150
-------
OWNERS' EQUITY - END OF YEAR ........... $ 4,200
=======
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................ $ 2,150
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization ................... 322
Provisions for losses on accounts receivable .... 116
Changes in assets and liabilities:
Accounts receivable ............................. 69
Prepaid expenses and other ...................... (52)
Accounts payable and accrued liabilities ........ 185
Income taxes payable ............................ 241
NET CASH PROVIDED BY OPERATING ACTIVITIES ............. 3,031
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............... (68)
NET CASH USED BY INVESTING ACTIVITIES ................. (68)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt ................................. (59)
Distributions to owners ........................... (2,150)
Repayment of related party debt ................... (173)
NET CASH USED BY FINANCING ACTIVITIES ................. (2,382)
NET INCREASE IN CASH .................................. 581
CASH AT BEGINNING OF YEAR ............................. 1,026
-------
CASH AT END OF YEAR ................................... $ 1,607
=======
SUPPLEMENTARY DISCLOSURE:
Interest paid ..................................... $ 118
=======
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
The financial statements presented are the combined financial
statements of Cushman Management Associates, Inc. (the management
company), Cedar Glen Nursing Home, Danvers Twin Oaks Nursing Home,
Inc., Saugus Nursing Home, Inc., d/b/a Louise Caroline Rehabilitation
and Nursing Center, and Evtan Nursing Home, Inc., d/b/a Maplewood Manor
Nursing Home, (collectively, the "Companies"). The majority
stockholders of Cushman Management Associates, Inc. own a majority
interest in the above nursing homes. Cushman Management Associates,
Inc. is a Subchapter S Corporation and operates a management company in
Topsfield, Massachusetts. Cushman Management Associates, Inc. provides
various services to nursing homes including administration,
bookkeeping, and other patient related services. Danvers Twin Oaks
Nursing Home, Inc.; Saugus Nursing Home, Inc., and Evtan Nursing Home,
Inc. are Subchapter S Corporations and operate nursing homes of 101, 80
and 120 beds, respectively. Cedar Glen Nursing Home is a limited
partnership and operates a 100-bed nursing home.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Companies' significant accounting policies follows:
a) BASIS ON COMBINATION: The combined financial statements include all
the accounts of the above-named entities. All significant intercompany
balances and transactions have been eliminated.
b) PATIENT SERVICE REVENUE: Private patient service revenue is reported
at the estimated net realizable amounts. Third-party payor revenues are
recorded as indicated in Note 2.
C) PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost.
Depreciation of building and improvements is calculated using the
straight-line and accelerated methods over the estimated useful lives
that range from five to forty years. Depreciation of equipment and
motor vehicles is calculated using the straight-line and accelerated
methods over the estimated useful lives that range from three to ten
years. Depreciation charged to operations amounted to $310 for 1996.
d) CASH AND CASH EQUIVALENTS: The Companies consider all short-term
debt securities purchased with an original maturity of three months or
less to be cash equivalents.
5
<PAGE>
Cont.
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
e) INCOME TAXES: Cushman Management Associates, Inc.; Danvers Twin Oaks
Nursing Home, Inc.; Saugus Nursing Home, Inc.; and Evtan Nursing Home,
Inc.; have elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Companies do not
pay federal income taxes on their taxable income. Instead, the
stockholders are liable for individual income taxes on their respective
share of the Companies' taxable income.
The Companies are considered to be engaged in a unitary business and as
a result have exceeded certain gross income limitations for state
income tax purposes. Consequently, the Companies are liable for state
corporate income taxes on its taxable income.
No income taxes are payable by or provided for Cedar Glen Nursing Home,
a Limited Partnership. Partners are liable for individual federal and
state income taxes on their respective share of the Partnership's
taxable income.
f) INTANGIBLE ASSETS: Intangible assets are stated on the basis of cost
and are amortized on a straight-line basis, over the estimated future
periods to be benefited. Amortization charged to operations amounted to
$12 for 1996.
g) 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 reporting period. Actual costs could
differ from those estimates.
h) PROMOTIONAL ADVERTISING: Promotional advertising costs are expensed
as incurred. Promotional advertising costs charged to operations
amounted to $72 for 1996.
6
<PAGE>
Cont.
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
NOTE 2 - PATIENT SERVICE REVENUES FROM THIRD PARTY PAYORS
SUMMARY OF THE PAYMENT ARRANGEMENTS WITH THIRD PARTY PAYORS
MEDICAID - PROSPECTIVE RATE SYSTEM - The Companies receive
reimbursement from the Commonwealth of Massachusetts under the
prospective rate of payment system for the care and services rendered
to publicly-aided patients in long-term care facilities pursuant to
regulations promulgated by the Division of Health Care Finance and
Policy (the Division). Under the regulations, the current year rates
are calculated utilizing base year costs adjusted for inflation. The
base year costs are subject to audit which could result in a
retroactive rate adjustment for the current year.
As a result of the audit of prior years' cost reports by the Division,
the Companies have received amended prospective rates for the years
1992 and 1991. The amended rates resulted in a retroactive adjustment
due the Companies of $150 and $133 for 1992 and 1991, respectively.
These settlements have been received in 1996 and such settlements have
been reflected under the caption "Total Net Revenue" on Exhibit B to
the extent not previously reflected.
Management estimates that the Companies have underspent the OBRA
component of the prospective rate during 1993, 1992 and 1991, resulting
in a retroactive adjustment due the Commonwealth of $14, $11 and $15
for 1993, 1992 and 1991, respectively. These retroactive adjustments
have been settled in 1996 and such settlements have been reflected
under the caption "Total Net Revenue" on Exhibit B to the extent not
previously recorded.
MEDICARE - The Companies receive reimbursement for patient care under
the federally sponsored Medicare program through an insurance
intermediary. During the year, an interim rate is assigned based upon
the cost experience of a prior year modified by its current
regulations, and the facilities are paid at this rate during the year.
A cost report is filed with, and audited by, the insurance
intermediary. A final rate which may be subject to cost limitations is
then established and final settlement of the difference is called for
under the regulations.
Final settlements have been received through 1994 and such settlements
have been included in the caption "Total Net Revenue" on Exhibit B, to
the extent that they had not been reflected in prior years.
7
<PAGE>
Cont.
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
NOTE 2 - PATIENT SERVICE REVENUES FROM THIRD PARTY PAYORS (Continued)
Inasmuch as the final settlement rates for 1996 and 1995 cannot be
determined with sufficient accuracy for proper recording in these
financial statements, the income for these years has been recorded at
the interim rate of payment. The actual amounts will be accrued in the
year of settlement.
NOTE 3 - ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
BALANCE AT
DECEMBER 31,
1996
----------------
<S> <C>
Private patients .................. $ 103
Prepaid room and board ............ (11)
Medicare patients ................. 334
Publicly aided patients ........... 1,648
Managed facilities ................ 5
Allowance for uncollectibles ...... (75)
-------
Accounts receivable, net .......... $ 2,004
=======
</TABLE>
Bad debts expense charged to operations amounted to $116 for 1996.
NOTE 4 - RELATED PARTY TRANSACTIONS
The Companies have entered into the following transactions with related
parties:
a) MANAGEMENT FEES - Danvers Twin Oaks Nursing Home, Inc.
recorded management fees of $47 to an officer and stockholder
of Cushman Management Associates, Inc. for 1996.
8
<PAGE>
Cont.
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)
b) Related party loans which have no fixed repayment terms, are as
follows:
<TABLE>
<CAPTION>
Balance at
Interest December 31,
Rate 1996
------------------
<S> <C> <C>
Due from related parties:
Federal Funds
Officers and stockholders ......... Rate $124
----
Due to related parties:
Officers and stockholders ....... 9% 88
Partners ........................ 9% 27
Other related parties ........... 9% 44
----
Total due to related parties ... 159
----
Net due to related parties ........ $ 35
====
</TABLE>
Net interest expense incurred on the above related party loans amounted
to $21 for 1996.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following at
December 31, 1996:
<TABLE>
<S> <C>
Land ............................. $ 195
Building and improvements ........ 5,528
Equipment ........................ 2,688
Motor vehicles ................... 39
Construction in process .......... 5
------
8,455
Less: Accumulated Depreciation .. (4,965)
======
Property, plant and equipment, net $3,490
======
</TABLE>
At December 31, 1996, the Companies have incurred and capitalized $5 of
engineering costs related to the replacement of two HVAC systems. As of
December 31, 1996, no date has been set for the start of the work on
the HVAC systems.
9
<PAGE>
Cont.
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
NOTE 6 - LONG-TERM DEBT
The Companies are obligated under long-term debt at December 31, 1996
as follows:
<TABLE>
<S> <C>
9% first mortgage to Salem Five, secured by real estate and guaranteed
by a majority of the shareholders, payable in monthly payments of $8,
including interest with a balloon payment of all unpaid principal and
interest due on October 8, 1999.
$ 791
9% 3 - year mortgage to Salem Five, due November 17, 1999, secured by
real estate and guaranteed by a majority of the shareholders, payable
in monthly installments of $6 including interest with a balloon
payment due November 17, 1999.
352
9% 25-year first mortgage to Ipswich Savings Bank, due October 1,
2017, secured by land and buildings of Cushman Management Associates,
Inc., payable in monthly installments of $2 including interest
238
---------------
Total 1,381
Current maturities 61
---------------
Long-term debt, net $ 1,320
===============
</TABLE>
10
<PAGE>
Cont.
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
NOTE 6 - LONG-TERM DEBT (Continued)
Interest incurred on the above long-term debt amounted to $119 for
1996.
Following are maturities of long-term debt for each of the next five
years:
<TABLE>
<CAPTION>
Amount
------------------
<S> <C>
1997 $ 61
1998 69
1999 1,027
2000 5
2001 6
</TABLE>
NOTE 7 - CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Companies to
concentrations of credit risk consist principally of the following:
a.) CASH: The Companies maintain cash balances in several
federally insured financial institutions in the same
geographic area. The cash exceeding federally insured limits
totaled $995 at December 31, 1996. There may be times during
the year when uninsured cash is significantly higher.
b.) ACCOUNTS RECEIVABLE: The Companies extend unsecured credit
to their private patients and patients covered under
third-party payor arrangements. Accounts receivable from
private patients and third-party payors totaled $2,015 at
December 31, 1996. See Note (2) and Note (3) for details of
third-party payor arrangements and receivable balances,
respectively.
d.) DUE FROM RELATED PARTIES: The Companies extend unsecured
credit to their affiliates and owners. The balance due from
related parties totaled $124 at December 31, 1996. See Note
(4) for further details.
11
<PAGE>
Cont.
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
NOTE 8 - COMMITMENTS AND CONTINGENCIES
a) Pursuant to the Commonwealth of Massachusetts Medical Assistance
Program regulations, the Companies are members of a group of related
nursing homes (the Group) which are considered to be under common
ownership. Consequently, all members of the Group are contingently
liable for the recoupments of liabilities of other members of the
Group.
b) A significant portion of the Companies' revenues are derived from
services reimbursable under the Medicaid program, (See Note 2). The
base year costs utilized in calculating the Medicaid prospective rates
are subject to audit which could result in a retroactive rate
adjustment for all years in which that base year's costs are utilized
in calculating the prospective rate. It is not possible at this time to
determine whether the Companies will be audited or if a retroactive
rate adjustment would result.
c.) A portion of the Companies' revenues are derived from services
under the Medicare program, (see Note 2). Under this program all cost
report years are subject to audit which could result in a retroactive
rate adjustment. It is not possible at this time to determine whether
the Companies will be audited or if a retroactive rate adjustment will
result.
If the Companies' Medicare Fiscal Intermediary were to issue prudent
buyer adjustments for 1996 using the same methodology as applied to
1995, as detailed in Note 9 (b), this would result in a payable to the
Medicare program of approximately $280. The Companies would vigorously
contest any adjustments made by the fiscal intermediary. In addition,
the Companies contract with outside suppliers of therapy services
provides for indemnification to the Companies in the event that
Medicare limits reimbursement to less then cost. Consequently, no
provision has been made to the accompanying financial statements.
NOTE 9 - SUBSEQUENT EVENTS
A.) SALE OF THE NURSING HOMES: In August 1997, the Companies sold their
property and equipment and operating licenses of the nursing homes. The
Companies would retain all assets, other than property and equipment,
and all liabilities.
12
<PAGE>
Cont.
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
NOTE 9 - SUBSEQUENT EVENTS (Continued)
B.) MEDICARE SETTLEMENTS: In 1997, the Companies' Medicare Fiscal
Intermediary issued settlements for 1995, which include a
limitation of the ancillary therapy services to less than cost.
These settlements result in a payable to the Medicare program of
approximately $130. The Companies strongly disagree with these
settlements and will vigorously contest these settlements through
the appeal process.
The Companies contract with outside suppliers of therapy services
provides for indemnification to the Companies in the event that
Medicare limits reimbursement to less than the providers cost,
consequently, no provision has been made in the accompanying financial
statement for this retroactive adjustment.
13
