UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
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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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(Exact name of registrant as specified in its charter)
Massachusetts 04-3307188
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(State or other jurisdiction of (IRS Employer incorporation or
organization) Identification No.)
470 Atlantic Avenue, Boston, Massachusetts 02210
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (617) 556-1515
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Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Tile of each class On which registered
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Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X].
At March 31, 1997, the registrant had 8,000,000 shares of Common Stock
outstanding. The aggregate market value on February 28, 1997 of the registrant's
Common Stock held by non-affiliates of the registrant was $43,200,000 (based on
the closing price of these shares as quoted on such date on the New York Stock
Exchange and 3,600,000 shares of common stock held by non-affiliates).
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy statement for the
Annual Meeting of Stockholders to be held on May 14, 1997 are incorporated into
Part III of this Form 10-K.
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TABLE OF CONTENTS
PAGE
PART I
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS 3
ITEM 1. BUSINESS 5
ITEM 2. PROPERTIES 16
ITEM 3. LEGAL PROCEEDINGS 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 4.1 EXECUTIVE OFFICERS OF THE REGISTRANT 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED 19
STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 22
CONDITION AND RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 46
ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 46
ITEM 11. EXECUTIVE COMPENSATION 46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 46
AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS 46
ON FORM 8-K
SIGNATURES 52
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K, 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-K, or hereafter included in
other publicly available documents filed with the Securities and Exchange
Commission, reports to the Company's stockholders and other publicly available
statements issued or released by the Company involve known and unknown risks,
uncertainties, and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ materially from
the future results, performance (financial or operating) or achievements
expressed or implied by such forward-looking statements. The Company believes
the following important factors could cause such a material difference to occur:
1. The Company's ability to grow through the acquisition and development of
long-term care facilities or the acquisition of ancillary businesses.
2. The Company's ability to identify suitable acquisition candidates, to
consummate or complete construction projects, or to profitably operate or
successfully integrate enterprises into the Company's other operations.
3. The occurrence of changes in the mix of payment sources utilized by the
Company's patients to pay for the Company's services.
4. The adoption of cost containment measures by private pay sources such as
commercial insurers and managed care organizations, as well as efforts by
governmental reimbursement sources to impose cost containment measures.
5. Changes in the United States healthcare system, including changes in
reimbursement levels under Medicaid and Medicare, and other changes in
applicable government regulations that might affect the profitability of
the Company.
6. The Company's continued ability to operate in a heavily regulated
environment and to satisfy regulatory authorities, thereby avoiding a
number of potentially adverse consequences, such as the imposition of
fines, temporary suspension of admission of patients, restrictions on the
ability to acquire new facilities, suspension or decertification from
Medicaid or Medicare programs, and in extreme cases, revocation of a
facility's license or the closure of a facility, including as a result of
unauthorized activities by employees.
7. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth through acquisition and
development, as well as internal growth.
8. Changes in certificate of need laws that might increase competition in the
Company's industry, including, particularly, in the states in which the
Company currently operates or anticipates operating in the future.
9. The Company's ability to staff its facilities appropriately with qualified
healthcare personnel, including in times of shortages of such personnel,
and to maintain a satisfactory relationship with labor unions.
10. The level of competition in the Company's industry, including without
limitation, increased competition from acute care hospitals, providers of
assisted and independent living services and and providers of home
healthcare and changes in state regulatory systems which 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.
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13. Adverse changes to 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.
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ITEM 1. BUSINESS
GENERAL OVERVIEW
Harborside Healthcare (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. Immediately prior to the Offering 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 "Reorganization").
Harborside Healthcare provides high quality long-term care, subacute care and
other specialty medical services in four principal regions: the Southeast
(Florida), the Midwest (Ohio and Indiana), New England (New Hampshire) and the
Mid-Atlantic (New Jersey and Maryland). Within these regions, as of December 31,
1996, the Company operated 30 licensed long-term care facilities (13 owned and
17 leased) with a total of 3,700 licensed beds. The Company provides traditional
skilled nursing care, a wide range of subacute care programs (such as
orthopedic, CVA/stroke, cardiac, pulmonary and wound care), as well as distinct
programs for the provision of care to Alzheimer's and hospice patients. In
addition, the Company provides certain rehabilitation therapy services both at
Company-operated and non-affiliated facilities. As of December 31, 1996, the
Company provided rehabilitation services to patients at 37 non-affiliated
long-term care facilities. From December 31, 1993 to December 31, 1996, the
Company increased its overall patient capacity by approximately 1,551 licensed
beds, or 72.2%. During the same period, the Company also increased the
percentage of net patient service revenues derived from the Medicare program
from 21.2% to 28.4% of net patient service revenues. This increase was a result
of the Company's expansion of its subacute care and other specialty medical
services.
PATIENT SERVICES
Basic Patient Services
Basic patient services are those traditionally provided to elderly patients in
long-term care facilities to assist with the activities of daily living and to
provide general medical care. The Company provides 24-hour skilled nursing care
by registered nurses, licensed practical nurses and certified nursing aides in
all of its facilities. Each facility is managed by an on-site licensed
administrator who is responsible for the overall operation of the facility,
including the quality of care provided. The medical needs of patients are
supervised by a medical director, who is a licensed physician. Although
treatment of patients is the responsibility of their own attending physicians,
who are not employed by the Company, the medical director monitors all aspects
of delivery of care. The Company also provides support services, including
dietary services, therapeutic recreational activities, social services,
housekeeping and laundry services, pharmaceutical and medical supplies and
routine rehabilitation therapy.
Each facility offers a number of individualized therapeutic activities
designed to enhance the quality of life of its patients. These activities
include entertainment events, musical productions, trips, arts and crafts and
volunteer and other programs that encourage community interaction.
Specialty Medical Services
Specialty medical services are those provided to patients with medically
complex needs, who generally require more extensive treatment and a higher level
of skilled nursing care. These services typically generate higher net patient
service revenues per patient day than basic patient services as a result of
increased levels of care and the provision of ancillary services.
Subacute Care. Subacute care is goal-oriented, comprehensive care designed for
an individual who has had an acute illness, injury, or exacerbation of a disease
process. Subacute care is typically rendered immediately after, or instead of,
acute hospitalization in order to treat one or more specific, active, complex
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medical conditions or in order to administer one or more technically complex
treatments. The Company provides subacute care services at all but one of its
existing facilities in such areas as complex medical, cardiac recovery,
digestive, immuno-suppressed disease, post-surgical, wound, and CVA/stroke care,
hemodialysis, infusion therapy, and diabetes and pain management.
In facilities that have shown strong demand for subacute services, the Company
has developed distinct subacute units marketed under the name "COMprehensive
Patient Active Subacute System" or "COMPASS." Each COMPASS unit contains 20 to
60 beds and is specially staffed and equipped for the delivery of subacute care.
Patients in COMPASS units typically range in age from late teens to the elderly,
and typically require high levels of nursing care and the services of
physicians, therapists, dietitians, clinical pharmacists or psycho/social
counselors. Certain patients may also require life support or monitoring
equipment. Because patient goals are generally rehabilitation-oriented, lengths
of stay in COMPASS units are generally expected to be less than 30 days each. As
of December 31, 1996, the Company operated nine COMPASS units containing a total
of approximately 280 licensed beds.
The Company has designed clinical pathways for these COMPASS units in the
areas of orthopedic rehabilitation, CVA/stroke recovery, cardiac recovery,
pulmonary rehabilitation and wound care management. These clinical pathways are
designed to achieve specified measurable outcomes in an efficient and
cost-effective manner. The Company's COMPASS units and the clinical pathways
used in these units are designed to attract commercial insurance and managed
care organizations, such as HMOs and PPOs. The Company will continue to develop
additional clinical pathways based on market opportunities. Additionally, the
Company has begun to provide COMPASS programming at facilities in addition to
those which maintain distinct COMPASS units. The Company has personnel dedicated
to actively marketing its COMPASS units to commercial insurers and managed care
organizations.
Alzheimer's and Hospice Care. The Company has also developed distinct units
that provide care for patients with Alzheimer's disease and hospice units for
patients with terminal illnesses. As of December 31, 1996, the Company operated
dedicated Alzheimer's units at four facilities. The Company also operated
hospice units at three of its facilities, where it provides care to terminally
ill patients and counseling to their families.
OPERATIONS
Facilities. Each of the Company's facilities is supervised by a licensed
facility administrator who is responsible for all aspects of the facility's
operations. The facility administrator oversees (i) a director of nursing who
supervises a staff of registered nurses, licensed practical nurses and certified
nursing aides, (ii) a director of admissions who is responsible for developing
local marketing strategies and programs and (iii) various other departmental
supervisors. The Company also contracts with one or more licensed physicians at
each facility to serve as medical directors for the purpose of supervising the
medical management of patients. Facilities with subacute or specialty medical
units or programs may also contract with physician specialists to serve as
rehabilitation or specialty program medical directors in areas such as physiatry
(physical medicine), neurology or gero-psychology. Facilities may also employ or
contract for additional clinical staff such as case managers, respiratory
therapists and program directors. Department supervisors at each of the
Company's facilities oversee personnel who provide dietary, maintenance,
laundry, housekeeping, therapy and social services. In addition, a business
office staff at each facility routinely performs administrative functions,
including billing, payroll, accounts payable and data processing. The Company's
corporate and regional staff provide support services such as quality assurance,
management training, clinical consultation and support, management information
systems, risk management, human resource policies and procedures, operational
support, accounting and reimbursement expertise.
Regions. The Company seeks to cluster its long-term care facilities and
ancillary businesses in selected geographic regions to establish a strong
competitive position as well as to position the Company as a healthcare provider
of choice to managed care and private payors in these markets. The Company's
facilities currently serve four principal geographic regions: the Southeast
(Florida), the Midwest (Ohio and Indiana), New England (New Hampshire), and the
Mid-Atlantic (New Jersey and Maryland). The Company maintains regional operating
offices in Clearwater, Florida; Indianapolis, Indiana; Bridgewater, New Jersey;
and Peterborough, New Hampshire. Each region is supervised by a regional
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director of operations who directs the efforts of a team of professional support
staff in the areas of clinical services, marketing, bookkeeping, human resources
and engineering. Other Company staff, who are principally based in the regions,
provide support and assistance to all of the Company's facilities in the areas
of subacute services, managed care contracting, reimbursement services, risk
management, data processing and training. Financial control is maintained
through financial and accounting policies established at the corporate level for
use at each facility. The Company has standardized operating policies and
procedures and continually monitors operating performance to assure consistency
and quality of operations. In addition to its principal executive office in
Boston, an accounting and data processing office is maintained in Fort Wayne,
Indiana. The Company's ancillary services businesses maintain offices in Palm
Harbor, Florida, and Indianapolis, Indiana.
Continuous Quality Improvement Program. The Company has developed a continuous
quality improvement program which is designed to monitor, evaluate and improve
the delivery of patient care. The program is supervised by the Company's Senior
Vice President of Professional Services and consists of the standardization of
policies and procedures, routine site visits and assessments and a quality
control system for patient care and physical plant compliance. Pursuant to its
quality control system, the Company routinely collects information from
patients, family members, referral sources, employees and state survey agencies
which is then compiled, analyzed and distributed throughout the Company in order
to monitor the quality of care and services provided.
The Company's continuous quality improvement program is modeled after
guidelines for long-term care and subacute facilities promulgated by the Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO"), a nationally
recognized accreditation agency for hospitals and other healthcare
organizations. The Company believes that JCAHO accreditation is an important
factor in gaining provider contracts from managed care and commercial insurance
companies. Accordingly, in late 1995 the Company began a program to seek
accreditation from JCAHO for the Company's facilities. As of December 31, 1996,
15 of the Company's facilities had received accreditation, and of these 12 had
received accreditation "with commendation".
MARKETING
The Company's marketing program is designed to attract patients who will have
a favorable impact on the Company's profits and quality mix of revenues. The
Company establishes monthly occupancy and revenue goals for each of its
facilities and maintains marketing objectives to be met by each facility. The
Company's Vice President of Marketing is principally responsible for the
development and implementation of the Company's marketing program. Regional
marketing directors provide routine support to the facility-based admissions
directors through the development of facility-based marketing strategies,
competitive assessments and routine visits.
The Company uses a decentralized marketing approach in order to capitalize on
each facility's strengths and reputation in the community it serves. Admissions
staff at each facility are primarily responsible for marketing basic medical
services and developing semi-annual marketing plans in consultation with the
Company's regional marketing and operations staff. Basic medical services are
marketed to area physicians, hospital discharge planning personnel, individual
patients and their families and community referral sources. Facility personnel
also market the Company's specialty medical services to these sources. Corporate
and regional personnel who specialize in subacute care, managed care and
reimbursement also assist in the marketing of specialty medical services.
The Company believes its marketing program has demonstrated its effectiveness.
The Company's average annual occupancy rates for the fiscal years ended December
31, 1994, 1995 and 1996 were 91.5%, 91.5% and 91.9%. In comparison, a study of
approximately 1,500 nursing facilities conducted by the U.S. Department of
Health and Human Services found that in 1995 these facilities operated at
approximately 87% of capacity.
Since June 1994, the Company has maintained a dedicated managed care marketing
group whose primary purpose is to solicit managed care and commercial insurance
contracts. The Company's regional and corporate staff attend trade shows and
events for managed care, commercial insurance companies and case managers in
order to broaden the Company's overall presence and recognition with these
groups.
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SOURCES OF REVENUES
The Company derives its revenues primarily from private pay sources, the
Federal Medicare program for certain elderly and disabled patients and state
Medicaid programs for indigent patients. The Company's revenues are influenced
by a number of factors, including (i) the licensed bed capacity of its
facilities, (ii) occupancy rates, (iii) the mix of patients and the rates of
reimbursement among payor categories (private and other, Medicare and Medicaid)
and (iv) the extent to which subacute and other specialty medical and ancillary
services are utilized by the patients and paid for by the respective payment
sources. The Company employs specialists to monitor reimbursement rules,
policies and related developments in order to comply with all reporting
requirements and to assist the Company in receiving payments from third party
payors.
The following table identifies the Company's net patient service revenues
attributable to each of its payor sources for the periods indicated:
NET PATIENT SERVICE REVENUES(1)
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1994 1995 1996
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(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Private and other $ 31,899 37.1% $ 33,912 32.3% $ 46,659 30.4%
Medicare ........ 21,423 24.9 34,730 33.1 43,626 28.4
Medicaid ........ 32,627 38.0 36,274 34.6 63,290 41.2
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Total ......... $ 85,949 100.0% $104,916 100.0% $153,575 100.0%
======== ======= ======== ======= ======== =======
</TABLE>
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(1) Net patient service revenues exclude management fees and net patient service
revenues of the Larkin Chase Center which is owned by the Bowie Center Limited
Partnership ("Bowie L.P."). The Company owns a 75% partnership interest in Bowie
L.P., but records its investment in Bowie L.P. using the equity method. See Note
G. to the Company's consolidated financial statements included elsewhere in this
report.
Private and Other. Private and other net patient service revenues include
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payments from individuals who pay directly for services without governmental
assistance and payments from commercial insurers, HMOs, PPOs, Blue Cross
organizations, workers' compensation programs, hospice programs and other
similar payment sources. The Company's rates for private pay patients are
typically higher than rates for patients eligible for assistance under state
Medicaid programs. The Company's private pay rates vary from facility to
facility and are influenced primarily by the rates charged by other providers in
the local market and by the Company's ability to distinguish its services from
those provided by its competitors. Although private pay rates are generally
established on a facility-specific fee schedule, rates charged for individual
cases may vary widely because, in the case of managed care, they are either
negotiated on a case-by-case basis with the payor, or are fixed by contract.
Rates charged to private pay patients are not subject to regulatory control in
any of the states in which the Company operates.
Medicare. All but one of the Company's facilities are certified Medicare
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providers. The Company does not expect to seek Medicare certification for this
one facility because all of the patients currently at the facility are private
pay patients. Medicare is a Federally funded and administered health insurance
program primarily designed for individuals who are age 65 or over and are
entitled to receive Social Security benefits. The Medicare program consists of
two parts. The first part, Part A, covers inpatient hospital services and
certain services furnished by other institutional healthcare providers, such as
long-term care facilities. The second part, Part B, covers the services of
doctors, suppliers of medical items and services and various types of outpatient
services. Part B services include physical, speech and occupational therapy and
durable medical equipment and other ancillary services of the type provided by
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long-term care or acute care facilities. Part A coverage, as applied to services
delivered in a long-term care facility, is limited to skilled nursing and
rehabilitative care related to a recent hospitalization and is limited to a
specified term (generally 100 days per calendar year), requires beneficiaries to
share some of the cost of covered services through the payment of a deductible
and a co-insurance payment and requires beneficiaries to meet certain qualifying
criteria. There are no limits on duration of coverage for Part B services, but
there is a co-insurance requirement for most services covered by Part B.
The method used in determining Medicare reimbursement for rehabilitation
therapy services furnished in the Company's facilities depends on the type of
therapy provided. Medicare currently applies salary equivalency guidelines to
determine the reasonable cost of physical therapy services and respiratory
therapy services provided on a contract basis, which is the cost that would be
incurred if the therapist were employed at the facility, plus an amount designed
to compensate the provider for certain general and administrative overhead
costs. Medicare pays for occupational therapy and speech language pathology
services on a reasonable cost basis, subject to the so-called "prudent buyer"
rule for evaluating the reasonableness of the costs. The Health Care Financing
Administration ("HCFA") has announced its intention to propose rules revising
the current salary equivalency guidelines for physical therapy and respiratory
therapy and also applying salary equivalency guidelines to speech and
occupational therapy services provided on a contract basis. If these proposed
rules are implemented, they could reduce the profitability of these services.
See "Governmental Regulation."
Under the Medicare Part A program, the Company is reimbursed for its direct
costs (which consist of routine, ancillary and capital expenses) plus an
allocation of indirect costs. The total of routine costs and the respective
allocated overhead is subject to a regional routine cost limit. As the Company
expands its subacute care and other specialty medical services, the costs of
care for these patients have exceeded and are expected to continue to exceed the
regional reimbursement routine cost limits. The Company is required to submit
routine cost limit exception requests in order to recover the excess costs from
Medicare. There can be no assurance that the Company will be able to recover
such excess costs under any pending or future requests. The failure to recover
these excess costs in the future could materially adversely affect the Company.
Under current regulations, new long-term care facilities are, in certain limited
circumstances, able to apply for a three year exemption from routine cost
limits. The Company has applied for, been denied and is now appealing such
exemptions for two of its facilities. Unless and until such exemptions are
granted, these facilities can only recover excess costs through routine cost
limit exception requests.
Reimbursements from the Medicare program are determined by filing cost reports
with a fiscal intermediary. These cost reports are then audited and subject to
retroactive adjustment by the intermediary and the Medicare program. To date,
adjustments from Medicare audits have not had a material adverse effect on the
Company. Although there can be no assurances that future adjustments will not
have a material adverse effect on the Company, the Company believes that it has
properly applied the various payment formulas.
Medicaid. Medicaid includes the various state-administered reimbursement
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programs for indigent patients created by Federal law. Although Medicaid
programs vary from state to state, they are partially subsidized by Federal
funds. Reimbursement rates are determined by the state; however, the Federal
government retains the right to approve or disapprove individual state plans.
For Medicaid recipients, providers must accept reimbursement from Medicaid as
payment in full for the services rendered, because the provider may not bill the
patient for more than the amount of the Medicaid payment received.
All but one of the Company's facilities participate in the Medicaid program of
the states in which they are located. The one facility is currently occupied
solely by private pay patients and does not participate in the Ohio Medicaid
program. Under the Boren Amendment, a Federal Medicaid statute, and related
regulations, state Medicaid programs must provide reimbursement rates that are
reasonable and adequate to cover the costs that would be incurred by efficiently
and economically operated facilities in providing services in conformity with
state and Federal laws, regulations and quality and safety standards.
Furthermore, payments must be sufficient to enlist enough providers so that
services under the state's Medicaid plan are available to recipients at least to
the extent that those services are available to the general population. However,
there can be no assurance that payments under Medicaid programs will be
sufficient to cover the costs allocable to patients eligible for reimbursement
pursuant to such programs. In the past, several states' healthcare provider
organizations have initiated litigation challenging the Medicaid
reimbursement methodologies employed in such states, asserting that
reimbursement payments are not adequate to reimburse an efficiently operated
facility for the costs of providing Medicaid covered services.
The Medicaid programs in the states in which the Company operates pay a per
diem rate for providing services to Medicaid patients based on the facility's
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reasonable allowable costs incurred in providing services, subject to cost
ceilings applicable to patient care, other operating and capital costs. Most
state Medicaid programs currently include incentive allowances for providers
whose costs are less than certain ceilings and who meet other requirements.
There are generally two types of Medicaid reimbursement rates: retrospective
and prospective, although many states have adopted plans that have both
retrospective and prospective features. A retrospective rate is determined after
completion of a cost report by the service provider and is designed to reimburse
incurred costs. Typically, an interim rate based upon historical cost factors
and inflation is paid by the state during the cost reporting period and a cost
settlement is made following an audit of the filed cost report. Such adjustments
may result in additional payments being made to the Company or in recoupments
from the Company, depending on actual performance and the limitations within an
individual state plan.
The more prevalent type of Medicaid reimbursement rate is the prospective
rate. Under a prospective plan, the state sets its rate of payment for the
period in advance of services rendered. Actual costs incurred by operators
during a period are used by the state to establish the prospective rate for a
subsequent period. The provider must accept the prospective rate as payment in
full for all services rendered. Although there is usually no settlement based
upon actual costs incurred subsequent to the cost report filing, subsequent
audits may provide a basis for the state program to retroactively recoup monies.
The Medicaid programs of Maryland, Florida, Indiana, New Hampshire and New
Jersey are, at present, substantially prospective plans. Ohio's reimbursement
plan is a prospective plan with reimbursement rates adjusted quarterly on a
facility-by-facility basis.
Traditionally, the State of New Hampshire re-based facility Medicaid
reimbursement rates on October 1 of each year. In October 1995, the State of New
Hampshire adopted legislation which eliminated incentive payments and froze
reimbursement rates through June 30, 1996. The legislation also called for a
redesign of the Medicaid payment system in New Hampshire, to be effective July
1, 1996; however, the state did not achieve this timetable and extended the rate
freeze through September 30, 1996. On October 1, 1996 the state re-based
facility Medicaid rates using the 1995 Medicaid cost reports. The current
methodology excludes the former incentive payments, and the state anticipates
revising its methodology to incorporate an acuity-based facility-specific
methodology in the future.
To date, adjustments from Medicaid audits have not had a material adverse
effect on the Company. Although there can be no assurance that future
adjustments will not have a material adverse effect on the Company, the Company
believes that it has properly applied the various payment formulas.
Ancillary Services to Non-Affiliates. The Company generates revenues from
services to non-affiliates from its rehabilitation therapy business which
provides services to patients at long-term care facilities not operated by the
Company. In general, payments for these services are received directly from the
non-affiliated long-term care facilities, which in turn are reimbursed by
Medicare or other payors. The Company's revenues from non-affiliates, though not
directly regulated, are effectively limited by competitive market factors and
regulatory reimbursement policies imposing salary equivalency guidelines and
prudent buyer concepts on the long-term care facilities that contract for these
therapy services. In addition, the revenues that the Company derives for these
services are subject to adjustment in the event the facility is denied
reimbursement by Medicare or any other applicable payor on the basis that the
services provided by the Company were not medically necessary.
GOVERNMENTAL REGULATION
The Federal government and all states in which the Company operates regulate
various aspects of the Company's business. In addition to the regulation of
rates by governmental payor sources, the development and operation of long-term
care facilities and the provision of long-term care services are subject to
Federal, state and local licensure and certification laws which regulate, with
respect to a facility, among other matters, the number of beds, the services
provided, the distribution of pharmaceuticals, equipment, staffing requirements,
patients' rights, operating policies and procedures, fire prevention measures,
environmental matters and compliance with building and safety codes. There can
be no assurance that Federal, state or local governmental regulations will not
change or be subjected to new interpretations that impose additional
restrictions which might adversely affect the Company's business.
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All of the facilities operated by the Company are licensed under applicable
state laws and possess the required Certificate of Need ("CON") from responsible
state authorities. As previously noted, all but one of the Company's facilities
are certified or approved as providers under the Medicaid and Medicare programs.
Both the initial and continuing qualification of a long-term care facility to
participate in such programs depend upon many factors, including accommodations,
equipment, services, non-discrimination policies against indigent patients,
patient care, quality of life, patients' rights, safety, personnel, physical
environment and adequacy of policies, procedures and controls. Licensing,
certification and other applicable standards vary from jurisdiction to
jurisdiction and are revised periodically. State agencies survey or inspect all
long-term care facilities on a regular basis to determine whether such
facilities are in compliance with the requirements for participation in
government-sponsored third-party payor programs. In some cases, or upon repeat
violations, the reviewing agency has the authority to take various adverse
actions against a facility, including the imposition of fines, temporary
suspension of admission of new patients to the facility, suspension or
decertification from participation in the state Medicaid or the Medicare
program, offset of amounts due against future billings to the Medicare or
Medicaid programs, denial of payments under Medicaid for new admissions,
reduction of payments, restrictions on the ability to acquire new facilities
and, in extreme circumstances, revocation of a facility's license or closure of
a facility. The compliance history of a prior operator may be used by state or
Federal regulators in determining possible action against a successor operator.
The Company believes that its facilities are in substantial compliance with
all statutes, regulations, standards and requirements applicable to its
business, including applicable Medicaid and Medicare regulatory requirements.
However, in the ordinary course of its business, the Company from time to time
receives notices of deficiencies for failure to comply with various regulatory
requirements. In most cases, the Company and the reviewing agency will agree
upon corrective measures to be taken to bring the facility into compliance.
Although the Company has been subject to fines and, in one instance, to a 30-day
moratorium on admissions at one of the Company's Florida facilities in January
1995, statements of deficiency and other corrective actions have not had a
material adverse effect on the Company. There can be no assurance that future
agency inspections will not have a material adverse effect on the Company.
Certificates of Need. All states in which the Company operates have adopted
--------------------
CON or similar laws which generally require that a state agency determine that a
need exists prior to the construction of new facilities, the addition or
reduction of licensed beds or services, the implementation of other changes, the
incurrence of certain capital expenditures, the approval of certain acquisitions
and changes in ownership or, in certain states, the closure of a facility. State
CON approval is generally issued for a specific project or number of beds,
specifies a maximum expenditure, is sometimes subject to an inflation
adjustment, and requires implementation of the proposal within a specified
period of time. Failure to obtain the necessary state approval can result in the
inability of the facility to provide the service, operate the facility or
complete the acquisition, addition or other change and can also result in
adverse reimbursement action or the imposition of sanctions or other adverse
action on the facility's license. Ohio has imposed a moratorium on the issuance
of CONs for the construction of new long-term care facilities and the addition
of beds to existing facilities. The moratorium is scheduled to remain in effect
until June 30, 1997. Recent legislation in New Hampshire has eliminated the
certain expansion rights or "leeway beds" on existing CONs. New Hampshire
previously permitted long-term care facilities to add up to 10 licensed beds
every two years as a matter of right.
Medicare and Medicaid. Effective October 1, 1990, the Omnibus Budget
---------------------
Reconciliation Act of 1987 ("OBRA") eliminated the different certification
standards for "skilled" and "intermediate care" nursing facilities under the
Medicare program in favor of a single "nursing facility" standard. This standard
requires, among other things, that the Company have at least one registered
nurse on each day shift and one licensed nurse on each other shift and also
increases training requirements for nurses aides by requiring a minimum number
of training hours and a certification test before a nurses aide can commence
work. In order to obtain Medicare reimbursement, states continue to be required
to certify that nursing facilities provide "skilled care." The Omnibus Budget
Reconciliation Act of 1993 ("OBRA 93") affects Medicare reimbursement for
skilled nursing services in two ways, neither of which have had a material
adverse effect on the Company's revenues. First, the current limits on the
portion of the Medicare reimbursement known as "routine service costs"
(excluding capital-related expenses) were frozen for two consecutive cost report
years beginning October 1, 1993. Second, the return on equity component of
Medicare reimbursement was eliminated beginning October 1, 1993. Although the
11
<PAGE>
Company believes that it is in substantial compliance with the current
requirements of OBRA and OBRA 93, it is unable to predict how future
interpretation and enforcement of regulations promulgated under OBRA and OBRA 93
by the state and Federal governments could affect the Company in the future.
Effective July 1, 1995, HCFA promulgated new survey, certification and
enforcement rules governing long-term care facilities participating in the
Medicare and Medicaid programs, which impose significant new burdens on
long-term care facilities and may require state survey agencies to take
aggressive enforcement actions. Among other things, the new HCFA rules governing
survey and certification requirements define or redefine a number of terms used
in the survey and certification process. The rules require states to amend their
state plans (as required by Federal law) to incorporate the provisions of the
new rules. The regulations may require state survey agencies to take aggressive
enforcement actions. The breadth of the new rules and their recent effective
date create uncertainty over the manner in which the rules will be implemented,
the ability of any long-term care facility to comply with them and the effect of
the new rules on the Company.
Under the new rules, unannounced standard surveys of facilities must be
conducted at least once every 15 months with a state-wide average of 12 months.
In addition to the standard survey, survey agencies have the authority to
conduct surveys as frequently as necessary to determine whether facilities
comply with participation requirements, to determine whether facilities have
corrected past deficiencies and to monitor care if a change occurs in the
ownership or management of a facility. Furthermore, the state survey agency must
review all complaint allegations and conduct a standard or an abbreviated survey
to investigate such complaints if a review of the complaint shows that a
deficiency in one or more of the Federal requirements may have occurred and only
a survey will determine whether a deficiency or deficiencies exist. If a
facility has been found to furnish substandard care, it is subject to an
extended survey. The extended survey is intended to identify the policies and
procedures that caused a facility to furnish substandard care.
HCFA's new rules substantially revise provisions regarding the enforcement of
compliance requirements for long-term care facilities with deficiencies. The
rules allow either HCFA or state agencies to impose one or more remedies
provided under the rules for any particular deficiency. Facilities must provide
a plan of correction for all deficiencies regardless of whether a remedy is
imposed. At a minimum, the following remedies are available: termination of
provider agreement; temporary management; denial of payment for new admissions;
civil money penalties; closure of the facility in emergencies or transfer of
patients or both; and on-site state monitoring. States may also adopt optional
remedies. The new rules divide remedies into three categories. Category 1
remedies include directed plans of correction, state monitoring and directed
in-service training. Category 2 remedies include denial of payments for new
admissions, denial of payments for all individuals (imposed only by HCFA) and
civil money penalties of $50 to $3,000 per day. Category 3 remedies include
temporary management, immediate termination or civil money penalties of $3,050
to $10,000 per day. The rules define situations in which one or more of the
penalties must be imposed.
HCFA has announced its intention to propose rules applying salary equivalency
guidelines to speech and occupational therapy services, while updating physical
and respiratory therapy guidelines. In addition, on April 14, 1995, HCFA issued
a memorandum in response to requests by intermediaries for information on
reasonable costs for speech and occupational therapy. The cost data in the
memorandum set forth rates for speech and occupational therapy services that are
lower than the Medicare reimbursement rates currently received by the Company
for such services. Although the memorandum states that the cost data are to be
informative and not serve as a limit on reimbursement rates for speech and
occupational therapy services, intermediaries and customers of the Company may
apply the cost data guidelines as absolute limits on payments. The cost data
figures contained in the memorandum have been subject to criticism by the
industry and the Company is unable to determine what effect, if any, such
criticism will have on future actions or policy decisions taken by HCFA in
connection with Medicare reimbursement rates for speech and occupational therapy
services. The Company cannot predict when, or if, any changes will be made to
the current Medicare reimbursement methodologies for contract speech and
occupational therapy services, or the extent to which the data in the HCFA
memorandum will be used by intermediaries and customers in determining
reimbursement. The imposition of salary equivalency guidelines on contract
speech and occupational therapy services, or the widespread use by
intermediaries of the data in the memorandum, could adversely affect the
Company's revenues derived from ancillary services and thereby limit the
12
<PAGE>
Company's ability to recoup its investment in that part of its business.
Similarly, any future regulations reducing the government payment rates for
subacute or other specialty medical services could materially adversely affect
the Company.
Fee Splitting and Referrals. The Company is also subject to Federal and state
---------------------------
laws that govern financial and other arrangements between healthcare providers.
Federal laws, as well as the laws of certain states, prohibit direct or indirect
payments or fee splitting arrangements between healthcare providers that are
designed to induce or encourage the referral of patients to, or the
recommendation of, a particular provider for medical products and services.
These laws include the Federal "anti-kickback law" which prohibits, among other
things, the offer, payment, solicitation or receipt of any form of remuneration
in return for the referral of Medicare and Medicaid patients. A wide array of
relationships and arrangements, including ownership interests in a company by
persons in a position to refer patients and personal service agreements have,
under certain circumstances, been alleged to violate these provisions. Certain
discount arrangements may also violate these laws. Because of the broad reach of
these laws, the Federal government has published certain "safe harbors," which
set forth the requirements under which certain relationships will not be
considered to violate such laws. One of these safe harbors protects investment
interests in certain large, publicly traded entities which meet certain
requirements regarding the marketing of their securities and the payment of
returns on the investment. A second safe harbor protects payments for management
services which are set in advance at a fair market rate and which do not vary
with the value or volume of services referred, so long as there is a written
contract which meets certain requirements. A safe harbor for discounts, which
focuses primarily on appropriate disclosure, is also available. A violation of
the Federal anti-kickback law could result in the loss of eligibility to
participate in Medicare or Medicaid, or in criminal penalties. Violation of
state anti-kickback laws could lead to loss of licensure, significant fines and
other penalties.
Various Federal and state laws regulate the relationship between healthcare
providers and physicians, including employment or service contracts and
investment relationships. These laws include the broadly worded fraud and abuse
provisions of the Medicaid and Medicare statutes, which prohibit various
transactions involving Medicaid or Medicare covered patients or services. In
particular, OBRA 93 contains provisions which greatly expand the Federal
prohibition on physician referrals to entities with which they have a financial
relationship. Effective January 1, 1995, OBRA 93 prohibits any physician with a
financial relationship (defined as a direct or indirect ownership or investment
interest or compensation arrangement) with an entity from making a referral for
"designated health services" to that entity and prohibits that entity from
billing for such services. "Designated health services" do not include skilled
nursing services, but do include many services which long-term care facilities
provide to their patients, including infusion therapy and enteral and parenteral
nutrition. Various exceptions to the application of this law exist, including
one that protects physician ownership in publicly traded companies which in the
past three years have had average shareholder equity exceeding $75 million and
one which protects the payment of fair market compensation for the provision of
personal services, so long as various requirements are met. Violations of these
provisions may result in civil or criminal penalties for individuals or entities
and/or exclusion from participation in the Medicaid and Medicare programs.
Various state laws contain analogous provisions, exceptions and penalties. The
Company believes that in the past it has been, and in the future it will be,
able to arrange its business relationships so as to comply with these
provisions.
Each of the Company's long-term care facilities has at least one medical
director that is a licensed physician. The medical directors may from time to
time refer their patients to the Company's facilities in their independent
professional judgment. The physician anti-referral restrictions and prohibitions
could, among other things, require the Company to modify its contractual
arrangements with its medical directors or prohibit its medical directors from
referring patients to the Company. From time to time, the Company has sought
guidance as to the interpretation of these laws. However, there can be no
assurance that such laws will ultimately be interpreted in a manner consistent
with the practices of the Company.
Healthcare Reform. In addition to extensive existing governmental healthcare
-----------------
regulation, there are numerous legislative and executive initiatives at the
Federal and state levels for comprehensive reforms affecting the payment for and
availability of healthcare services. It is not clear at this time what
proposals, if any, will be adopted or, if adopted, what effect such proposals
would have on the Company's business. Aspects of certain of these proposals,
such as reductions in funding of the Medicare and Medicaid programs, potential
changes in reimbursement regulations for rehabilitation therapy services,
interim measures to contain healthcare costs such as a short-term freeze on
13
<PAGE>
prices charged by healthcare providers or changes in the administration of
Medicaid at the state level, could materially adversely affect the Company.
There can be no assurance that currently proposed or future healthcare
legislation or other changes in the administration or interpretation of
governmental healthcare programs will not have an adverse effect on the Company.
Environmental and Other. The Company is also subject to a wide variety of
-----------------------
Federal, state and local environmental and occupational health and safety laws
and regulations. Among the types of regulatory requirements faced by healthcare
providers are: air and water quality control requirements, waste management
requirements, specific regulatory requirements applicable to asbestos,
polychlorinated biphenyls and radioactive substances, requirements for providing
notice to employees and members of the public about hazardous materials and
wastes and certain other requirements.
In its role as owner and/or operator of properties or facilities, the Company
may be subject to liability for investigating and remedying any hazardous
substances that have come to be located on the property, including such
substances that may have migrated off of, or emitted, discharged, leaked,
escaped or been transported from, the property. The Company's operations may
involve the handling, use, storage, transportation, disposal and/or discharge of
hazardous, infectious, toxic, radioactive, flammable and other hazardous
materials, wastes, pollutants or contaminants. Such activities may harm
individuals, property or the environment; may interrupt operations and/or
increase their costs; may result in legal liability, damages, injunctions or
fines; may result in investigations, administrative proceedings, penalties or
other governmental agency actions; and may not be covered by insurance. The cost
of any required remediation or removal of hazardous or toxic substances could be
substantial and the liability of an owner or operator for any property is
generally not limited under applicable laws and could exceed the property's
value. Although the Company is not aware of any material liability under any
environmental or occupational health and safety laws, there can be no assurance
that the Company will not encounter such liabilities in the future, which could
have a material adverse effect on the Company.
COMPETITION
The long-term care industry is highly competitive. The Company competes with
other providers of long-term care on the basis of the scope and quality of
services offered, the rate of positive medical outcomes, cost-effectiveness and
the reputation and appearance of its long-term care facilities. The Company also
competes in recruiting qualified healthcare personnel, in acquiring and
developing additional facilities and in obtaining CONs. The Company's current
and potential competitors include national, regional and local long-term care
providers, some of whom have substantially greater financial and other resources
and may be more established in their communities than the Company. The Company
also faces competition from assisted living facility operators as well as
providers of home healthcare. In addition, certain competitors are operated by
not-for-profit organizations and similar businesses which can finance capital
expenditures and acquisitions on a tax-exempt basis or receive charitable
contributions unavailable to the Company.
The Company expects competition for the acquisition and development of
long-term care facilities to increase in the future as the demand for long-term
care increases. Construction of new (or the expansion of existing) long-term
care facilities near the Company's facilities could adversely affect the
Company's business. State regulations generally require a CON before a new
long-term care facility can be constructed or additional licensed beds can be
added to existing facilities. CON legislation is in place in all states in which
the Company operates or expects to operate. The Company believes that these
regulations reduce the possibility of overbuilding and promote higher
utilization of existing facilities. However, a relaxation of CON requirements
could lead to an increase in competition. In addition, as cost containment
measures have reduced occupancy rates at acute care hospitals, a number of these
hospitals have converted portions of their facilities into subacute units.
Competition from acute care hospitals could adversely affect the Company.
14
<PAGE>
EMPLOYEES
As of December 31, 1996, the Company employed approximately 4,800
facility-based personnel on a full- or part-time basis. The Company's corporate
and regional staff consisted of 80 persons as of such date. Approximately 180
employees at two of the Company's facilities are covered by collective
bargaining agreements. Although the Company believes that it maintains good
relationships with its employees and the unions that represent certain of its
employees, it cannot predict the impact of continued or increased union
representation or organizational activities on its future operations.
The Company believes that the attraction and retention of dedicated, skilled
and experienced nursing and other professional staff has been and will continue
to be a critical factor in the successful growth of the Company. The Company
believes that its wage rates and benefit packages for nursing and other
professional staff are commensurate with market rates and practices.
The Company competes with other healthcare providers in attracting and
retaining qualified or skilled personnel. The long-term care industry has, at
times, experienced shortages of qualified personnel. A shortage of nurses or
other trained personnel or general economic inflationary pressures may require
the Company to enhance its wage and benefits package in order to compete with
other employers. There can be no assurance that the Company's labor costs will
not increase or, if they do, that they can be matched by corresponding increases
in private-payor revenues or governmental reimbursement. Failure by the Company
to attract and retain qualified employees, to control its labor costs or to
match increases in its labor expenses with corresponding increases in revenues
could have a material adverse effect on the Company.
INSURANCE
The Company carries general liability, professional liability, comprehensive
property damage and other insurance coverages that management considers adequate
for the protection of its assets and operations based on the nature and risks of
its business, historical experience and industry standards. There can be no
assurance, however, that the coverage limits of such policies will be adequate
or that insurance will continue to be available to the Company on commercially
reasonable terms in the future. A successful claim against the Company not
covered by, or in excess of, its insurance coverage could have a material
adverse effect on the Company. Claims against the Company, regardless of their
merit or eventual outcome, may also have a material adverse effect on the
Company's business and reputation, may lead to increased insurance premiums and
may require the Company's management to devote time and attention to matters
unrelated to the Company's business. The Company is self-insured (subject to
contributions by covered employees) with respect to most of the healthcare
benefits and workers' compensation benefits available to its employees. The
Company believes that it has adequate resources to cover any self-insured claims
and the Company maintains excess liability coverage to protect it against
unusual claims in these areas. However, there can be no assurance that the
Company will continue to have such resources available to it or that substantial
claims will not be made against the Company.
15
<PAGE>
ITEM 2. PROPERTIES
The following table summarizes certain information regarding the Company's
facilities as of December 31, 1996:
SUMMARY OF FACILITIES
<TABLE>
<CAPTION>
YEAR OWNED/ LICENSED
FACILITY LOCATION ACQUIRED LEASED BEDS
<S> <C> <C> <C> <C>
SOUTHEAST REGION
FLORIDA
Brevard Rockledge 1994 Leased 100
Clearwater Clearwater 1990 Owned 120
Gulf Coast New Port Richey 1990 Owned 120
Naples Naples 1989 Leased 120
Ocala Ocala 1990 Owned 120
Palm Harbor Palm Harbor 1990 Owned 120
Pinebrook Venice 1989 Leased 120
Sarasota Sarasota 1990 Leased 120
Tampa Bay Oldsmar 1990 Owned 120
-----
1,060
MIDWEST REGION
OHIO
Defiance Defiance 1993 Leased 100
Northwestern Ohio Bryan 1993 Leased 189
Swanton Swanton 1995 Leased 100
Toledo Perrysburg 1990 Owned 100
Troy Troy 1989 Leased 195
Beachwood Beachwood 1996 Owned 274
Broadview Broadview Heights 1996 Owned 159
Westlake I Westlake 1996 Owned 153
Westlake II Westlake 1996 Owned 106
INDIANA
Decatur Indianapolis 1988 Owned 88
Indianapolis Indianapolis 1988 Leased 103
New Haven New Haven 1990 Leased 120
Terre Haute Terre Haute 1990 Owned 120
-----
1,807
NEW ENGLAND REGION
NEW HAMPSHIRE
Applewood Winchester 1996 Leased 70
Crestwood Milford 1996 Leased 82
Milford Milford 1996 Leased 52
Northwood Bedford 1996 Leased 147
Pheasant Wood Peterborough 1996 Leased 99
Westwood Keene 1996 Leased 87
-----
537
MID-ATLANTIC REGION
MARYLAND
Larkin Chase Center Bowie 1994 Owned(1) 120
NEW JERSEY
Woods Edge Bridgewater 1988 Leased 176
-----
296
-----
TOTAL 3,700
=====
</TABLE>
16
<PAGE>
(1) Owned by Bowie L.P. The Company's interest in Bowie L.P. is pledged to the
facility's mortgage lender. The Company has guaranteed the indebtedness of Bowie
L.P.
The Company's corporate offices in Boston are subleased from an affiliate. The
Company also leases regional offices in Clearwater, Florida and Indianapolis,
Indiana, and owns a regional office in Peterborough, New Hampshire. An
accounting and data processing office is leased by the Company in Fort Wayne,
Indiana and the Company's ancillary services companies lease offices in Palm
Harbor, Florida and Indianapolis, Indiana. The Company considers its properties
to be in good operating condition and suitable for the purposes for which they
are being used.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to claims and legal actions arising in the ordinary
course of business. Management does not believe that unfavorable outcomes in any
such matters, individually or in the aggregate, would have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
last quarter of the Company's fiscal year ended December 31, 1996.
ITEM 4.1 EXECUTIVE MANAGEMENT OF THE REGISTRANT
The following table sets forth certain information with respect to the executive
officers of the Company:
NAME AGE POSITION
- ---- --- --------
Stephen L. Guillard 47 Chairman, President, Chief Executive
Officer and Director
Damian N. Dell'Anno 37 Executive Vice President of Operations
William H. Stephan 40 Senior Vice President and Chief Financial
Officer
Bruce J. Beardsley 33 Senior Vice President of Acquisitions
Robert L. Boelter, R.R.T. 46 Senior Vice President of Subacute and
Specialty Services
Michael E. Gomez, R.P.T. 35 Senior Vice President of Rehabilitation
Services
Kenneth Montgomery 38 Senior Vice President of Operations
Stephen L. Guillard has served as President and Chief Executive Officer of the
Company since March 21, 1996 and of the predecessors of the Company since May
1988 and as a Director and Chairman of the Board of the Company since its
incorporation. Mr. Guillard previously served as Chairman, President and Chief
Executive Officer of Diversified Health Services ("DHS"), a long-term care
company which Mr. Guillard co-founded in 1982. DHS operated approximately 7,500
long-term care and assisted living beds in five states. Mr. Guillard has a total
of 25 years of experience in the long-term care industry and is a licensed
Nursing Home Administrator.
Damian N. Dell'Anno has served as Executive Vice President of Operations of
the Company since March 21, 1996 and its predecessors since 1994. From 1993 to
1994, he served as the head of the specialty services group for the predecessors
of the Company and was instrumental in developing the Company's rehabilitation
therapy business. From 1989 to 1993, Mr. Dell'Anno was Vice President of
Reimbursement for the predecessors of the Company. From 1988 to 1989, Mr.
Dell'Anno served as Director of Budget, Reimbursement and Cash Management for
The Mediplex Group, Inc. ("Mediplex"), a long-term care company. Mr. Dell'Anno
has a total of 15 years of experience in the long-term care industry.
17
<PAGE>
William H. Stephan has served as Senior Vice President and Chief Financial
Officer since March 21, 1996 and its predecessors since joining the Company in
1994. From 1986 to 1994, Mr. Stephan was a Manager in the health care practice
of Coopers & Lybrand L.L.P. His clients there included long-term care
facilities, continuing care retirement centers, physician practices and acute
care hospitals. Mr. Stephan is a Certified Public Accountant and a member of the
Healthcare Financial Management Association.
Bruce J. Beardsley has served as Senior Vice President of Acquisitions since
March 21, 1996 and its predecessors since 1994. From 1992 to 1994, he was Vice
President of Planning and Development of the Company with responsibility for the
development of specialized services, planning and engineering. From 1990 to
1992, he was an Assistant Vice President of the Company responsible for risk
management and administrative services. From 1988 to 1990, Mr. Beardsley served
as Special Projects Manager of the Company. Prior to joining the Company in
1988, Mr. Beardsley was a commercial and residential real estate appraiser.
Robert L. Boelter, R.R.T. has served as Senior Vice President of Subacute and
Specialty Services March 21, 1996 and its predecessors since 1995. From 1994 to
1995, he was Vice President of Subacute and Specialized Services for the
Company. From 1992 through 1994, Mr. Boelter was the Manager and later,
Corporate Director, of Subacute Programs for Arbor Health Care Company
("Arbor"), a publicly-held nursing and subacute care organization based in Lima,
Ohio. While at Arbor, Mr. Boelter assisted with the development of that
company's subacute model and directed the implementation of all distinct
subacute programs. From 1984 to 1992, he was President of Pedi-Medical, a
hospital-affiliated home medical equipment provider. Mr. Boelter is a licensed
respiratory therapist.
Michael E. Gomez, R.P.T. has served as the Company's Senior Vice President of
Rehabilitation Services since March 21, 1996 and its predecessors since 1994.
From 1993 to 1994, Mr. Gomez served as Director of Therapy Services for the
Company with responsibility for overseeing the coordination and direction of
physical, occupational and speech therapy services. From 1991 to 1993, Mr. Gomez
was Director of Rehabilitation Services at Mary Washington Hospital in
Fredericksburg, Virginia. From 1988 to 1990, he was Physical Therapy State
Manager for Pro-Rehab, a contract therapy company based in Boone, North
Carolina. Mr. Gomez is a licensed physical therapist.
Kenneth Montgomery has served as Senior Vice President of the Company since
1996. Mr. Montgomery joined the Company's predecessors in 1991, originally as
administrator of the Company's Gulf Coast facility in New Port Richey, Florida.
He was promoted to Regional Director of Operations for the Midwest Region in
1993, and served in that position until 1996. Mr. Montgomery previously served
as administrator, marketing specialist and regional director with a long-term
care company based in Philadelphia, Pennsylvania, operating facilities
throughout the mid-Atlantic states.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS
The Company's common stock is listed on the New York Stock Exchange under the
symbol "HBR". The following table sets forth, for the periods indicated, the
high and low sale price per share of the Company's common stock as reported on
the New York Stock Exchange composite tape.
1996 High Low
---- ---
Second quarter $ 11 $ 9.5
Third quarter 10.75 9.5
Fourth quarter 12.25 $ 9.0
The Company completed its initial public offering on June 14, 1996. The
Company's shares also began trading on June 14, 1996.
There were approximately 2,100 holders of record of the Company's common stock
as of January 31, 1997.
The Company has never declared or paid any dividends on its common stock since
its formation in 1996. The Company does not anticipate paying cash dividends on
its Common Stock for the foreseeable future and intends to retain all of its
earnings for reinvestment in the operations and activities of the Company. Any
future decision as to the payment of dividends will be at the discretion of the
Company's Board of Directors. The Company's ability to pay dividends is also
limited by the terms of current (and possibly future) lease and financing
arrangements that restrict, among other things, the ability of the Company's
subsidiaries to distribute funds to the Company.
19
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated financial data for the
Company. The selected historical consolidated financial data for each of the
years in the five year period ended December 31, 1996 have been derived from the
Company's consolidated financial statements, which have been audited by Coopers
& Lybrand L.L.P., independent accountants. The financial data set forth below
should be read in conjunction with the Consolidated Financial Statements and the
Notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this report.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND OTHER DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Total net revenues ................... $ 62,623 $ 75,101 $ 86,376 $ 109,425 $ 165,412
----------- ----------- ----------- ----------- -----------
Expenses:
Facility operating ................... 48,413 57,412 68,951 89,378 132,207
General and administrative ........... 3,079 3,092 3,859 5,076 7,811
Service charges paid to affiliate ... 637 746 759 700 700
Special compensation and other(2) .... -- -- -- -- 1,716
Depreciation and amortization ........ 4,655 4,304 4,311 4,385 3,029
Facility rent ........................ -- 525 1,037 1,907 10,223
----------- ----------- ----------- ----------- -----------
Total expenses ........................ 56,784 66,079 78,917 101,446 155,686
----------- ----------- ----------- ----------- -----------
Income from operations ............... 5,839 9,022 7,459 7,979 9,726
Other:
Interest expense, net ................ (4,690) (4,740) (4,609) (5,107) (4,634)
Loss on investment in limited
partnership(3) ...................... -- -- (448) (114) (263)
Gain on sale of facilities, net ....... -- -- -- 4,869 --
Loss on refinancing of debt ........... -- -- (453) -- --
Minority interest in net income ....... (1,472) (2,297) (1,575) (6,393) --
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary loss ................... (323) 1,985 374 1,234 4,829
Income taxes .......................... -- -- -- -- (809)
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary loss (323) 1,985 374 1,234 4,020
Extraordinary loss on early
retirement of debt, net of tax ....... -- -- -- -- (1,318)
----------- ----------- ----------- ----------- -----------
Net income(loss) ...................... (323) 1,985 374 1,234 2,702
=========== =========== =========== =========== ===========
Pro forma data:
Historical income (loss) before
income taxes and extraordinary loss... (323) 1,985 374 1,234 4,829
Pro forma income taxes ................ -- (774) (146) (481) (799)
----------- ----------- ----------- ----------- -----------
Pro forma income (loss) before
extraordinary loss.................... (323) 1,211 228 753 4,030
Extraordinary loss, net of tax......... -- -- -- -- (1,318)
----------- ----------- ----------- ----------- -----------
Pro forma net income (loss)............ $ (323) $ 1,211 $ 228 $ 753 $ 2,712
=========== =========== =========== =========== ===========
Pro forma net income per share(4):
Pro forma income before
extraordinary loss ................... $ 0.05 $ 0.17 $ 0.63
Extraordinary loss .................... (0.21)
----------- ----------- -----------
Pro forma net income .................. $ 0.05 $ 0.17 $ 0.42
=========== =========== ===========
Pro forma weighted average
shares outstanding(4) ............... 4,425,000 4,425,000 6,396,142
</TABLE>
20
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<TABLE>
<S> <C> <C> <C> <C> <C>
OTHER DATA(1):
Facilities (as of end of period):
Owned(5) ................................... 15 15 16 9 13
Leased ..................................... -- 2 3 11 17
---------- ---------- ---------- ---------- ----------
Total ..................................... 15 17 19 20 30
========== ========== ========== ========== ==========
Licensed beds (as of end of period):
Owned(5) .................................. 1,860 1,860 1,976 1,028 1,720
Leased .................................... -- 289 389 1,443 1,980
---------- ---------- ---------- ---------- ----------
Total ..................................... 1,860 2,149 2,365 2,471 3,700
========== ========== ========== ========== ==========
Patient days(6):
Private and other .......................... 247,529 258,847 258,585 257,864 341,080
Medicare ................................... 47,954 60,459 68,256 90,107 116,198
Medicaid ................................... 341,006 366,105 404,372 432,392 670,695
Total ...................................... 636,489 685,411 731,213 780,363 1,127,973
Average occupancy rate(7) ................. 93.5% 92.5% 91.5% 91.5% 91.9%
Sources of net patient service revenues(8):
Private and other(9) ...................... 43.0% 39.9% 37.1% 32.3% 30.4%
Medicare .................................. 16.2% 21.2% 24.9% 33.1% 28.4%
Medicaid .................................. 40.8% 38.9% 38.0% 34.6% 41.2%
AS OF DECEMBER 31,
------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
BALANCE SHEET DATA(1):
Cash and cash equivalents .................. $ 5,935 $ 10,214 $ 14,013 $ 40,157 $ 9,722
Working capital ............................ 6,734 6,511 13,915 10,735 16,826
Total assets ............................... 84,865 85,472 93,876 92,632 141,799
Total debt ................................. 40,580 40,708 53,296 43,496 75,485
Stockholders' equity ....................... 3,631 4,918 2,866 4,130 44,880
</TABLE>
(1) 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.
(2) Consists primarily of special compensation to certain senior management
personnel in connection with the completion of the Company's Offering. See Note
N to the Company's consolidated financial statements included elsewhere in this
report.
(3) Represents the Company's allocation of operating results for the Larkin
Chase Center which the Company accounts for using the equity method.
(4) Through the Offering the Company issued 3,600,000 shares of common stock.
Pro forma net income per share for 1994 and 1995 is calculated based on the
4,400,000 shares of common issued through the Reorganization. For 1996 the
21
<PAGE>
calculation is based upon 4,400,000 shares outstanding for the entire year and
the appropriate weighting for shares issued through the Offering.
(5) Includes the Larkin Chase Center beginning in 1994.
(6) Excludes patient days associated with the Larkin Chase Center.
(7) "Average occupancy rate" is computed by dividing the number of occupied
licensed beds by the total number of available licensed beds during each of the
periods indicated.
(8) Net patient service revenues exclude all rehabilitation therapy service
revenues and the management fees and net patient service revenues of the Larkin
Chase Center.
(9) Consists primarily of revenues derived from private pay individuals, managed
care organizations, HMOs, hospice programs and commercial insurers.
ITEM 7. 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". Actual results may differ materially from
those anticipated by such forward-looking statements.
OVERVIEW
Harborside Healthcare provides high quality, long-term care, subacute care and
other specialty medical services in four principal regions: the Southeast
(Florida), the Midwest (Ohio and Indiana), New England (New Hampshire) and the
Mid-Atlantic (New Jersey and Maryland). As of December 31, 1996, the Company
operated 30 licensed long-term care facilities (13 owned and 17 leased) with a
total of 3,700 licensed beds. As described in Note G to the financial statements
included elsewhere in this report, the Company accounts for its investment in
one of its owned facilities using the equity method. 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 December 31, 1996, the Company provided
rehabilitation therapy services to patients at 37 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 combined 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
22
<PAGE>
the Predecessor Entities. (See Note M to the Company's consolidated 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"). As described in Note O to the Company's consolidated financial
statements included elsewhere in this report, 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 combined financial statements and the interest of the
Unitholders was reflected as minority interest. The net gain of $4,869,000
recognized by KYP in connection with the sale of the Seven Facilities was
allocated to the KYP Unitholders and is reflected in "minority interest in net
income". In March 1996, a liquidating distribution was paid to the Unitholders.
RESULTS OF OPERATIONS
The Company's total net revenues include net patient service revenues, and
beginning in 1995, rehabilitation therapy services revenues from contracts with
non-affiliated long-term care facilities. In recent years, the Company has
experienced an increase in average net patient service revenues per patient day
as a result of an increase in the proportion of patients requiring higher levels
of medical care, including subacute care. In 1993, the Company anticipated a
decline in revenues from traditional custodial care private pay patients and
sought to offset this potential loss through the expansion of subacute care and
other specialty medical services. As a result, the percentage of net patient
service revenues attributable to the Medicare program was 33.1% in 1995, a
substantial increase from the 24.9% and 21.2% experienced in 1994 and 1993,
respectively. This percentage decreased to 28.4% in 1996 as the result of the
acquisition of facilities during 1996 with less revenues derived from the
Medicare program.
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.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
TOTAL NET REVENUES. Total net revenues increased by $55,987,000, or 51.2%,
from $109,425,000 in 1995 to $165,412,000 in 1996. This increase resulted
primarily from the acquisition of six New Hampshire Facilities on January 1,
1996 and four Ohio Facilities on July 1, 1996, the generation of revenues from
rehabilitation therapy services provided under contracts 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, $23,245,000, or 41.5% of the increase, resulted from the operation of
the New Hampshire Facilities, and $17,493,000, or 31.2% of the increase,
resulted from the operation of the Ohio Facilities.
Revenues generated by providing rehabilitation therapy services under contracts
with non-affiliated facilities increased by $7,250,000, from $3,045,000 in 1995
to $10,295,000 in 1996 (primarily the result of additional contracts). The
remaining $7,999,000, or 14.3% of the increase in revenues, is attributable to
higher average net patient service revenues per patient day at the Company's
"same store" facilities, primarily resulting from increased care levels provided
to patients with higher acuity conditions. Average net patient service revenues
per patient day at "same store"facilities increased by 6.0% from $134.45 in 1995
to $142.45 in 1996. The average occupancy rate at all of the Company's
facilities increased from 91.5% in 1995 to 91.9% in 1996, also contributing to
the increase in revenues. The Company's quality mix of private, Medicare and
insurance revenues was 65.4% for the year ended December 31, 1995 as compared to
58.8% for the year ended December 31, 1996. The decrease in the quality mix
percentage was primarily due to the acquisition of the New Hampshire Facilities
which at the time of the acquisition did not participate in the Medicare
program.
23
<PAGE>
FACILITY OPERATING EXPENSES. Facility operating expenses increased by
$42,829,000, or 47.9%, from $89,378,000 in 1995 to $132,207,000 in 1996. The
acquisition of the New Hampshire Facilities accounted for $17,909,000, or 41.8%,
of the increase in facility operating expenses while the Ohio Facilities
accounted for $13,712,000, or 32.0% of this increase. Operating expenses
associated with non-affiliated therapy contracts increased as a result of
additional contracts. Operating expenses associated with these contracts
increased from $3,290,000 in 1995 to $8,212,000 in 1996. The remainder of the
increase in facility operating expenses, approximately $2,996,000, 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 $2,735,000, or 53.9%, from $5,076,000 in
1995 to $7,811,000 in 1996. Approximately $787,000 of this increase resulted
from the acquisition of the New Hampshire Facilities, and $290,000 from the
acquisition of the Ohio Facilities. Most of the remainder was associated with
the expansion of regional and corporate support, increases in salaries, and
additional travel and consulting expenses associated with the Company's growth.
The Company reimburses an affiliate for rent and other expenses related to its
corporate headquarters, as well as for certain data processing and
administrative services provided to the Company. In 1995 and 1996, such
reimbursements totaled $700,000.
SPECIAL COMPENSATION AND OTHER. In connection with the Offering and the
Reorganization, the Company recorded $1,716,000 of non-recurring charges in
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 Reorganization
which preceded the Offering.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased from
$4,385,000 in 1995 to $3,029,000 in 1996 as a net result of the sale of the
Seven Facilities effective December 31, 1995 and the acquisition of the Ohio
Facilities on July 1, 1996 which has been accounted for as a capital lease.
FACILITY RENT. Facility rent expense increased by $8,316,000 from $1,907,000
in 1995 to $10,223,000 in 1996. The increase in rent expense is the result of
the sale and subsequent leaseback of the Seven Facilities and the acquisition of
the six New Hampshire Facilities on January 1, 1996 pursuant to an operating
lease financing.
INTEREST EXPENSE, NET. Interest expense, net, decreased by $473,000 from
$5,107,000 in 1995 to $4,634,000 in 1996. This decrease is due to the net result
of the pay down of the Seven Facilities debt, the repayment of $25,000,000 of
long-term debt using proceeds from the Offering and additional interest expense
resulting from the acquisition of the Ohio facilities.
LOSS ON INVESTMENT IN LIMITED PARTNERSHIP. The Company accounts for its
investment in the Larkin Chase Center using the equity method. The Company
recorded a loss of $114,000 in 1995 as compared to a loss of $263,000 during
1996 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 the related tax benefit) as
the result of a prepayment penalty paid to the lender and the write-off of
deferred financing costs.
INCOME TAXES. Prior to the date of the Offering, the Company's financial
statements did not include a provision for income taxes because the Predecessor
Entities were not directly subject to Federal or state income taxation. The
provision for income taxes in 1996 was $809,000 and consisted of a provision for
income taxes for the period after the Offering less a tax benefit resulting from
book-tax differences inherited as part of the Company's Reorganization.
NET INCOME. Net income was $1,234,000 in 1995 as compared to $2,702,000 in
1996. The increase of $1,468,000 was primarily the result of increased operating
income in 1996 and the elimination of the minority interest charge resulting
from the liquidation of KYP.
24
<PAGE>
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
TOTAL NET REVENUES. Total net revenues increased by $23,049,000, or 26.7%,
from $86,376,000 in 1994 to $109,425,000 in 1995. This increase resulted
primarily from the operation of two additional facilities, the generation of
revenues from rehabilitation therapy services provided to patients at the Larkin
Chase Center and non-affiliated long-term care facilities and increased net
patient service revenues per patient day at the Company's "same store"
facilities. Of such increase, $6,279,000, or 27.2%, resulted from the operation
of the Brevard facility, which the Company began leasing in October 1994, and
the Swanton facility, which the Company began leasing in April 1995. In 1995,
the Company began providing rehabilitation therapy services at non-affiliated
long-term care facilities, which generated revenues of $3,045,000, or 13.2% of
such increase. In addition, rehabilitation therapy service revenues from the
Larkin Chase Center increased by $687,000, or 3.0% of such increase, to
$1,031,000 in 1995. The remaining $13,038,000, or 56.6% of such increase, was
attributable to higher average net patient service revenues per patient day at
the Company's "same store" facilities, primarily resulting from increased care
levels provided to patients with high acuity conditions. Average net patient
service revenues per patient day increased by 14.4% from $117.54 in 1994 to
$134.45 in 1995. The average occupancy rate at the Company's facilities remained
unchanged in 1995 at 91.5%.
FACILITY OPERATING EXPENSES. The increase in the number of facilities operated
by the Company in 1995 and the expansion of the Company's rehabilitation therapy
services to include non-affiliated facilities, as well as the greater percentage
of patients receiving higher levels of care, resulted in an increase in facility
operating expenses of $20,427,000, or 29.6%, from $68,951,000 in 1994 to
$89,378,000 in 1995. Facilities added during 1994 and 1995 accounted for
$4,962,000, or 24.3%, of the increase in facility operating expenses. As
described above, in 1995 the Company began providing rehabilitation therapy
services to patients at non-affiliated facilities. During 1995, the Company
entered into rehabilitation therapy service contracts with 16 non-affiliated
facilities. The cost of providing rehabilitation therapy services at these
facilities, together with the related marketing and contract development
expenses, increased the Company's facility operating expenses by $3,290,000 over
1994. The remainder of the increase in facility operating expenses,
approximately $12,175,000, is due to increases in the costs of labor, medical
supplies and rehabilitation therapy services purchased from third parties. The
Company's efforts to enhance its clinical capabilities required it to
significantly increase facility staffing levels in 1995 as compared to 1994.
GENERAL AND ADMINISTRATIVE; SERVICE CHARGES PAID TO AFFILIATE . Expenses
associated with the Company's regional and corporate offices increased by
$1,217,000, or 31.5%, from $3,859,000 in 1994 to $5,076,000 in 1995. The
majority of this increase resulted from the creation of new positions to support
the development of the Company's subacute programs, as well as from the addition
of administrative services needed to support facilities added during 1995 and
late in 1994. 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. In 1995, such
reimbursements totaled $700,000, compared to $759,000 in 1994. The reduction in
this expense is attributable to functions assumed by employees of the Company
during 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization remained
relatively unchanged at $4,385,000 in 1995 as compared to $4,311,000 in 1994.
FACILITY RENT. Facility rent expense increased by $870,000, or 83.9%, from
$1,037,000 in 1994 to $1,907,000 in 1995. The increase in rent resulted from the
addition of two facilities financed pursuant to long-term leases. In April 1995,
the Company began leasing its Swanton facility. In October 1994, the Company
entered into a lease for its Brevard facility.
INTEREST EXPENSE, NET. Interest expense, net, increased from $4,609,000 in
1994 to $5,107,000 in 1995. This increase of $498,000, or 10.8%, resulted from a
refinancing of long-term debt in October 1994 which resulted in the incurrence
of approximately $13,100,000 of additional debt. Partially offsetting this
increase was the fact that the new debt was issued at a lower interest rate.
This increase in interest expense was also partially offset by increased
interest income resulting from a higher average cash balance held during 1995
following the issuance of the additional debt in October 1994 and prior to the
use of these funds for facility acquisitions.
25
<PAGE>
LOSS ON INVESTMENT IN LIMITED PARTNERSHIP. The Company accounts for its
investment in the Larkin Chase Center using the equity method. The Company's 75%
allocation of the net loss from this facility was reduced from $448,000 in 1994
to $114,000 in 1995. Most of the improvement resulted from an increase in
occupancy at this facility in 1995 and the recognition of start-up losses during
1994. The Larkin Chase Center opened on April 30, 1994 and achieved stabilized
occupancy by the fourth quarter of 1995.
GAIN ON SALE OF FACILITIES. The net gain on sale of facilities of
approximately $4,869,000 in 1995 resulted from the sale of the Seven Facilities
on December 31, 1995. All of the net gain from this sale was allocated to the
Unitholders in accordance with the partnership agreement and was reflected in
the increased minority interest charge in 1995.
MINORITY INTEREST IN NET INCOME. The minority interest charge increased from
$1,575,000 in 1994 to $6,393,000 in 1995, an increase of $4,818,000.
Substantially all of the increase was attributable to the allocation of the net
gain on the sale of the Seven Facilities.
NET INCOME. Net income was $374,000 in 1994 as compared to $1,234,000 in 1995.
The increase of $860,000 was primarily the result of increased operating income
in 1995 and a reduced loss from the Company's equity investment in the Larkin
Chase Center in 1995. In addition, in 1994 the Company incurred a loss of
$453,000 relating to the refinancing of certain indebtedness.
LIQUIDITY AND CAPITAL RESOURCES
The Predecessor Entities historically financed their operations and
acquisitions growth primarily through a combination of mortgage financing,
operating leases, and capital contributed by the Unitholders. As of December 31,
1995, the Company had cash and cash equivalents totaling $40,157,000; however,
approximately $33,493,000 of this cash was held pending a liquidating
distribution to the Unitholders, which occurred in March 1996. On June 14, 1996,
the Company completed the Offering and received proceeds (net of underwriters'
commissions and offering expenses) of approximately $37,160,000. As of December
31, 1996 the Company had cash and cash equivalents totaling $9,722,000.
The Company had two mortgage loans outstanding as of December 31, 1995. One
mortgage loan had an outstanding principal balance of $41,878,000 with interest
at an annual rate of 10.65% plus additional interest equal to 0.3% of the
difference between the annual operating revenues of the mortgaged facilities and
actual revenues during the twelve-month base period ending October 1, 1996. In
June 1996 the Company used $25,000,000 of the net proceeds of the Offering to
prepay a portion of this debt. In connection with this prepayment, the Company
incurred a penalty of approximately $1,517,000. As of December 31, 1996, the
Company's outstanding principal in connection with this loan was $16,610,000 of
which $15,140,000 is due at maturity in 2004. As of December 31, 1996, the
Company's other mortgage loan, which encumbers a single facility, had an
outstanding principal balance of $1,598,000, of which $1,338,000 is due in 2010.
This mortgage bears interest at 14%.
The Company's existing facility leases generally require it to make monthly
lease payments, establish escrow funds to serve as debt service reserve
accounts, and pay all property operating costs. The Company generally negotiates
leases which provide for extensions beyond the initial lease term and an option
to purchase the leased facility. The Company expects that various forms of
leasing arrangements will continue to provide it with an attractive form of
financing to support its growth.
The Company has recently arranged terms (subject to final documentation) for a
three-year $25 million revolving credit facility with a commercial bank.
Borrowings under this facility will be collateralized by the Company's patient
accounts receivable and certain other assets. Funds available through the credit
facility will be used to provide working capital for existing operations and
acquisitions and to finance a portion of future acquisitions. 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 on hand, cash generated through operations, as well as funds available
through the credit facility and other third party sources will be sufficient to
meet its operating requirements and to finance anticipated growth over the next
twelve months.
26
<PAGE>
From time to time, the Company expects to pursue certain expansion and new
development opportunities associated with existing facilities. In connection
with a Certificate of Need received by its Ocala facility in March 1996, the
Company expects to commence construction of a sixty-bed addition and a
rehabilitation therapy area during 1997. The costs of this project are estimated
to be approximately $2,800,000. The Company intends to fund this project using
existing financial resources. In addition, the Company's Larkin Chase facility
holds a Certificate of Need for a sixty-bed addition. The Company is currently
evaluating this project and may commence construction of a sixty-bed addition
during 1997. The costs associated with the Larkin Chase project are estimated to
be approximately $2,500,000 and would be substantially funded by an increase in
a loan to that facility from a commercial bank.
The Company's operating activities in 1996 generated net cash of $1,405,000 as
compared to $1,886,000 in 1995, a decrease of $481,000. Most of the reduction in
cash provided by operations was the net result of changes in accounts
receivable, accounts payable and accruals relating to the facilities acquired in
1996.
Net cash provided by investing activities was $36,818,000 in 1995. After
deducting the gross proceeds of $47,000,000 from the sale of the Seven
Facilities and related transaction costs of $884,000, net cash used by investing
activities was $9,298,000 in 1995 as compared to $4,050,000 used in 1996. In
each year the primary use of invested cash related to additions to property and
equipment ($3,081,000 in 1995 compared to $5,104,000 in 1996), the funding of
escrow accounts in connection with debt or lease financing arrangements
($760,000 in 1995 compared to $996,000 in 1996), and additions to deferred
financing costs associated with these financings ($1,202,000 in 1995 compared to
$950,000 in 1996). In 1995, the Company loaned $1,255,000 to Bowie L.P. to
finance its working capital requirements. In March 1997, Bowie L.P. refinanced
its loan with a bank, increasing the outstanding loan by approximately
$1,400,000. Bowie L.P. used this increased borrowing to repay the amount owed to
the Company. As a result of this refinancing, the interest rate of the bank loan
was reduced from prime plus 1% to, LIBOR plus 1.5%.
Net cash used by financing activities was $12,560,000 in 1995 as compared to
$27,790,000 in 1996. The early retirement of debt and the incurrence of a
related prepayment penalty required the use of $10,954,000 in 1995. The early
retirement of debt and the incurrence of a prepayment penalty required the use
of $26,517,000 in 1996. In 1996, payments associated with the Company's capital
lease obligation incurred in connection with its acquisition of the Ohio
Facilities amounted to $6,766,000. Of this amount, $5,000,000 represented
consideration in return for a purchase option. During 1996, the Company also
received approximately $37,160,000 in net proceeds from the Offering and a cash
payment from the landlord of $3,685,000 in connection with the leasing of the
New Hampshire Facilities. During 1996, the Company also received $803,000 from
the sale of equity interests to an officer and a director of the Company. In
March 1996, a liquidating distribution of $33,727,000 was paid to the
Unitholders.
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.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
<S> <C>
Report of Independent Accountants 29
Consolidated Balance Sheets as of December 31, 1995 and 1996 30
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 31
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1994, 1995 and 1996 32
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 33
Notes to Consolidated Financial Statements 34
</TABLE>
28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Harborside Healthcare Corporation:
We have audited the accompanying consolidated financial statements of
Harborside Healthcare Corporation and subsidiaries (the "Company") as listed in
Item 14 (a) of this Form 10-K. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Harborside
Healthcare Corporation and subsidiaries as of December 31, 1995 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 10, 1997
29
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
------------
1995 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 40,157 $ 9,722
Accounts receivable, net of allowances for doubtful
accounts of $1,526 and $1,860, respectively 9,967 22,984
Prepaid expenses and other 1,790 3,570
Demand note due from limited partnership (Note G) 1,255 1,369
Facility acquisition deposits (Notes P and Q) 3,000 --
Deferred income taxes -- 1,580
--------- ---------
Total current assets 56,169 39,225
Restricted cash (Note C) 2,755 3,751
Investment in limited partnership (Note G) 519 256
Property and equipment, net (Note H) 30,139 95,187
Intangible assets, net (Note I) 3,050 3,004
Deferred income taxes -- 376
--------- ---------
Total assets $ 92,632 $ 141,799
========= =========
LIABILITIES
Current liabilities:
Current maturities of long-term debt (Note E) $ 428 $ 169
Current portion of capital lease obligation (Note F) -- 3,744
Accounts payable 4,034 6,011
Employee compensation and benefits 4,495 8,639
Other accrued liabilities 959 2,177
Note payable to affiliate (Note Q) 2,000 --
Accrued interest 25 19
Current portion of deferred income -- 368
Income taxes payable -- 1,272
Distribution payable to minority interest (Note O) 33,493 --
--------- ---------
Total current liabilities 45,434 22,399
Long-term portion of deferred income (Note D) -- 2,948
Long-term portion of capital lease obligation (Note F) -- 53,533
Long-term debt (Note E) 43,068 18,039
--------- ---------
Total liabilities 88,502 96,919
--------- ---------
Commitments and contingencies (Notes D, G and K)
STOCKHOLDERS' EQUITY (NOTE N)
Common stock, $.01 par value, 30,000,000 shares authorized, 4,400,000 and
8,000,000 shares issued and outstanding,
respectively 44 80
Additional paid-in capital 10,328 48,340
Accumulated deficit (6,242) (3,540)
--------- ---------
Total stockholders' equity 4,130 44,880
--------- ---------
Total liabilities and stockholders' equity $ 92,632 $ 141,799
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
30
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Total net revenues $ 86,376 $ 109,425 $ 165,412
----------- ----------- -----------
Expenses:
Facility operating 68,951 89,378 132,207
General and administrative 3,859 5,076 7,811
Service charges paid to affiliate (Note Q) 759 700 700
Special compensation and other (Note N) -- -- 1,716
Depreciation and amortization 4,311 4,385 3,029
Facility rent 1,037 1,907 10,223
----------- ----------- -----------
Total expenses 78,917 101,446 155,686
----------- ----------- -----------
Income from operations 7,459 7,979 9,726
Other:
Interest expense, net (4,609) (5,107) (4,634)
Loss on investment in limited partnership (Note G) (448) (114) (263)
Gain on sale of facilities, net (Note O) -- 4,869 --
Loss on refinancing of debt (Note E) (453) -- --
Minority interest in net income (Notes B and O) (1,575) (6,393) --
----------- ----------- -----------
Income before income taxes and extraordinary loss 374 1,234 4,829
Income taxes (Note M) -- -- (809)
----------- ----------- -----------
Income before extraordinary loss 374 1,234 4,020
Extraordinary loss on early retirement of debt,
net of taxes of $843 (Note E) -- -- (1,318)
----------- ----------- -----------
Net income $ 374 $ 1,234 $ 2,702
=========== =========== ===========
Pro forma data (unaudited--Notes B and M):
Historical income before income taxes and extraordinary loss $ 374 $ 1,234 $ 4,829
Pro forma income taxes (146) (481) (799)
----------- ----------- -----------
Pro forma income before extraordinary loss 228 753 4,030
Extraordinary loss, net -- -- (1,318)
----------- ----------- -----------
Pro forma net income $ 228 $ 753 $ 2,712
=========== =========== ===========
Pro forma net income per share:
Pro forma income before extraordinary loss $ 0.05 $ 0.17 $ 0.63
Extraordinary loss, net -- -- (0.21)
----------- ----------- -----------
Pro forma net income $ 0.05 $ 0.17 $ 0.42
=========== =========== ===========
Weighted average number of common and common
equivalent shares used in pro forma net income
per share (Note C) 4,425,000 4,425,000 6,396,142
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
31
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
----- ------- ------- -----
<S> <C> <C> <C> <C>
Stockholders' equity, December 31, 1993 $ 44 $ 10,524 $ (5,650) $ 4,918
Net income for the year ended December 31, 1994 -- -- 374 374
Distributions -- (226) (2,200) (2,426)
-------- -------- -------- --------
Stockholders' equity, December 31, 1994 44 10,298 (7,476) 2,866
Net income for the year ended December 31, 1995 -- -- 1,234 1,234
Contributions -- 30 -- 30
-------- -------- -------- --------
Stockholders' equity, December 31, 1995 44 10,328 (6,242) 4,130
Net income for the year ended December 31, 1996 -- -- 2,702 2,702
Purchase of equity interests -- 1,028 -- 1,028
Distributions -- (140) -- (140)
Proceeds of initial public offering, net 36 37,124 -- 37,160
-------- -------- -------- --------
Stockholders' equity, December 31, 1996 $ 80 $ 48,340 $ (3,540) $ 44,880
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
32
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 374 $ 1,234 $ 2,702
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest 1,575 6,393 234
Gain on sale of facilities, net -- (4,869) --
Loss on refinancing of debt 453 -- 1,318
Depreciation of property and equipment 3,744 3,924 2,681
Amortization of intangible assets 567 461 348
Amortization of deferred income -- -- (369)
Loss from investment in limited partnership 448 114 263
Amortization of loan costs and fees 172 109 103
Accretion of interest on capital lease obligation -- -- 1,419
Deferred interest -- -- (114)
Common stock grant -- -- 225
Other 8 14 --
-------- -------- --------
7,341 7,380 8,810
Changes in operating assets and liabilities:
(Increase) in accounts receivable (2,888) (7,573) (13,017)
(Increase) in prepaid expenses and other (521) (456) (1,780)
(Increase) in deferred income taxes -- -- (1,956)
Increase in accounts payable 656 1,345 1,977
Increase in employee compensation and benefits 635 1,385 4,144
Increase (decrease) in accrued interest 367 (490) (6)
Increase (decrease) in other accrued liabilities (60) 295 1,118
(Decrease) in due to affiliates (591) -- --
Increase in income taxes payable -- -- 2,115
-------- -------- --------
Net cash provided by operating activities 4,939 1,886 1,405
-------- -------- --------
Investing activities:
Additions to property and equipment (2,585) (3,081) (5,104)
Facility acquisition deposits -- (3,000) 3,000
Additions to intangibles (1,410) (1,202) (950)
Transfers to restricted cash, net (1,995) (760) (996)
Demand note from limited partnership -- (1,255) --
Contributions to investment in limited partnership (88) -- --
Payment of costs related to sale of facilities -- (884) --
Proceeds from sale of facilities -- 47,000 --
-------- -------- --------
Net cash provided (used) by investing activities (6,078) 36,818 (4,050)
-------- -------- --------
Financing activities:
Payment of long-term debt (29,842) (9,800) (25,288)
Principal payments of capital lease obligation -- -- (6,766)
Debt prepayment penalty -- (1,154) (1,517)
Payment of termination fee on interest protection agreement (384) -- --
Payment of demand note payable (225) -- --
Issuance of long-term debt 42,300 -- --
Note payable to an affiliate -- 2,000 (2,000)
Receipt of cash in connection with lease -- -- 3,685
Dividend distribution (2,426) -- (140)
Distributions to minority interest (4,485) (3,636) (33,727)
Purchase of equity interests and other contributions -- 30 803
Proceeds from sale of common stock -- -- 37,160
-------- -------- --------
Net cash provided (used) by financing activities 4,938 (12,560) (27,790)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 3,799 26,144 (30,435)
Cash and cash equivalents, beginning of period 10,214 14,013 40,157
-------- -------- --------
Cash and cash equivalents, end of period $ 14,013 $ 40,157 $ 9,722
======== ======== ========
Supplemental Disclosure:
Interest paid $ 4,505 $ 6,208 $ 4,060
Income taxes paid $ -- $ -- $ 760
Noncash investing and financing activities:
Property and equipment additions by capital lease -- -- $ 57,625
Capital lease obligation incurred -- -- $ 57,625
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
33
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
A. NATURE OF BUSINESS
Harborside Healthcare Corporation and its subsidiaries (the "Company") operate
long-term care facilities and provide rehabilitation therapy services. As of
December 31, 1996, the Company owned thirteen facilities, operated seventeen
additional facilities under various leases and owned a rehabilitation therapy
services company. The Company accounts for its investment in one of its owned
facilities using the equity method (see Note G). The Company's long-term care
facilities are located in Florida, Ohio, Indiana, Maryland, New Hampshire and
New Jersey.
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 in exchange for 4,400,000 shares of the Company's common
stock. The presentation of stockholders' equity has been adjusted to
retroactively reflect this exchange of shares as of December 31, 1993. 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 approximately
$37,160,000. A portion of the proceeds was used to repay some of the Company's
long-term debt (see Note E).
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 combined
financial statements and the interest of the Unitholders was reflected as
minority interest. In March 1996, a liquidating distribution was paid to the
Unitholders (see Notes D and O).
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 combined
financial statements include a pro forma income tax provision for each period
presented, as if the Company had always owned the Predecessor Entities (see Note
M).
C. SIGNIFICANT ACCOUNTING POLICIES
The Company uses the following accounting policies for financial reporting
purposes:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements (combined prior to June 14, 1996)
include the accounts of the Company and its subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
TOTAL NET REVENUES
Total net revenues include net patient service revenues, rehabilitation
therapy service revenues from contracts to provide services to non-affiliated
long-term care facilities and management fees from the facility owned by Bowie
L.P. (see Note G).
Net patient service revenues payable by patients at the Company's facilities
are recorded at established billing rates. Net patient service revenues to be
reimbursed by contracts with third-party payors, primarily the Medicare and
Medicaid programs, are recorded at the amount estimated to be realized under
these contractual arrangements. Revenues from Medicare and Medicaid are
generally based on reimbursement of the reasonable direct and indirect costs of
providing services to program participants or a prospective payment system. The
Company separately estimates revenues due from each third party with which it
has a contractual arrangement and records anticipated settlements with these
parties in the contractual period during which services were rendered. The
amounts actually reimbursable under Medicare and Medicaid are determined by
filing cost reports which are then audited and generally retroactively adjusted
by the payor. Legislative changes to state or Federal reimbursement systems may
also retroactively affect recorded revenues. Changes in estimated revenues due
in connection with Medicare and Medicaid may be recorded by the Company
subsequent to the year of origination and prior to final settlement based on
improved estimates. Such adjustments and final settlements with third party
payors, which could materially and adversely affect the Company, are reflected
in operations at the time of the adjustment or settlement. Accounts receivable,
net, at December 31, 1995 and 1996 includes $7,372,000 and $10,667,000,
respectively, of estimated settlements due from third party payors and
$7,162,000 and $5,194,000, respectively, of estimated settlements due to third
party payors.
34
<PAGE>
C. SIGNIFICANT ACCOUNTING POLICIES (cont.)
In addition, direct and allocated indirect costs reimbursed under the Medicare
program are subject to regional limits. The Company's costs generally exceed
these limits and accordingly, the Company is required to submit exception
requests to recover such excess costs. The Company believes it will be
successful in collecting these receivables, however, the failure to recover
these costs in the future could materially and adversely affect the Company.
Beginning in 1995, total net revenues includes revenues recorded by the
Company's rehabilitation therapy subsidiary (which does business under the name
"Theracor") for therapy services provided to non-affiliated long-term care
facilities.
CONCENTRATIONS
A significant portion of the Company's revenues are derived from the Medicare
and Medicaid programs. There have been, and the Company expects that there will
continue to be, a number of proposals to limit reimbursement allowable to
long-term care facilities under these programs. The Company cannot predict at
this time whether any of these proposals will be adopted, or if adopted and
implemented, what effect such proposals would have on the Company. Approximately
63%, 68%, and 70% of the Company's net patient service revenues in the years
ended December 31, 1994, 1995 and 1996, respectively, are from the Company's
participation in the Medicare and Medicaid programs. As of December 31, 1995 and
1996, $7,780,000 and $17,560,000, respectively, of net accounts receivable were
due from the Medicare and Medicaid programs.
FACILITY OPERATING EXPENSES
Facility operating expenses include expenses associated with the normal
operations of a long-term care facility. The majority of these costs consist of
payroll and employee benefits related to nursing, housekeeping and dietary
services provided to patients, as well as maintenance and administration of the
facilities. Other significant facility operating expenses include: the cost of
rehabilitation therapies, medical and pharmacy supplies, food and utilities.
Beginning in 1995, facility operating expenses include expenses associated with
services rendered by Theracor to non-affiliated facilities.
PROVISION FOR DOUBTFUL ACCOUNTS
Provisions for uncollectible accounts receivable of $538,000, $1,240,000 and
$1,116,000 are included in facility operating expenses for the years ended
December 31, 1994, 1995 and 1996, respectively. Individual patient accounts
deemed to be uncollectible are written off against the allowance for doubtful
accounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the period reported. Actual results could differ
from those estimates. Estimates are used when accounting for the collectibility
of receivables, depreciation and amortization, employee benefit plans, taxes and
contingencies.
PRO FORMA NET INCOME PER SHARE
Pro forma net income per share is computed using the weighted average number
of common and dilutive common equivalent shares (stock options) outstanding
during each year presented. Pro forma net income per share for the years ended
December 31, 1994 and 1995 is calculated based upon the common shares of the
Company (4,400,000) issued in accordance with the Reorganization Agreement.
Pursuant to Securities and Exchange Commission staff requirements, stock options
issued within one year of an initial public offering, calculated using the
treasury stock method and the initial public offering price of $11.75 per share,
have been included in the calculation of pro forma net income per common share
as if they were outstanding for all periods presented.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures that extend the lives
of affected assets are capitalized, while maintenance and repairs are charged to
expense as incurred. Upon the retirement or sale of an asset, the cost of the
asset and any related accumulated depreciation are removed from the balance
sheet, and any resulting gain or loss is included in net income.
Depreciation expense includes the amortization of capital assets and is
estimated using the straight-line method. These estimates are calculated using
the following estimated useful lives:
Buildings and improvements 31.5 to 40 years
Furniture and equipment 5 to 10 years
Leasehold improvements over the life of the lease
Land improvements 8 to 40 years
35
<PAGE>
C. SIGNIFICANT ACCOUNTING POLICIES (cont.)
INTANGIBLE ASSETS
Intangible assets consist of amounts identified in connection with certain
facility acquisitions accounted for under the purchase method and certain
deferred costs which were incurred in connection with various financings (see
Note I).
In connection with each of its acquisitions, the Company reviewed the assets
of the acquired facility and assessed its relative fair value in comparison to
the purchase price. Certain acquisitions resulted in the allocation of a portion
of the purchase price to the value associated with the existence of a workforce
in place, residents in place at the date of acquisition and covenants with
sellers which limit their ability to engage in future competition with the
Company's facilities. The assets recognized from an assembled workforce and
residents in place are amortized using the straight-line method over the
estimated periods (from three to seven years) during which the respective
benefits would be in place. Covenants not-to-compete are being amortized using
the straight-line method over the period during which competition is restricted.
Goodwill resulted from the acquisition of certain facilities for which the
negotiated purchase prices exceeded the allocations of the fair market value of
identifiable assets. The Company's policy is to evaluate each acquisition
separately and identify an appropriate amortization period for goodwill based on
the acquired property's characteristics. Goodwill was being amortized using the
straight-line method over a 31.5 to 40 year period. The Company's remaining
goodwill was written-off in connection with the sale of the Seven Facilities in
1995 (see Note O).
Costs incurred in obtaining financing (including loans, letters of credit and
facility leases) are amortized as interest expense using the straight-line
method (which approximates the interest method) over the term of the related
financial obligation.
ASSESSMENT OF LONG-LIVED ASSETS
Effective for the year ended December 31, 1995, the Company adopted the
provisions of Statement of Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Accordingly, the Company periodically reviews the carrying value of its
long-lived assets (primarily property and equipment and intangible assets) to
assess the recoverability of these assets; any impairments would be recognized
in operating results if a diminution in value considered to be other than
temporary were to occur. The adoption of this Statement had no impact on the
Company's financial position, results of operations or liquidity. As part of
this assessment, the Company reviews the expected future net operating cash
flows from its facilities, as well as the values included in appraisals of its
facilities, which have periodically been obtained in connection with various
financial arrangements.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with maturities
of three months or less at the date of their acquisition by the Company.
RESTRICTED CASH
Restricted cash consists of cash set aside in escrow accounts as required by
several of the Company's leases and other financing arrangements.
D. OPERATING LEASES
In March 1993, a subsidiary of the Company entered into an agreement with a
non-affiliated entity to lease two long-term care facilities in Ohio with 289
beds for a period of ten years. The lease agreement, which became effective in
June 1993, provides for fixed annual rental payments of $900,000. At the end of
the ten-year period, the Company has the option to acquire the facilities for
$8,500,000, or to pay a $500,000 termination fee and relinquish the operation of
the facilities to the lessor. On the effective date of the lease, the subsidiary
paid $1,200,000 to the lessor for a covenant not-to-compete which remains in
force through June 2003.
Effective October 1, 1994, a subsidiary of the Company entered into an
agreement with a related party to lease a 100 bed long-term care facility in
Florida for a period of ten years. The lease agreement provides for annual
rental payments of $551,250 in the initial twelve-month period and annual
increases of 2% thereafter. The Company has the option to exercise two
consecutive five-year lease renewals. The Company also has the right to purchase
the facility at fair market value at any time after the fifth anniversary of the
commencement of the lease. The lease agreement also required the Company to
escrow funds equal to three months' base rent ($165,000).
36
<PAGE>
D. OPERATING LEASES (cont.)
Effective April 1, 1995, a subsidiary of the Company entered into an agreement
with Meditrust to lease a 100-bed long-term care facility in Ohio for a period
of ten years. The lease agreement provides for annual rental payments of
$698,400 in the initial twelve-month period. The Company is also required to
make additional rental payments beginning April 1, 1996 in an amount equal to
5.0% of the difference between the facility's operating revenues in each
applicable year and the operating revenues in the twelve-month base period which
commenced on April 1, 1995. The annual additional rent payment will not exceed
$14,650. At the end of the initial lease period, the Company has the option to
exercise two consecutive five-year lease renewals. The lease agreement also
required the Company to escrow funds equal to three months' base rent
($152,000). The Company's obligations under the lease are collateralized by,
among other things, an interest in any property improvements made by the Company
and by the facility's accounts receivable. The Company also has the right to
purchase the facility at its fair market value on the eighth and tenth
anniversary dates of the commencement of the lease and at the conclusion of each
lease renewal.
Effective January 1, 1996, a subsidiary of the Company entered into an
agreement with Meditrust to lease the Seven Facilities formerly owned by KYP
(see Note O). The lease agreement provides for annual rental payments of
$4,582,500 in the initial twelve-month period and annual rental increases of
$117,500 for the remainder of the lease term. The lease has an initial term of
ten years with two consecutive five-year renewal terms exercisable at the
Company's option. The lease agreement also required the Company to escrow funds
in an amount equal to three months' base rent ($1,146,000). The Company's
obligations under the lease are collateralized by, among other things, an
interest in any property improvements made by the Company and by the related
facilities' accounts receivable. In conjunction with the lease, the Company was
granted a right of first refusal and an option to purchase the facilities as a
group, which option is exercisable at the end of the eighth year of the initial
term and at the conclusion of each renewal term. The purchase option is
exercisable at the greater of the fair market value of the facilities at the
time of exercise or Meditrust's original investment.
Effective January 1, 1996, a subsidiary of the Company entered into an
agreement with Meditrust to lease six long-term care facilities with a total of
537 licensed beds in New Hampshire. The lease agreement provides for annual
rental payments of $2,324,000 in the initial twelve-month period and annual
rental increases of $64,000 for the remainder of the lease term. The lease has
an initial term of ten years with two consecutive five-year renewal terms
exercisable at the Company's option. The lease agreement also required the
Company to escrow funds in an amount equal to three months' base rent
($581,000). In addition, the lease agreement required the Company to establish a
renovation escrow account in the amount of $560,000 to fund facility renovations
identified in the agreement. The renovation escrow funds are released upon
completion of the required renovations. As of December 31, 1996, $325,000 of
these funds remained in escrow pending completion of the specified renovations.
The Company's obligations under the lease are collateralized by, among other
things, an interest in any property improvements made by the Company and by the
related facilities' accounts receivable. In conjunction with the lease, the
Company was granted a right of first refusal and an option to purchase the
facilities as a group, which is exercisable at the end of the eighth year of the
initial term and at the conclusion of each renewal term. The purchase option is
exercisable at the greater of 90% of the fair market value of the facilities at
the time of exercise or Meditrust's original investment. In connection with this
lease, the Company received a cash payment of $3,685,000 from Meditrust which
was recorded as deferred income and is being amortized over the ten-year initial
lease term as a reduction of rental expense.
The Meditrust leases contain cross-default and cross-collateralization
provisions. A default by the Company under one of these leases could adversely
affect a significant number of the Company's properties and result in a loss to
the Company of such properties. In addition, the leases permit Meditrust to
require the Company to purchase the facilities upon the occurrence of a default.
Under the terms of each of the facility leases described above, the Company is
responsible for the payment of all real estate and personal property taxes, as
well as other reasonable costs required to operate, maintain, insure and repair
the facilities.
Future minimum rent commitments under the Company's non-cancelable operating
leases as of December 31, 1996 are as follows:
1997 $ 9,263,000
1998 9,456,000
1999 9,650,000
2000 9,844,000
2001 10,038,000
Thereafter 38,480,000
-------------
$ 86,731,000
=============
37
<PAGE>
E. LONG-TERM DEBT
In October 1994, certain of the Predecessor Entities refinanced $29,189,000 of
the then outstanding bank debt, and as a result, recorded a loss of $453,000.
This loss included a payment of $384,000 upon the termination of a related
interest rate protection agreement, which was required pursuant to the terms of
the bank debt in order to effectively fix the interest rate on such debt. The
retirement of this debt was financed by the concurrent borrowing of $42,300,000
from Meditrust. Using proceeds from the Offering, on June 14, 1996 the Company
repaid $25,000,000 of this debt, incurring a prepayment penalty of $1,517,000.
Additionally, the Company wrote-off $544,000 of deferred financing costs related
to the retired debt and incurred $100,000 of additional transaction costs. The
loss on this early retirement of debt totaled $2,161,000 and is presented as an
extraordinary loss in the Statement of Operations for the year ended December
31, 1996 net of the related estimated income tax benefit of $843,000. The
Meditrust debt was collateralized by the assets of certain of the Predecessor
Entities (the "Seven S Corporations), and subsequent to the debt paydown, the
remaining debt is cross-collateralized by the assets of four facilities (the
"Four Facilities"). The Meditrust debt bears interest at the annual rate of
10.65%. Additional interest payments are also required commencing on January 1,
1997 in an amount equal to 0.3% of the difference between the operating revenues
of the Four Facilities in each applicable year and the actual operating revenues
of the Four Facilities during a twelve-month base period which commenced October
1, 1995. The Meditrust debt is cross-collateralized by the assets of each of the
Four Facilities. The loan agreement with Meditrust places certain restrictions
on the Four Facilities; among them, the agreement restricts their ability to
incur additional debt or to make significant dispositions of assets. The Four
Facilities are also required to maintain a debt service coverage ratio of at
least 1.2 to 1.0 (as defined in the loan agreement) and a current ratio of at
least 1.0 to 1.0. The Meditrust loan agreement contains a prepayment penalty,
which decreases from 1.5% of the then outstanding balance in the sixth year to
none in the ninth year.
A subsidiary of the Company assumed a first mortgage note (the "Note") with a
remaining balance of $1,775,000 as part of the acquisition of a long-term care
facility in 1988. The Note requires the annual retirement of principal in the
amount of $20,000. The Company pays interest monthly at the rate of 14% per
annum on the outstanding principal amount until maturity in October 2010, when
the remaining unpaid principal balance of $1,338,000 is due. The Note is
collateralized by the property and equipment of the facility.
Interest expense charged to operations for the years ended December 31, 1994,
1995 and 1996 was $5,048,000, $5,830,000, and $5,576,000, respectively.
As of December 31, 1996, future long-term debt maturities associated with the
Company's debt are as follows:
1997 $ 169,000
1998 186,000
1999 205,000
2000 226,000
2001 248,000
Thereafter 17,174,000
-----------
$18,208,000
===========
Approximately $28 million of the Company's assets are subject to liens under
long-term debt or operating lease agreements.
F. CAPITAL LEASE OBLIGATION
On July 1, 1996, a subsidiary of the Company began leasing four long-term care
facilities in Ohio (the "Ohio Facilities"). This transaction is being accounted
for as a capital lease as a result of a bargain purchase option exercisable at
the end of the lease. The initial term of the lease is five years and during the
final six months of the initial term, the Company may exercise an option to
purchase the Ohio Facilities for a total price of $57,125,000. If the Company
exercises the purchase option but is unable to obtain financing for the
acquisition, the lease may be extended for up to two additional years, during
which time the Company must obtain financing and complete the purchase of the
facilities. The annual rent under the agreement is $5,000,000 during the initial
term and $5,500,000 during the extension term. The Company is also responsible
for facility expenses such as taxes, maintenance and repairs. The Company agreed
to pay $8,000,000 for the option to purchase these facilities. Of this amount,
$5,000,000 was paid prior to the closing on July 1, 1996, and the remainder,
$3,000,000, is due at the end of the initial lease term whether or not the
Company exercises its purchase option. The following is a schedule of future
minimum lease payments required by this lease together with the present value of
the minimum lease payments:
1997 $ 5,000,000
1998 5,000,000
1999 5,000,000
2000 5,000,000
2001 57,625,000
----------
77,625,000
----------
Less amount representing interest (20,348,000)
----------
57,277,000
----------
Less current portion ( 3,744,000)
----------
Long-term portion of capital lease obligation $53,533,000
===========
38
<PAGE>
G. INVESTMENT IN LIMITED PARTNERSHIP
In April 1993, a subsidiary of the Company acquired a 75% partnership interest
in Bowie L.P., which developed a 120-bed long-term care facility in Maryland
that commenced operations on May 1, 1994. The remaining 25% interest in Bowie
L.P. is owned by a non-affiliated party. The Company records its investment in
Bowie L.P. using the equity method. Although the Company owns a majority
interest in Bowie L.P., the Company only maintains a 50% voting interest and
accordingly does not exercise control over the operations of Bowie L.P. In
addition, the non-affiliated party has the option to purchase the Company's
partnership interest during the sixty-day period prior to the seventh
anniversary of the facility's opening and each subsequent anniversary
thereafter. If the option is exercised, the purchase price would be equal to the
fair market value of the Company's interest at the date on which the option is
exercised. The Company is entitled to 75% of the facility's net income and
manages this facility in return for a fee equal to 5.5% of the facility's net
revenues (effective September 1995). Prior to this date, the management fee
approximated $10,000 per month. The Company recorded $96,000, $234,000 and
$445,000 in management fees from this management contract for the years ended
December 31, 1994, 1995 and 1996, respectively.
Bowie L.P. obtained a $4,377,000 construction loan from a bank to finance the
construction of the facility. Bowie L.P. also obtained a $1,000,000 line of
credit from the bank to finance pre-opening costs and working capital
requirements. On July 31, 1995, the line of credit converted to a term loan. As
of December 31, 1995 and 1996, Bowie L.P. owed the bank a principal amount of
$5,200,000 and $4,964,000, respectively, on these loans. Interest on the loans
is payable monthly at the bank's prime rate (8.25% at December 31, 1996) plus
1%. These loans limit Bowie L.P.'s ability to borrow additional funds and to
make acquisitions, dispositions and distributions. Additionally, the loans
contain covenants with respect to maintenance of specified levels of net worth,
working capital, occupancy and debt service coverage.
These loans are collateralized by each partner's partnership interest as well
as all of the assets of Bowie L.P. These loans are also guaranteed by a
subsidiary of the Company and additional collateral pledged by the
non-affiliated partner. The Bowie L.P. partnership agreement states that each
partner will contribute an amount in respect of any liability incurred by a
partner in connection with a guarantee of the partnership's debt so that the
partners each bear their proportionate share of the liability based on their
percentage ownership of the partnership.
The results of operations of Bowie L.P. are summarized below:
For the years ended December 31,
--------------------------------
1994 1995 1996
---- ---- ----
Net operating revenues $ 2,523,000 $ 7,595,000 $ 8,104,000
Net operating expenses 2,840,000 7,236,000 7,758,000
Net loss (598,000) (152,000) (351,000)
The financial position of Bowie L.P. was as follows:
As of December 31,
------------------
1995 1996
---- ----
Current assets $2,701,000 $2,511,000
Non-current assets 5,045,000 4,882,000
Current liabilities 2,080,000 2,335,000
Non-current liabilities 4,973,000 4,716,000
Partners' equity 693,000 342,000
On December 28, 1995, the Company advanced $1,255,000 to Bowie L.P. to support
additional facility working capital requirements by means of a demand note
bearing interest at 9.0% per annum which accrued throughout 1996.
H. PROPERTY AND EQUIPMENT
The Company's property and equipment are stated at cost and consist of the
following as of December 31:
1995 1996
---- ----
Land $ 2,994,000 $ 2,994,000
Land improvements 2,874,000 3,077,000
Leasehold improvements 450,000 2,371,000
Buildings and improvements 28,257,000 28,764,000
Equipment, furnishings and fixtures 5,872,000 7,835,000
Assets under capital lease -- 63,125,000
------------ ------------
40,447,000 108,166,000
Less accumulated depreciation 10,308,000 12,979,000
------------ ------------
$ 30,139,000 $ 95,187,000
============ ============
39
<PAGE>
I. INTANGIBLE ASSETS
Intangible assets are stated at cost and consist of the following as of
December 31:
1995 1996
---- ----
Patient lists $1,459,000 $1,459,000
Assembled workforce 930,000 930,000
Covenant not to compete 1,838,000 1,838,000
Organization costs 256,000 256,000
Deferred financing costs 2,157,000 2,563,000
---------- ----------
6,640,000 7,046,000
Less accumulated amortization 3,590,000 4,042,000
---------- ----------
$3,050,000 $3,004,000
========== ==========
J. RETIREMENT PLANS
The Company maintains an employee 401(k) defined contribution plan. All
employees who have worked at least one thousand hours and have completed one
year of continuous service are eligible to participate in the plan. The plan is
subject to the provisions of the Employee Retirement Income Security Act of
1974. Employee contributions to this plan may be matched at the discretion of
the Company. The Company contributed $86,000, $120,000 and $180,000 to the plan
in 1994, 1995 and 1996, respectively.
During September 1995, the Company established a Supplemental Executive
Retirement Plan (the "SERP") to provide benefits to key employees. Participants
may defer up to 25% of their compensation which is matched by the Company at a
rate of 50% (up to 10% of base salary). Vesting in the matching portion occurs
in January of the second year following the plan year in which contributions
were made.
K. CONTINGENCIES
The Company is involved in legal actions and claims in the ordinary course of
its business. It is the opinion of management, based on the advice of legal
counsel, that such litigation and claims will be resolved without material
effect on the Company's consolidated financial position, results of operations
or liquidity.
Beginning in 1994, the Company self-insures for health benefits provided to a
majority of its employees. The Company maintains stop-loss insurance such that
the Company's liability for losses is limited. The Company recognizes an expense
for estimated health benefit claims incurred but not reported at the end of each
year.
Beginning in 1995, the Company self-insures for most workers' compensation
claims. The Company maintains stop-loss insurance such that the Company's
liability for losses is limited. The Company accrues for estimated workers'
compensation claims incurred but not reported at the end of each year.
L. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of each class of
financial instruments, for those instruments for which it is practicable to
estimate that value, and the estimated fair values of the financial instruments
are as follows:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short effective
maturity of these instruments.
LONG-TERM DEBT
The fair value of the Company's long-term debt is estimated based on the
current rates offered to the Company for similar debt. The carrying value of the
Company's long-term debt approximates its fair value as of December 31, 1995 and
1996.
40
<PAGE>
M. INCOME TAXES
PRO FORMA INCOME TAXES (Unaudited)
The financial statements of the Company for the periods prior to the
Reorganization do not include a provision for income taxes because the
Predecessor Entities (primarily partnerships and subchapter S corporations) were
not directly subject to Federal or state taxation. For financial reporting
purposes, for the years ended December 31, 1994, 1995 and 1996, a pro forma
provision for income taxes has been reflected in the accompanying statements of
operations based on taxable income for financial statement purposes and an
estimated effective Federal and state income tax rate of 39% which would have
resulted if the Predecessor Entities had filed corporate income tax returns
during those years.
Effective with the Reorganization described in Note B, the Company became
subject to Federal and state income taxes. The historical provision for income
taxes reflects the recording of a one-time Federal and state income tax benefit
of $1,400,000 upon the change in the tax status of the entity as required by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes".
Significant components of the Company's deferred tax assets as of December 31,
1996 are as follows:
Total
Deferred Tax Assets:
Reserves $1,144,000
Rental payments 358,000
Interest payments 376,000
Other 78,000
------
Total deferred tax assets $1,956,000
==========
Significant components of the provision for income taxes for the year ended
December 31,1996 are as follows:
Current:
Federal $2,229,000
State 536,000
-------
Total current 2,765,000
---------
Deferred:
Federal (1,648,000)
State (308,000)
--------
Total deferred (1,956,000)
----------
Total income tax expense $809,000
========
The reconciliation of income tax computed at statutory rates to income tax
expense for the year ended December 31,1996 is as follows:
Statutory rate $ 1,699,000 35.0%
State income tax, net of federal benefit 148,000 3.1
Permanent differences 100,000 2.1
Deferred tax asset resulting from change
in tax status (1,256,000) (25.9)
Other 118,000 2.4
----------- ------
$ 809,000 16.7%
=========== ======
41
<PAGE>
N. CAPITAL STOCK
COMMON STOCK
On June 14, 1996, the Company completed its initial public offering (the
"Offering"). Through the Offering the Company issued 3,600,000 shares at $11.75
per share resulting in net proceeds to the Company (after deducting
underwriters' commissions and other offering expenses) of approximately
$37,160,000. A portion of the proceeds was used to repay some of the Company's
long-term debt (see Note E) and the remainder to fund acquisitions.
SPECIAL COMPENSATION
The Predecessor Entities maintained an executive long-term incentive plan (the
"Executive Plan") which granted an economic interest in the appreciation of the
Predecessor Entities above a baseline valuation of $23,000,000 to certain senior
level management personnel upon the successful completion of an initial public
offering at a minimum retained equity valuation above $43,000,000. A pool of
three percent of the retained equity above $23,000,000 was reserved and
allocated to the eligible recipients. In June, 1996, subsequent to the Offering,
payments totaling $861,000 were made to the personnel who participated in the
Executive Plan and that plan was terminated. Additionally, the Company made a
bonus payment in the form of common stock valued at $225,000 to an officer of
the Company in connection with his employment agreement. These expenses are
included in the Statement of Operations for the year ended December 31, 1996, in
the line "Special Compensation and Other."
On December 31, 1995, certain of the Predecessor Entities (the " S
Corporations") issued a 6% equity interest in the S Corporations to the
president of the Company amounting to $438,000 and a 5% equity interest in the S
Corporations to the president of an affiliate amounting to $365,000. The
issuance amounts represented the fair market value of these interests at the
date of issuance based on an independent appraisal obtained by the Company.
Payment for the issuance of these shares was due within 90 days; and
accordingly, the amounts receivable from these individuals were reflected as a
contra-equity subscription receivable with no net increase to stockholders'
equity at December 31, 1995. Subsequent to year-end and in connection with the
execution of the 1996 employment agreement of the Company's president, the
Company granted a special bonus to the president equal to the cost of the shares
issued. This expense is included in the Statement of Operations for the year
ended December 31, 1996 in the line "Special Compensation and Other."
In February 1996, one of the Predecessor Entities, Harborside Healthcare
Limited Partnership ("HHLP"), granted an option to purchase a 1.36% limited
partnership interest in HHLP to each of two members of senior management. The
exercise price per percentage limited partnership interest under each such
option was $239,525 per percentage interest, which represented the fair market
value of a 1% limited partnership interest in HHLP at the date of grant based on
an independent appraisal obtained by the Company. The options vested in equal
one-third portions on each anniversary of the date of grant over a three-year
period and expired ten years from the date of grant. With the completion of the
Offering, the option grants in HHLP were converted on a pro rata basis to
options to acquire shares of the Company's common stock.
STOCK OPTION PLANS
During 1996, the Company established two stock option plans, the 1996 Stock
Option Plan for Non-employee Directors (the "Director Plan") and the 1996
Long-Term Stock Incentive Plan (the "Stock Plan"). Directors of the Company who
are not employees, or affiliates of the Company, are eligible to participate in
the Director Plan. On the date of the Offering, each of the four non-employee
directors was granted options to acquire 15,000 shares of the Company's common
stock at the Offering price. On January 1 of each year, each non-employee
director will receive an additional grant for 3,500 shares at the fair market
value on the date of grant. Through the Directors Retainer Fee Plan,
non-employee directors of the Company may also elect to receive all or a portion
of their director fees in shares of the Company's common stock. The Stock Plan
is administered by the Stock Plan Committee of the Board of Directors which is
composed of outside directors who are not eligible to participate in this plan.
The Stock Plan authorizes the issuance of non-qualified stock options, incentive
stock options, stock appreciation rights, restricted stock and other stock-based
awards. Options granted during the year ended December 31, 1996, were granted
with exercise prices equal to or greater than the fair market value of the stock
on the date of grant. Options granted during 1996 vest over a three-year period
and have a maximum term of ten years. A maximum of 800,000 shares of common
stock have been reserved for issuance in connection with these plans.
Information with respect to options granted under these stock option plans is as
follows:
Options Outstanding
<TABLE>
<CAPTION>
Number Exercise Price Weighted-Average
of Shares Per Share Exercise Price
--------- --------- --------------
<S> <C> <C> <C>
Balance at December 31, 1995 -- -- --
Granted 523,000 $8.15 - $11.75 $11.16
Cancelled ( 24,000) $11.75 $11.75
--------
Balance at December 31, 1996 499,000 $8.15 - $11.75 $11.14
=======
</TABLE>
42
<PAGE>
N. CAPITAL STOCK (cont.)
As of December 31, 1996, no options to purchase shares of the Company's common
stock were exercisable.
In 1996, the Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation", ("SFAS No. 123"). SFAS No. 123
requires that companies either recognize compensation expense for grants of
stock, stock options, and other equity instruments based on fair value, or
provide pro forma disclosure of net income and earnings per share in the notes
to the financial statements. The Company has adopted the disclosure provisions
of SFAS No. 123, and has applied Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock option plans. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS No. 123, the Company's unaudited pro forma net income and
pro forma net income per share for the year ended December 31, 1996, would have
been reduced to the amounts indicated below:
Pro Forma
Pro Forma Net Income
Net Income Per Share
---------- ---------
As
Reported $2,712,000 $ 0.42
Pro
forma $2,372,000 $ 0.37
The fair value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: an expected life of five years, expected volatility of 40%, no
dividend yield, and a risk-free interest rate of 6.5%. The weighted average
grant date fair value of options granted during 1996 was $4.72.
O. GAIN ON SALE OF FACILITIES, NET
As discussed in Note B, in December 1995, KYP sold seven facilities to
Meditrust (the "Sale") for $47,000,000. The Sale was effective December 31,
1995, and a net gain of $4,869,000 was recorded.
A portion of the proceeds of the Sale was used by KYP to repay the outstanding
balance of its Medium-Term Notes ($9,409,000), a related prepayment penalty
($1,154,000) and transaction costs ($884,000). The original principal amount of
the Medium-Term Notes was $6,000,000 and interest on this obligation accrued at
10.55% per annum through June 30, 1993. Commencing December 31, 1993, KYP began
making semiannual interest payments on the original principal and the accrued
interest. The principal and all deferred interest were scheduled to be repaid in
June 1998. As a result of the early retirement of this debt, the Company
recorded a loss of $1,502,000, which was netted against the gain on the sale of
the KYP facilities.
The terms of the KYP partnership agreement specified that one of the
Predecessor Entities which served as KYP's general partner would not share in
the gain associated with the sale of the facilities; as such, the entire amount
of the net gain was allocated to the Unitholders, and was included in the
minority interest reflected in the Statement of Operations for the year ended
December 31, 1995.
The determination of the net gain included the recognition of an estimated
liability of approximately $3,000,000 to Medicare and certain states' Medicaid
programs. This amount is included with other estimated settlements due to/from
third-party payors as a component of accounts receivable. Under existing
regulations, KYP is required to repay these programs for certain depreciation
expense recorded by the KYP facilities and for which they received reimbursement
prior to the sale. Any payments assessed by these programs to settle these
obligations in excess of the funds withheld from the proceeds of the sale of the
facilities will be the responsibility of the Company without any recourse to the
Unitholders. However, if the ultimate settlement of these obligations results in
a net amount due to KYP, this amount would be distributed to the Unitholders.
The Sale provided for the dissolution of KYP and the distribution of the net
proceeds of the Sale to the Unitholders, which occurred in March 1996. The
Company's balance sheet as of December 31, 1995 included the cash to be
distributed to the Unitholders as well as the related distribution payable of
$33,493,000.
P. FACILITY ACQUISITION DEPOSITS
At December 31, 1995, Company funds in the amount of $3,000,000 were held in
escrow in connection with the acquisition of long-term care facilities. Of this
amount, $1,000,000 was refunded in January 1996 in conjunction with the
acquisition of six facilities. The remaining $2,000,000 related to the purchase
of a separate group of facilities, for which negotiations were terminated and
the deposit was returned in March 1996 (see Note Q).
43
<PAGE>
Q. RELATED PARTY TRANSACTIONS
An affiliate of the Company provides office space, legal, tax, data processing
and other administrative services to the Company in return for a monthly fee.
Total service charges under this arrangement were $759,000, $700,000 and
$700,000 for the years ended December 31, 1994, 1995 and 1996, respectively. As
of December 31, 1995 and 1996, the Company owed the affiliate $178,000 and $0,
respectively for these and other related services. Also, on December 28, 1995,
the affiliate advanced $2,000,000 to the Company to make an acquisition deposit
on a group of long-term care facilities. The advance was repaid in March 1996
(see Note P).
R. RECENT ACQUISITIONS
The following unaudited pro forma financial information gives effect to the
acquisition of the Seven Facilities, the New Hampshire Facilities, and the Ohio
Facilities as if they had occurred on January 1, 1995. The pro forma financial
results are not necessarily indicative of the actual results of operations which
might have occurred or of the results of operations which may occur in the
future.
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1995 1996
---- ----
(Unaudited)
<S> <C> <C>
Total net revenues $163,698,000 $181,704,000
Income before income taxes and extraordinary loss 3,351,000 4,910,000
Pro forma income before extraordinary loss 2,044,000 4,079,000
Pro forma net income 2,044,000 2,761,000
Pro forma net income per common share using
4,425,000 and 6,396,142 common and
common equivalent shares, respectively $ 0.46 $ 0.43
</TABLE>
44
<PAGE>
S. SUMMARY QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The Company's unaudited quarterly financial information follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------
First Second Third Fourth
Quarter Quarter Quarter (1) Quarter (1)
------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Total net revenues $ 34,931,000 $ 36,872,000 $ 45,903,000 $ 47,706,000
Income from operations 1,307,000 846,000(2) 3,655,000 3,918,000
Income (loss) before
income taxes and
extraordinary loss 205,000 (229,000) 2,312,000 2,541,000
Income taxes (benefit) -- (400,000) 902,000 307,000
Income before
extraordinary loss 205,000 171,000 1,410,000 2,234,000
Extraordinary loss -- (1,318,000)(3) -- --
Net income (loss) 205,000 (1,147,000) 1,410,000 2,234,000
Net income per share $ 0.18 $ 0.28
Pro forma income taxes
(benefit) 80,000 (489,000)
Pro forma income before
extraordinary loss 125,000 260,000
Pro forma net income (loss) 125,000 (1,058,000)
Pro forma net income
before extraordinary loss
per share $ 0.03 $ 0.05
Pro forma net income (loss)
per share $ 0.03 $ (0.21)
<CAPTION>
Year Ended December 31, 1995
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Total net revenues $ 23,777,000 $ 26,737,000 $ 28,515,000 $ 30,396,000
Income from operations 1,290,000 1,671,000 2,123,000 2,895,000
Net income (loss) (240,000) 253,000 297,000 924,000
Pro forma income taxes
(benefit) (94,000) 99,000 116,000 360,000
Pro forma net income (loss) (146,000) 154,000 181,000 564,000
Pro forma net income (loss)
per share $ (0.03) $ 0.03 $ 0.04 $ 0.13
</TABLE>
(1) Includes the results of the Ohio Facilities acquired on July 1, 1996 (see
Note F).
(2) Includes $1,716,000 of special compensation and other expenses incurred
primarily as a result of the Offering (see Note N).
(3) A portion of the proceeds of the Offering was used to repay long-term debt
in June 1996. The resulting loss on early retirement of debt is
presented as an extraordinary loss net of related estimated tax benefit
(see Note E).
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held on May 14, 1997, to be filed
with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held on May 14, 1997, to be filed
with the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held on May 14, 1997, to be filed
with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held on May 14, 1997, to be filed
with the Securities and Exchange Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
See Index to Consolidated Financial Statements in Item 8 of this annual report.
2. Financial Statement Schedules:
None.
46
<PAGE>
3. Exhibits
The exhibits listed in the accompanying index to exhibits are incorporated by
reference herein or are filed as part of this annual report.
Exhibit
Number Description of Document
- ------ -----------------------
2.1* Reorganization Agreement, dated as of May 15, 1996, by and among
Harborside Healthcare Corporation, The Berkshire Companies Limited
Partnership, Krupp Enterprises Limited Partnership, The Douglas
Krupp 1994 Family Trust, The George Krupp 1994 Family Trust,
Laurence Gerber, Stephen L. Guillard and
Damian Dell'Anno.
3.1** Amended and Restated Certificate of incorporation of the Company.
3.2** Amended and Restated By-laws of the Company.
4.1* Form of Specimen Common Stock certificate.
4.2 Letter from the Company to the Commission agreeing to file certain
debt instruments.
10.1(a)* Facility lease Agreement, dated as of December 31, 1995 between
Meditrust Tri-States, Inc. and HHCI Limited Partnership (New Haven
Facility).
10.1(b)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust Tri-States, Inc. and HHCI Limited Partnership
(Indianapolis Facility).
10.1(c)* Facility Lease Agreement, dated as of December 31, 1995 between
Meditrust of Ohio, Inc. and HHCI Limited Partnership (Troy
Facility).
10.1(d)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust of Florida, Inc. and HHCI Limited Partnership (Sarasota
Facility).
10.1(e)* Facility Lease Agreement, dated as of December 31, 1995 between
Meditrust of Florida, Inc. and HHCI Limited Partnership (Pinebrook
Facility).
10.1(f)* Facility Lease Agreement, dated as of December 31, 1995 between
Meditrust of Florida, Inc. and HHCI Limited Partnership (Naples
Facility).
10.1(g)* Facility Lease Agreement, dated as of December 31, 1995 between
Meditrust of New Jersey, Inc. and HHCI Limited Partnership (Woods
Edge Facility).
10.1(h)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust Tri-States, Inc. and HHCI Limited
Partnership (New Haven Facility).
10.1(i)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust Tri-States, Inc. and HHCI Limited
Partnership (Indianapolis Facility).
10.1(j)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of Ohio, Inc. and HHCI Limited
Partnership (Troy Facility).
10.1(k)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by ad between Meditrust of Florida, Inc. and HHCI Limited
Partnership (Sarasota Facility).
10.1(l)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of Florida, Inc. and HHCI Limited
Partnership (Pinebrook Facility).
47
<PAGE>
10.1(m)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of Florida, Inc. and HHCI Limited
Partnership (Naples Facility).
10.1(n)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Jersey, Inc. and HHCI Limited
Partnership (Woods Edge Facility).
10.2(a)* Loan Agreement among Meditrust Mortgage Investments, Inc. and Bay
Tree Nursing Center Corporation, Belmont Nursing Center Corporation,
Countryside Care Center Corporation, Oakhurst Manor Nursing Center
Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point
Nursing Center Corporation, West Bay Nursing Center Corporation and
Harborside Healthcare Limited Partnership, dated October 13, 1994.
10.2(b)* Guaranty, dated October 14, 1994, to Meditrust Mortgage Investments,
Inc. from Harborside Healthcare Limited Partnership.
10.2(c)* Environmental Indemnity Agreement, dated October 13, 1994, by and
among Bay Tree Nursing Center Corporation, Belmont Nursing Center
Corporation, Countryside Care Center Corporation, Oakhurst Manor
Nursing Center Corporation, Orchard Ridge Nursing Center
Corporation, Sunset Point Nursing Center Corporation, West Bay
Nursing Center Corporation and Harborside Healthcare Limited
Partnership and Meditrust Mortgage Investments, Inc.
10.2(d)* Consolidated and Renewal Promissory Note, dated October 13, 1994,
from Bay Tree Nursing Center Corporation, Belmont Nursing Center
Corporation, Countryside Care Center Corporation, Oakhurst Manor
Nursing Center Corporation, Orchard Ridge Nursing Center
Corporation, Sunset Point Nursing Center Corporation, West Bay
Nursing Center Corporation to Meditrust Mortgage Investments, Inc.
10.2(e)* Negative Pledge Agreement, dated October 13, 1994, by and among
Douglas Krupp, George Krupp, Bay Tree Nursing Center Corporation,
Belmont Nursing Center Corporation, Countryside Care Center
Corporation, Oakhurst Manor Nursing Center Corporation, Orchard
Ridge Nursing Center Corporation, Sunset Point Nursing Center
Corporation, West Bay Nursing Center Corporation and Meditrust
Mortgage Investments, Inc.
10.2(f)* Affiliated Party Subordination Agreement, dated October 13, 1994, by
and among Bay Tree Nursing Center Corporation, Belmont Nursing
Center Corporation, Countryside Care Center Corporation, Oakhurst
Manor Nursing Center Corporation, Orchard Ridge Nursing Center
Corporation, Sunset Point Nursing Center Corporation, West Bay
Nursing Center Corporation, Harborside Healthcare Limited
Partnership, Harborside Rehabilitation Limited Partnership and
Meditrust Mortgage Investments, Inc.
10.2(g)* First Amendment to Loan Agreement, dated May 17, 1996 by and among
Meditrust Mortgage Investments, Inc. and Bay Tree Nursing Center
Corporation, Belmont Nursing Center Corporation, Countryside Care
Center Corporation, Oakhurst Manor Nursing Center Corporation,
Orchard Ridge Nursing Center Corporation, Sunset Point Nursing
Center Corporation, West Bay Nursing Center Corporation and
Harborside Healthcare Limited Partnership.
10.3(a)* Facility lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire Inc. and Harborside New Hampshire Limited
Partnership (Westwood Facility).
10.3(b)* Facility Lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire, Inc. and Harborside New Hampshire
Limited Partnership (Pheasant Wood Facility).
10.3(c)* Facility Lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire, Inc. and Harborside New Hampshire
Limited Partnership (Crestwood Facility).
48
<PAGE>
10.3(d)* Facility Lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire, Inc. and Harborside New Hampshire
Limited Partnership (Milford Facility).
10.3(e)* Facility Lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire, Inc. and Harborside New Hampshire
Limited Partnership (Applewood Facility).
10.3(f)* Facility Lease Agreement, dated as of December 31, 1996 between
Meditrust of Bedford, Inc. and Harborside New Hampshire Limited
Partnership (Northwood Facility).
10.3(g)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and Harborside
New Hampshire Limited Partnership (Westwood Facility).
10.3(h)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and Harborside
New Hampshire Limited Partnership (Pheasant Wood Facility).
10.3(i)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and Harborside
New Hampshire Limited Partnership (Crestwood Facility).
10.3(j)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and Harborside
New Hampshire Limited Partnership (Milford Facility).
10.3(k)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and Harborside
New Hampshire Limited Partnership (Applewood Facility).
10.3(l)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of Bedford, Inc. and Harborside New
Hampshire Limited Partnership (Northwood Facility).
10.4(a)* Facility Lease Agreement, dated as of March 31, 1995 between
Meditrust of Ohio, Inc. and Harborside of Toledo Limited Partnership
(Swanton Facility).
10.4(b)* First Amendment of Facility Lease Agreement, dated as of December
31, 1995, by and between Harborside Toledo Limited Partnership and
Meditrust of Ohio, Inc. (Swanton Facility).
10.4(c)* Second Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of Ohio , Inc. and Harborside Toledo
Limited Partnership (Swanton Facility).
10.5* Amended and Restated Agreement of Limited Partnership of Bowie
Center Limited Partnership, dated April 7, 1993.
10.6* Agreement of Lease, dated March 16, 1993, between Bryan Nursing
Home, Inc. and Harborside of Ohio Limited Partnership (Defiance and
Northwestern Ohio Facilities).
10.7* First Amendment to Agreement of Lease, dated June 1, 1993, by and
between Bryan Nursing Home, Inc. and Harborside Ohio Limited
Partnership.
10.8* Option to Purchase Agreement, dated March 16, 1993, by and between
Bryan Nursing Home, Inc. And Harborside Ohio Limited Partnership.
49
<PAGE>
10.9(a)* Lease, dated September 30, 1994, between Rockledge T. Limited
Partnership and Harborside of Florida Limited Partnership (Brevard
Facility).
10.9(b)* Lease Guaranty, dated September 30, 1994, to Rockledge T. Limited
Partnership from Harborside Healthcare Limited Partnership.
10.9(c)* Indemnity Agreement, dated September 30, 1994, between Rockledge T.
Limited Partnership, Harborside of Florida Limited Partnership,
Harborside Healthcare Limited Partnership and Southtrust Bank of
Alabama.
10.9(d)* Assignment and Security Agreement, dated September 30, 1994, between
Rockledge T. Limited Partnership, Harborside of Florida Limited
Partnership and Southtrust Bank of Alabama.
10.9(e)* Subordination Agreement (Lease), dated September 30, 1994, by and
among Rockledge T. Limited Partnership, Harborside of Florida
Limited Partnership, Harborside Healthcare Limited Partnership and
Southtrust Bank of Alabama.
10.9(f)* Subordination Agreement (Management), dated September 30, 1994, by
and among Rockledge T. Limited Partnership, Harborside of Florida
Limited Partnership, Harborside Healthcare Limited Partnership and
Southtrust Bank of Alabama.
10.10(a)* Form of Employment Agreement between the Company and Stephen L.
Guillard.
10.10(b)* Form of Employment Agreement between the Company and Damian
Dell'Anno.
10.10(c)* Form of Employment Agreement between the Company and Bruce
Beardsley.
10.10(d)* Form of Employment Agreement between the Company and William
Stephan.
10.11* Form of 1996 Stock Option Plan for Non-Employee Directors.
10.12(a)* Form of 1996 Long-Term Stock Incentive Plan.
10.12(b)* Form of Nonqualified Stock Option Agreement.
10.13* Retirement Savings Plan of the Company.
10.14* Supplemental Executive Retirement Plan of the Company.
10.15* Form of Administrative Services Agreement between the Company and
Berkshire.
10.16* Agreement to Lease, dated as of May 3, 1996 among Westbay Manor
Company, Westbay Manor II Development Company, Royal View Manor
Development Company, Beachwood Care Center Limited Partnership,
Royalview Manor Company, Harborside Health I Corporation and
Harborside Healthcare Limited Partnership.
10.17* Form of Directors Retainer Fee Plan.
10.18* Form of Guaranty by Harborside Healthcare Corporation in favor of
Westbay Manor Company, Westbay Manor II Development Company,
Royalview Manor Development Company and Beachwood Care Center
Limited Partnership.
21.1 Subsidiaries of the Company.
50
<PAGE>
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule.
- --------------------
* Incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration No. 333-3096).
** Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996 (File No. 01-14358).
(b) The Company did not file any reports on Form 8-K during the last quarter of
of the Company's fiscal year ended December 31, 1996.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to signed on
its behalf by the undersigned, thereunto duly authorized, on the 31st day of
March, 1997.
HARBORSIDE HEALTHCARE
CORPORATION
By /s/ Stephen L. Guillard
-----------------------------------------
Chairman of the Board,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated
- -----------------------
Robert T. Barnum Director
- -----------------------
David F. Benson Director
/s/ Robert M. Bretholtz
- -----------------------
Robert M. Bretholtz Director
- -----------------------
Sally W. Crawford Director
/s/ Laurence Gerber
- -----------------------
Laurence Gerber Director
/s/ Stephen L. Guillard
- -----------------------
Stephen L. Guillard President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Douglas Krupp
- -----------------------
Douglas Krupp Director
/s/ William H. Stephan
- -----------------------
William H. Stephan Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
52
Exhibit 4.2
Harborside Healthcare Corporation
470 Atlantic Avenue
Boston, MA 02210
March 28, 1997
Securities and Exchange Commission
450 Fifth Avenue, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
In accordance with Item 601(b)(4)(iii) of Regulation S-K, Harborside
Healthcare Corporation (the "Company") has not filed herewith any instrument
with respect to long term debt not being registered where the total number of
securities authorized thereunder does not exceed ten percent (10%) of the total
assets of the Company and its subsidiaries on a consolidated basis. The Company
hereby agrees to furnish a copy of any such agreement to the Securities and
Exchange Commission upon request.
Very truly yours,
HARBORSIDE HEALTHCARE CORPORATION
By: /S/ William H. Stephan
-------------------------------------
Chief Financial Officer
Exhibit 22.1
Subsidiaries of Harborside Healthcare Corporation as of December 31, 1996
<TABLE>
<CAPTION>
Jurisdiction of
Incorporation or
Name Organization Doing Business As
---- ------------ -----------------
<S> <C> <C>
1. Bay Tree Nursing Center Corporation Massachusetts Harborside Healthcare-Palm Habor
2. Belmont Nursing Center Corporation Massachusetts Harborside Healthcare-Toledo
3. Bowie Center Limited Partnership Maryland Larkin Chase Nursing and Restoration
Center
4. Countryside Care Center Corporation Massachusetts Harborside Healthcare-Terre Haute
5. Harborside of Cleveland Limited Partnership Massachusetts Harborside Healthcare- Beachwood
Rehabilitation and Nursing Center
Harborside Healthcare- Broadview
Heights Rehabilitation and Nursing
Center
Harborside Healthcare- Westlake I
Rehabilitation and Nursing Center
Harborside Healthcare- Westlake II
Rehabilitation and Nursing Center
6. Harborside of Florida Limited Partnership Florida Harborside Healthcare- Brevard
7. Harborside of Ohio Limited Partnership Massachusetts Harborside Healthcare- Northwest Ohio
Harborside Healthcare- Defiance
8. Harborside Funding Limited Partnership Massachusetts
9. Harborside Health I Corporation Delaware Harborside Nursing Homes, Inc.
10. Harborside Healthcare Advisors Massachusetts
Limited Partnership
11. Harborside Healthcare Limited Massachusetts Allicor
Partnership Harborside Healthcare Management
Limited Partnership
12. Harborside Healthcare Network Florida
Limited Partnership
13. Harborside Homecare Limited Massachusetts Behavioral Health Care
Partnership
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
14. Harborside New Hampshire Massachusetts Harborside Nursing Facilities Limited
Limited Partnership Partnership
Harborside Healthcare- Applewood
Rehabilitation and Nursing Center
Harborside Healthcare- Crestwood
Rehabilitation and Nursing Center
Harborside Healthcare- Milford
Rehabilitation and Nursing Center
Harborside Healthcare- Northwood
Rehabilitation and Nursing Center
Harborside Healthcare- Pheasantwood
Rehabilitation and Nursing Center
Harborside Healthcare- Westwood
Rehabiliation and Nursing Center
15. Harborside Rehabiliation Limited Massachusetts Theracor Rehabilitation Services
Partnership
16. Harborside Toledo Corporation Massachusetts
17. Harborside Toledo Limited Partnership Massachusetts Harborside Healthcare- Swanton
18. HHCI Limited Partnership Massachusetts Harborside Healthcare- Naples
Harborside Healthcare- Sarasota
Harborside Healthcare- Pinebrook
Harborside Healthcare- New Haven
Harborside Healthcare- Woods Edge
Harborside Healthcare- Indianapolis
Harborside Healthcare- Troy
19. KHI Corporation Delaware
20. Maryland Harborside Corporation Massachusetts
21. Oakhurst Manor Nursing Center Massachusetts Harborside Healthcare- Ocala
Corporation
22. Orchard Ridge Nursing Center Massachusetts Harborside Healthcare- Gulf Coast
Corporation
23. Riverside Retirement Limited Partnership Massachusetts Harborside Healthcare- Decatur
24. Sunset Point Nursing Center Corporation Massachusetts Harborside Healthcare- Clearwater
25. West Bay Nursing Center Corporation Massachusetts Harborside Healthcare- Tampa Bay
</TABLE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement on
Form S-8 (Registration No. 333-10571) of our report dated February 10, 1997, on
our audits of the consolidated financial statements of Harborside Healthcare
Corporation and subsidiaries (the "Company") as of December 31, 1996 and 1995,
and for the three years in the period ended December 31, 1996, which report is
included in this Annual Report on Form 10-K.
/S/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 28, 1997
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,722
<SECURITIES> 0
<RECEIVABLES> 22,984
<ALLOWANCES> 0
<INVENTORY> 13,906<F1>
<CURRENT-ASSETS> 39,225
<PP&E> 95,187
<DEPRECIATION> 0
<TOTAL-ASSETS> 141,799
<CURRENT-LIABILITIES> 22,399
<BONDS> 74,520<F2>
0
0
<COMMON> 80
<OTHER-SE> 44,800<F3>
<TOTAL-LIABILITY-AND-EQUITY> 141,799
<SALES> 0
<TOTAL-REVENUES> 165,412
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 155,686
<LOSS-PROVISION> 263<F4>
<INTEREST-EXPENSE> 4,634
<INCOME-PRETAX> 4,829
<INCOME-TAX> (809)
<INCOME-CONTINUING> 4,020
<DISCONTINUED> 0
<EXTRAORDINARY> (1,318)
<CHANGES> 0
<NET-INCOME> 2,702
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.42
<FN>
<F1>Includes the following assets: prepaid expenses and other of $3,570, demand note of $1,369, deferred income
taxes--current of $1,580, deferred income taxes--long-term of $376, restricted cash of $3,751, investment in limited
partnership of $256, and intangible assets, net of $3,004.
<F2>Includes the following long-term liabilities: deferred income of $2,948, capital lease obligation of $53,533,
and long-term debt of $18,039.
<F3>Includes the following equity accounts: additional paid-in capital of $48,340 and accumulated deficit of
$(3,540).
<F4>Includes loss on investment in limited partnership of $263.
</FN>
</TABLE>
