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 June 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
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Commission file number 01-14358
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Harborside Healthcare Corporation
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Delaware 04-3307188
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(State or other 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 X No
--- ---
Number of shares of common stock, par value $0.01 per share outstanding as of
August 13, 1997: 8,001,999.
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Table of Contents
Page
----
Part I. Financial Information
Condensed Consolidated Balance Sheets
December 31, 1996 and June 30, 1997 3
Condensed Consolidated Statements of Operations
For the Three Months and Six Months Ended
June 30, 1996 and 1997 4
Condensed Consolidated Statements of Changes
in Stockholders' Equity
For the Six Months Ended June 30, 1997 5
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 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 16
Signatures 17
-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, June 30,
1996 1997
----------- --------
ASSETS (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 9,722 $ 10,694
Accounts receivable, net of allowances for doubtful
accounts of $1,860 and $1,700, respectively 22,984 27,561
Prepaid expenses and other 3,570 6,086
Demand note due from limited partnership 1,369 --
Deferred income taxes 1,580 1,580
-------- --------
Total current assets 39,225 45,921
Restricted cash 3,751 3,827
Investment in limited partnership 256 193
Property and equipment, net 95,187 94,287
Intangible assets, net 3,004 4,147
Deferred income taxes 376 376
-------- --------
Total assets $141,799 $148,751
======== ========
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 169 $ 178
Current portion of capital lease obligation 3,744 3,771
Accounts payable 6,011 6,328
Employee compensation and benefits 8,639 10,217
Other accrued liabilities 2,177 3,293
Accrued interest 19 84
Current portion of deferred income 368 369
Income taxes payable 1,272 567
-------- --------
Total current liabilities 22,399 24,807
Long-term portion of deferred income 2,948 2,763
Long-term portion of capital lease obligation 53,533 53,090
Long-term debt 18,039 20,116
-------- --------
Total liabilities 96,919 100,776
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 30,000,000 shares
authorized, 8,000,000 shares issued
and outstanding 80 80
Additional paid-in capital 48,340 48,340
Accumulated deficit (3,540) (445)
--------- ---------
Total stockholders' equity 44,880 47,975
--------- ---------
Total liabilities and stockholders' equity $ 141,799 $ 148,751
========= =========
</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 six months ended
June 30, June 30,
--------------------------- --------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
Total net revenues $ 36,872 $ 50,292 $ 71,803 $ 97,676
----------- ----------- ----------- -----------
Expenses:
<S> <C> <C> <C> <C>
Facility operating 29,806 40,142 57,926 77,517
General and administrative 1,710 2,257 3,430 4,723
Service charges paid to affiliate 180 177 365 354
Special compensation and other 1,201 -- 1,716 --
Depreciation and amortization 576 960 1,115 1,882
Facility rent 2,553 2,687 5,098 5,309
----------- ----------- ----------- -----------
Total expenses 36,026 46,223 69,650 89,785
----------- ----------- ----------- -----------
Income from operations 846 4,069 2,153 7,891
Other:
Interest expense, net 835 1,364 1,810 2,756
Loss on investment in
limited partnership 240 92 367 61
----------- ----------- ----------- -----------
Income (loss) before income taxes
and extraordinary loss (229) 2,613 (24) 5,074
Income taxes (benefit) (400) 1,020 (400) 1,979
----------- ----------- ----------- -----------
Income before extraordinary loss 171 1,593 376 3,095
Extraordinary loss on early retirement
of debt, net of taxes of $843 (1,318) -- (1,318) --
----------- ----------- ----------- -----------
Net income (loss) $ (1,147) $ 1,593 $ (942) $ 3,095
=========== =========== =========== ===========
Net income per share $ 0.20 $ 0.39
=========== ===========
Pro forma data:
Historical loss before income
taxes and extraordinary loss $ (229) $ (24)
Pro forma income taxes (benefit) (489) (409)
----------- -----------
Pro forma income before
extraordinary loss 260 385
Extraordinary loss, net (1,318) (1,318)
----------- -----------
Pro forma net loss $ (1,058) $ (933)
=========== ===========
Pro forma net income (loss) per share:
Pro forma income before
extraordinary loss $ 0.05 $ 0.08
Extraordinary loss, net (0.26) (0.28)
----------- -----------
Pro forma net loss $ (0.21) $ (0.20)
=========== ===========
Weighted average number of
common and common equivalent shares
used in per share computations 5,092,000 8,028,000 4,760,000 8,026,000
</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 Accumulated
Stock Capital Deficit Total
------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity, December 31, 1996 $80 $48,340 $ (3,540) $44,880
Net income for the six months ended
June 30, 1997 -- -- 3,095 3,095
------- -------- -------- ------
Stockholders' equity, June 30, 1997 $80 $48,340 $ (445) 47,975
=== ======= ======= ======
</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 six months ended June 30,
---------------------------------
1996 1997
--------- --------
Operating activities:
Net income (loss) $ (942) $ 3,095
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 940 1,712
Amortization of intangible assets 175 170
Amortization of deferred income (181) (184)
Loss from investment in limited partnership 367 61
Amortization of loan costs and fees 67 44
Deferred interest (57) --
Common stock grant 225 --
Accretion of interest on capital lease obligation -- 1,419
Other 2 2
-------- --------
2,148 6,319
Changes in operating assets and liabilities:
(Increase) in accounts receivable (3,642) (4,577)
(Increase) in prepaid expenses and other 912 (2,516)
(Increase) in deferred income taxes (400) --
(Decrease) in accounts payable 1,283 317
Increase in employee compensation and benefits 1,863 1,578
Increase in accrued interest 238 65
(Decrease) increase in other accrued liabilities 1,857 1,116
Increase in income taxes payable -- (705)
-------- --------
Net cash provided by operating activities 4,259 1,597
-------- --------
Investing activities:
Additions to property and equipment (1,497) (812)
Additions to intangibles (1,001) (1,357)
Transfers to restricted cash, net (842) (76)
Repayment of demand note -- 1,369
-------- --------
Net cash used by investing activities (3,340) (876)
-------- --------
Financing activities:
Issuance of long-term debt -- 2,175
Payment of long-term debt (25,175) (89)
Debt prepayment penalty (1,517) --
Principal payments of capital lease obligation -- (1,835)
Note payable to an affiliate (2,000) --
Receipt of lease inducement 3,685 --
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 (20,340) 251
-------- --------
Net increase (decrease) in cash and cash equivalents (19,421) 972
Cash and cash equivalents, beginning of period 40,157 9,722
-------- --------
Cash and cash equivalents, end of period $ 20,736 $ 10,694
======== ========
Supplemental Disclosure:
Interest paid $ 2,023 $ 1,734
Income taxes paid $ 0 $ 2,684
======== ========
The accompanying notes are an integral part of the condensed consolidated
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
June 30, 1997, the results of its operations for the three-month and six-month
periods ended June 30, 1997 and 1996 and its cash flows for the six-month
periods ended June 30, 1997 and 1996. The results of operations for the
three-month and six-month periods ended June 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:
<TABLE>
<CAPTION>
For the six months ended
June 30,
-------------------------------
1996 1997
-------------- -------------
<S> <C> <C>
Net operating revenues $3,806,000 $4,154,000
Net operating expenses 4,053,000 3,967,000
Net income (loss) (490,000) (82,000)
</TABLE>
<TABLE>
<CAPTION>
The financial position of the Partnership is as follows:
As of June 30, 1997
---------------------
<S> <C>
Current assets $2,391,000
Non-current assets 4,815,000
Current liabilities 730,000
Non-current liabilities 6,217,000
Partners' equity 259,000
</TABLE>
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 half of 1996, the Company incurred $1,716,000 of non-recurring
expenses associated with its corporate reorganization and its initial public
offering. Substantially all of these non-recurring expenses related to special
compensation arrangements with key members of management in connection with the
reorganization of the Company's ownership structure 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, 1996, a subsidiary of the Company began leasing four long-term
care facilities in Ohio (the "Ohio Facilities"). 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 for the six month period ended June 30, 1996, as if this
acquisition 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.
<TABLE>
<CAPTION>
For the six months ended June 30,
---------------------------------
1996
----
<S> <C>
Total net revenues $ 88,095
Income before income taxes and extraordinary loss 56
Extraordinary loss on early retirement of debt, net (1,318)
Net loss (862)
Pro forma net loss (884)
Pro forma net loss per common share
using 4,760,000 common and common
common equivalent shares $ (0.19)
</TABLE>
On August 1, 1997, the Company completed the acquisition of four long-term care
facilities with 401 beds. All four facilities are located in Massachusetts north
of Boston and are expected to generate annualized revenues of approximately
$18,500,000. The Company is leasing these facilities from a real estate
investment trust for an initial period of ten years with eight consecutive five
year renewal terms exercisable at the Company's option. In conjunction with the
lease, the Company was granted an option to purchase the facilities as a group,
which is exercisable one year before the end of the initial term and each
renewal term. The purchase option is exercisable at the fair market value of the
facilities at the time of exercise.
continued
-8-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Combined prior to June 14, 1996)
(Unaudited)
G. Long-term debt
In April of 1997, the Company obtained a three-year $25M revolving credit
facility from a commercial bank. Borrowings under this facility are
collateralized by patient accounts receivable and certain other assets. The
facility matures in April 2000 and provides for prime or LIBOR interest rate
options. The revolving 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 June
30, 1997, $2,000,000 was outstanding on the facility.
-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 June 30, 1997, the Company
operated 31 facilities (13 owned and 18 leased) with a total of 3,864 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
June 30, 1997, the Company provided rehabilitation therapy services to patients
at 52 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:
<TABLE>
<CAPTION>
As of June 30,
--------------------------------------------
1996 1997
---- ----
<S> <C> <C>
Facilities:
Owned (1) 9 13
Leased 17 18
------ ------
Total 26 31
====== ======
Licensed beds:
Owned (1) 1,028 1,720
Leased 1,980 2,144
----- -----
Total 3,008 3,864
===== =====
</TABLE>
(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.
-10-
<PAGE>
The following table sets forth certain operating data for the periods indicated:
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
----------------------------------- ---------------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Patient days:
Private and other 75,561 89,477 150,609 176,161
Medicare 23,721 33,062 47,217 66,968
Medicaid 144,352 189,113 288,082 370,365
------- ------- ------- -------
Total 243,634 311,652 485,908 613,494
======= ======= ======= =======
Average Occupancy rate (1) 92.7% 91.5% 92.4% 91.9%
</TABLE>
<TABLE>
<CAPTION>
Total net
revenues:
<S> <C> <C> <C> <C>
Private and other 36.4% 33.1% 36.5% 33.5%
Medicare 26.2% 28.4% 26.3% 28.7%
Medicaid 37.4% 38.5% 37.2% 37.8%
----- ------ ----- -----
Total 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
</TABLE>
(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.
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 June 30, 1996 Compared to Three Months Ended June 30, 1997
Total Net Revenues. Total net revenues increased by $13,420,000 or 36.4%, from
$36,872,000 in the second quarter of 1996 to $50,292,000 in the second quarter
of 1997. This increase resulted primarily from the acquisition of four Ohio
Facilities on July 1, 1996 and the acquisition of the Harford Gardens facility
on March 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, $9,068,000 or 67.6% of the increase
resulted from the operation of the Ohio Facilities and $1,715,000 or 12.8% of
the increase resulted from the operation of the Harford Gardens facility. The
Company began providing rehabilitation therapy services at non-affiliated
long-term care facilities during 1995. Revenues generated by providing these
services increased by $1,211,000, from $2,704,000 in the second quarter of 1996
to $3,915,000 in the second quarter of 1997. The remaining $1,426,000, or 10.6%
of such increase, is attributable to higher average net patient service revenues
per patient day at the Company's "same store" facilities, primarily resulting
from increased levels of care provided to patients with medically complex
conditions. Average net patient service revenues per patient day at "same store"
facilities increased from $139.61 during the second quarter of 1996 to $149.37
during the second quarter of 1997. Partially offsetting this increase was a
reduction in occupancy at "same store" facilities from 92.7% during the second
quarter of 1996 to 90.9% during the second quarter of 1997. The average
occupancy rate at all of the Company's facilities decreased from 92.7% during
the second quarter of 1996 to 91.5% during the second quarter of 1997. The
Company's quality mix of private, Medicare and insurance revenues was 62.6% for
the three months ended June 30, 1996 as compared to 61.5% in the same period of
1997. The slight decrease in the quality mix percentage was primarily due to the
acquisition of the Harford Garden facility.
Facility Operating Expenses. Facility operating expenses increased by
$10,336,000, or 34.7%, from $29,806,000 in the second quarter of 1996 to
$40,142,000 in the second quarter of 1997. The acquisition of the Ohio
Facilities accounted for $6,903,000, or 66.8% of the increase in facility
operating expenses while Harford Gardens accounted for $1,340,000, or 13.0% of
this increase. Operating expenses associated with additional non-affiliate
therapy contracts increased from $2,508,000 during the second quarter of 1996 to
$3,374,000 during the second quarter of 1997 and accounted for 8.4% of the
increased costs. The remainder of the increase in facility operating expenses,
approximately $1,227,000, is due to increases in the costs of labor, medical
supplies and rehabilitation therapy services
-11-
<PAGE>
purchased from third parties at "same store" facilities.
General and Administrative; Service Charges Paid to Affiliate. General and
administrative expenses increased by $547,000, or 32.0% from $1,710,000 in the
second quarter of 1996 to $2,257,000 in the second quarter of 1997. This
increase resulted from the acquisition of the Ohio Facilities, the expansion of
regional and corporate support, and additional travel and consulting expenses
associated with the Company's growth. The Company reimburses an affiliate for
rent and other expenses related to its corporate headquarters as well as for
certain data processing and administrative services provided to the Company.
During the second quarter of 1996, such reimbursements totaled $180,000 compared
to $177,000 during the second quarter of 1997.
Special Compensation and Other. In connection with the Offering and corporate
reorganization, the Company recorded $1,201,000 of non-recurring charges in the
second quarter of 1996. Of this amount, $1,086,000 consisted of compensation
earned by key members of management as a result of the successful Offering.
Depreciation and Amortization. Depreciation and amortization increased from
$576,000 in the second quarter of 1996 to $960,000 in the second quarter of 1997
primarily as a result of the acquisition of the Ohio facilities.
Facility Rent. Facility rent expense for the second quarter increased by
$134,000 from $2,553,000 in 1996 to $2,687,000 in 1997. The increase in rent
expense is primarily the result of the acquisition of Harford Gardens on March
1, 1997.
Interest Expense, net. Interest expense, net, increased from $835,000 in the
second quarter of 1996 to $1,364,000 in the second quarter of 1997. This net
increase is due to additional interest expense resulting from the acquisition of
the Ohio Facilities partially offset by reduced interest following the repayment
of $25,000,000 of long-term debt in June 1996, using proceeds from the Offering.
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 $240,000 in the second quarter of 1996 as compared to
loss of $92,000 during the second quarter 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 taxes increased from a benefit of $400,000 in the
second quarter of 1996 to an expense of $1,020,000 in the second quarter 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 (primarily partnerships and subchapter S corporations) were
not subject to Federal or state income taxation. The contribution of the
Predecessor Entities' interests which occurred as part of a corporate
reorganization contemporaneously with the Offering, caused the Company to
recognize a non-recurring tax benefit of $400,000 as a result of inherited
book-tax differences. The Company's consolidated financial statements for
periods prior to the date of the Offering include a pro forma income tax expense
(calculated as 39% of historical income before taxes) for each period presented,
as if the Predecessor Entities had previously been tax-paying entities.
Net Income (Loss). Net loss was $1,147,000 in the second quarter of 1996 as
compared to income of $1,593,000 in the second quarter of 1997.
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1997
Total Net Revenues. Total net revenues increased by $25,873,000 or 36.0%, from
$71,803,000 in the first half of 1996 to $97,676,000 in the first half of 1997.
This increase resulted primarily from the acquisition of four Ohio Facilities on
July 1, 1996 and the acquisition of the Harford Gardens facility on March 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, $17,624,000 or 68.1% of the increase resulted from the operation
of the Ohio Facilities and $2,327,000 or 9.0% of the increase resulted from the
operation of the Harford Gardens facility. The Company began providing
rehabilitation therapy services at non-affiliated long-term care facilities
during 1995. Revenues generated by providing these services increased by
$2,182,000, from $5,085,000 in the first half of 1996 to $7,267,000 in the first
half of 1997. The remaining $3,740,000, or 14.5% of such increase, is
attributable to higher average net patient service revenues per patient day at
the Company's "same store" facilities, primarily resulting from increased levels
of care provided to patients with medically complex conditions. Average net
patient service revenues per patient day at "same store" facilities increased
from $136.75 during the first half of 1996 to $146.89 during the first half of
1997. Partially offsetting this increase was a reduction in occupancy at "same
store" facilities from 92.4% during the first half of 1996 to 91.5% during the
first half of 1997. The average occupancy rate at all of the Company's
facilities decreased from 92.4% during the first half of 1996 to 91.9% during
the first half of 1997. The Company's quality mix of private, Medicare and
insurance revenues was 62.8% for the six months ended June 30, 1996 as compared
to 62.2% in the same period of 1997. The slight decrease in the quality mix
percentage was primarily due to the acquisition of the Harford Garden and Ohio
facilities.
-12-
<PAGE>
Facility Operating Expenses. Facility operating expenses increased by
$19,591,000, or 33.8%, from $57,926,000 in the first half of 1996 to $77,517,000
in the first half of 1997. The acquisition of the Ohio Facilities accounted for
$13,186,000, or 67.3% of the increase in facility operating expenses while
Harford Gardens accounted for $1,754,000, or 9.0% of this increase. Operating
expenses associated with additional non-affiliate therapy contracts increased
from $4,479,000 during the first half of 1996 to $6,408,000 during the first
half of 1997 and accounted for 9.9% of the increased costs. The remainder of the
increase in facility operating expenses, approximately $2,722,000, is due to
increases in the costs of labor, medical supplies and rehabilitation therapy
services purchased from third parties at "same store" facilities.
General and Administrative; Service Charges Paid to Affiliate. General and
administrative expenses increased by $1,293,000, or 37.7%, from $3,430,000 in
the first half of 1996 to $4,723,000 in the first half of 1997. This increase
resulted from the acquisition of the Ohio Facilities, the expansion of regional
and corporate support, and additional travel and consulting expenses associated
with the Company's growth. The Company reimburses an affiliate for rent and
other expenses related to its corporate headquarters as well as for certain data
processing and administrative services provided to the Company. During the
second quarter of 1996, such reimbursements totaled $365,000 compared to
$354,000 during the second quarter of 1997.
Special Compensation and Other. In connection with the Offering and corporate
reorganization, the Company recorded $1,716,000 of non-recurring charges in the
first half 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
$1,115,000 in the first half of 1996 to $1,882,000 in the first half of 1997
primarily as a result of the acquisition of the Ohio facilities.
Facility Rent. Facility rent expense for the first half increased by $211,000
from $5,098,000 in 1996 to $5,309,000 in 1997. The increase in rent expense is
primarily the result of the acquisition of Harford Gardens on March 1, 1997.
Interest Expense, net. Interest expense, net, increased from $1,810,000 in the
first half of 1996 to $2,756,000 in the first half of 1997. This net increase is
due to additional interest expense resulting from the acquisition of the Ohio
Facilities partially offset by reduced interest following the repayment of
$25,000,000 of long-term debt in June 1996, using proceeds from the Offering.
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 $367,000 in the first half of 1996 as compared to a
loss of $61,000 during the first half 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 taxes increased from a benefit of $400,000 in the
first half of 1996 to an expense of $1,979,000 in the first half 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 as a result of inherited book-tax differences.
Net Income (Loss). Net loss was $942,000 in the first half of 1996 as
compared to income of $3,095,000 in the first half of 1996.
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. 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 expects to commence construction of a sixty-bed addition and a
rehabilitation therapy area during 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 financings will be available to the Company on
acceptable terms, or at all. The Company expects that cash
-13-
<PAGE>
on hand and generated through operations, as well as funds available through
the credit facility will be sufficient to meet its operating requirements
through the remainder of 1997.
The Company had three mortgage loans outstanding as of June 30, 1997. One
mortgage loan had an outstanding principal balance of $16,537,000, 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
$1,755,807 at June 30, 1997, of which $1,338,000 is due in 2010.
The Company's operating activities during the first half of 1996 generated net
cash of $4,259,000 as compared to $1,597,000 in 1997, a decrease of $2,662,000.
Most of the reduction in cash provided by operations was the net result, most of
which resulted from acquisitions of increases in accounts receivable and prepaid
expenses and other assets, most of which resulted from acquisitions.
Net cash used by investing activities was $3,340,000 during the first half of
1996 as compared to $876,000 used in 1997. The primary use of invested cash
during these periods related to additions to property and equipment ($1,497,000
in 1996 compared to $812,000 in 1997), additions to intangible assets
($1,001,000 in 1996 compared to $1,357,000 in 1997) and the repayment of demand
note in 1997 of $1,369,000.
Net cash provided (used) by financing activities was a use of $20,340,000 in
1996 as compared to $251,000 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 half of 1996, the Company received $37,731,000 in net
proceeds from the Offering and a cash lease inducement 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.
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.
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.
-14-
<PAGE>
3. The occurrence of changes in the mix of payment sources utilized
by the Company's patients to pay for the Company's services.
4. The adoption of cost containment measures by private pay sources
such as commercial insurers and managed care organizations, as
well as efforts by governmental reimbursement sources to impose
cost containment measures.
5. Changes in the United States healthcare system, including changes
in reimbursement levels under Medicaid and Medicare, and other
changes in applicable government regulations that might affect
the profitability of the Company.
6. The Company's continued ability to operate in a heavily regulated
environment and to satisfy regulatory authorities, thereby
avoiding a number of potentially adverse consequences, such as
the imposition of fines, temporary suspension of admission of
patients, restrictions on the ability to acquire new facilities,
suspension or decertification from Medicaid or Medicare programs,
and in extreme cases, revocation of a facility's license or the
closure of a facility, including as a result of unauthorized
activities by employees.
7. The Company's ability to secure the capital and the related cost
of such capital necessary to fund its future growth through
acquisition and development, as well as internal growth.
8. Changes in certificate of need laws that might increase
competition in the Company's industry, including, particularly,
in the states in which the Company currently operates or
anticipates operating in the future.
9. The Company's ability to staff its facilities appropriately with
qualified healthcare personnel, including in times of shortages
of such personnel and to maintain a satisfactory relationship
with labor unions.
10. The level of competition in the Company's industry, including
without limitation, increased competition from acute care
hospitals, providers of assisted and independent living and
providers of home healthcare and changes in the regulatory system
in the state in which the Company operates that facilitate such
competition.
11. The continued availability of insurance for the inherent risks of
liability in the healthcare industry.
12. Price increases in pharmaceuticals, durable medical equipment and
other items.
13. The Company's reputation for delivering high-quality care and its
ability to attract and retain patients, including patients with
relatively high acuity levels.
14. Changes in general economic conditions, including changes that
pressure governmental reimbursement sources to reduce the amount
and scope of healthcare coverage.
The foregoing review of significant factors should not be construed as
exhaustive or as an admission regarding the adequacy of disclosures previously
made by the Company.
-15-
<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
The Company's Annual Meeting of Stockholders was held on May 14,
1997. At the meeting, Stephen L. Guillard and David F. Benson were
elected to the board of directors for three-year terms with
7,807,360 votes cast in favor and 9,200 votes cast against each of
the two directors. Robert T. Barnum, Robert M. Bretholtz, Laurence
Gerber and Douglas Krupp continue to serve their terms of office
following the meeting.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
27.1 Financial Data
Schedule
(b) Reports on 8-K
None
-16-
<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: August 13, 1997
-17-
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 10,694
<SECURITIES> 0
<RECEIVABLES> 27,561
<ALLOWANCES> 0
<INVENTORY> 16,209<F1>
<CURRENT-ASSETS> 45,921
<PP&E> 94,287
<DEPRECIATION> 0
<TOTAL-ASSETS> 148,751
<CURRENT-LIABILITIES> 24,807
<BONDS> 75,969<F2>
0
0
<COMMON> 80
<OTHER-SE> 47,895<F3>
<TOTAL-LIABILITY-AND-EQUITY> 148,751
<SALES> 0
<TOTAL-REVENUES> 97,676
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 89,785
<LOSS-PROVISION> (61)<F4>
<INTEREST-EXPENSE> 2,756
<INCOME-PRETAX> 5,074
<INCOME-TAX> 1,979
<INCOME-CONTINUING> 3,095
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,095
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.39
<FN>
<F1>Includes the following assets: prepaid expenses and other of $6,086,
deferred income taxes--current of $1,580, deferred income taxes--long-term of
$376, restricted cash of $3,827, investment in limited partnership of $193, and
intangible assets, net of $4,147.
<F2>Includes the following long-term liabilities: deferred income of $2,763,
capital lease obligation of $53,090, and long-term debt of $20,116.
<F3>Includes the following equity accounts: additional paid-in capital of
$48,340 and accumulated deficit of $(445).
<F4>Includes loss on investment in limited partnership of $61.
-18-
</FN>
</TABLE>
