UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [X]
For the quarterly period ended March 31, 1998
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
HARBORSIDE HEALTHCARE CORPORATION
Delaware 04-3307188
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
470 Atlantic Avenue, Boston, Massachusetts 02210
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(Address of principal executive offices) (Zip Code)
(617) 556-1515
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
Number of shares of common stock, par value $0.01 per share outstanding as of
May 7, 1998: 8,010,664.
<PAGE>
TABLE OF CONTENTS
Part I. Financial Information Page
----
Condensed Consolidated Balance Sheets December 31, 1997 and
March 31, 1998................................................... 1
Condensed Consolidated Statements of Operations For the
Three Months Ended March 31, 1997 and 1998....................... 2
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the Three Months Ended March 31, 1998................. 3
Condensed Consolidated Statements of Cash Flows For the
Three Months Ended March 31, 1997 and 1998....................... 4
Notes to Condensed Consolidated Financial Statements............. 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 7
Part II. Other Information................................................ 12
Signatures....................................................... 14
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
----------------
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(Unaudited)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 8,747 $ 2,180
Account receivable, net of allowances for doubtful
accounts of $1,871 and $2,903, respectively 32,416 39,286
Prepaid expenses and other 6,644 6,590
Prepaid income taxes - 757
Deferred income taxes 2,150 2,150
------------ ------------
Total current assets 49,957 50,963
Restricted cash 5,545 5,782
Investment in limited partnership 67 36
Property and equipment, net 96,872 99,361
Intangible assets, net 8,563 8,741
Note receivable 7,487 7,487
Deferred income taxes 71 71
------------ ------------
Total assets $ 168,562 $ 172,441
============ ============
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 186 $ 199
Current portion of capital lease obligation 3,924 4,123
Accounts payable 7,275 5,868
Employee compensation and benefits 10,741 14,231
Other accrued liabilities 4,417 4,510
Accrued interest 251 246
Current portion of deferred income 609 609
------------ -----------
Total current liabilities 27,403 29,786
Long-term portion of deferred income 3,559 3,431
Long-term debt 33,456 33,396
Long-term portion of capital lease obligation 52,361 52,147
------------ -----------
Total liabilities 116,779 118,760
============ ===========
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 30,000,000 shares
authorized, 8,008,665 and 8,010,664 shares issued
and outstanding, respectively 80 80
Additional paid-in capital 48,440 48,463
Retained earnings 3,263 5,138
------------ ------------
Total stockholders' equity 51,783 53,681
------------ ------------
Total liabilities and stockholders' equity $ 168,562 $ 172,441
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
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HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
--------------------
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1998
---- ----
Total net revenues $ 47,384 $ 72,454
--------- --------
Expenses:
Facility operating 37,452 57,381
General and administrative 2,389 3,365
Service charges paid to affiliate 177 313
Depreciation and amortization 922 1,085
Facility rent 2,622 5,556
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Total expenses 43,562 67,700
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Income from operations 3,822 4,754
Other:
Interest expense, net 1,392 1,650
Loss (income) on investment in limited partnership (31) 31
--------- --------
Income before income taxes 2,461 3,073
Income taxes 959 1,198
--------- --------
Net income $ 1,502 $ 1,875
========= ========
Net income per share - basic $ 0.19 $ 0.23
========= ========
Net income per share - diluted $ 0.19 $ 0.23
========= ========
Weighted average number of common shares used in
per share computation
Basic 8,025,000 8,059,000
Diluted 8,028,000 8,304,000
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
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HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- -------- -------
Stockholders' equity, December 31, 1997 $ 80 $ 48,440 $ 3,263 $51,783
Exercise of stock options - 23 - 23
Net income for the three months ended
March 31, 1998 - - 1,875 1,875
------ ---------- -------- -------
Stockholders' equity, March 31, 1998 $ 80 $ 48,463 $ 5,138 $53,681
====== ========== ======== =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1997 1998
-------- --------
Operating activities:
<S> <C> <C>
Net income $ 1,502 $ 1,875
Adjustments to reconcile net income to net cash (used) by operating
activities:
Depreciation of property and equipment 839 930
Amortization of intangible assets 83 155
Amortization of deferred income (92) (128)
Loss from investment in limited partnership (31) 31
Amortization of loan costs and fees 17 71
Accretion of interest on capital lease obligation 709 766
Other 3 -
-------- --------
3,030 3,700
Changes in operating assets and liabilities:
(Increase) in accounts receivable (1,738) (6,870)
(Increase) decrease in prepaid expenses and other (4,231) 54
(Decrease) in accounts payable (420) (1,407)
Increase in employee compensation and benefits 1,238 3,490
(Decrease) in accrued interest - (5)
Increase in other accrued liabilities 1,142 93
Increase (decrease) in income taxes payable 499 (757)
-------- --------
Net cash (used) by operating activities (480) (1,702)
-------- --------
Investing activities:
Additions to property and equipment (848) (3,419)
Additions to intangibles (1,186) (404)
Transfers to restricted cash, net 128 (237)
Repayment of demand note 1,369 -
-------- --------
Net cash (used) by investing activities (537) (4,060)
-------- --------
Financing activities:
Payment of long-term debt (41) (47)
Principal payments of capital lease obligation (909) (781)
Redemption of options - 23
-------- --------
Net cash (used) by financing activities (950) (805)
-------- --------
Net (decrease) in cash and cash equivalents (1,967) (6,567)
Cash and cash equivalents, beginning of period 9,722 8,747
-------- --------
Cash and cash equivalents, end of period $ 7,755 $ 2,180
======== ========
Supplemental Disclosure:
Interest paid $ 888 $ 1,040
======== ========
Interest taxes paid $ - $ 1,776
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. GENERAL
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report or Form 10-K for the year
ended December 31, 1997. In the opinion of management, the accompanying
unaudited financial statements reflect all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the Company's financial
position as of March 31, 1998, the results of its operations for the three-month
periods ended March 31, 1997 and 1998 and its cash flows for the three-month
periods ended March 31, 1997 and 1998. The results of operations for the
three-month period ended March 31, 1998 are not necessarily indicative of the
results which may be expected for the full year. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this report.
B. BASIS OF PRESENTATION
The Company was incorporated as a Delaware corporation on March 19,
1996 and was formed as a holding company, in anticipation of an initial public
offering (the "Offering"), to combine under the control of a single corporation
the operations of various business entities (the "Predecessor Entities") which
were all under the majority control of several related stockholders. Immediately
prior to the Offering, the Company executed an agreement (the "Reorganization
Agreement") which resulted in the transfer of ownership of the Predecessor
Entities to the Company prior to completion of the Offering in exchange for
4,400,000 shares of the Company's common stock. The Company's financial
statements for periods prior to the Offering have been prepared by combining the
historical financial statements of the Predecessor Entities, similar to a
pooling of interests presentation. On June 14, 1996, the Company completed the
issuance of 3,600,000 shares of common stock through the Offering resulting in
net proceeds to the Company (after deducting underwriters' commissions and other
offering expenses) of $37,160,000. The consolidated financial statements include
the accounts of Harborside Healthcare Corporation and its wholly-owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated in consolidation.
C. INVESTMENT IN LIMITED PARTNERSHIP
The Company holds a 75% partnership interest in Bowie Center Limited
Partnership (the "Partnership") which the Company accounts for using the equity
method. Although the Company owns a majority interest in the Partnership, the
Company only holds a 50% voting interest in the Partnership and accordingly, it
does not exercise control over the operations of the Partnership.
The results of operations of the Partnership are summarized below:
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1998
------------ ------------
Net operating revenues $ 2,092,000 $ 2,104,000
Net operating expenses 1,900,000 2,034,000
Net income (loss) 42,000 (42,000)
5
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The financial position of the Partnership is as follows:
AS OF MARCH 31, 1998
--------------------
Current assets $ 2,382,000
Non-current assets 4,644,000
Current liabilities 856,000
Non-current liabilities 6,122,000
Partners' equity 48,000
D. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net
income per share for the period ended March 31, 1998:
Numerator:
Numerator for basic and diluted net income per share $ 1,875,000
===========
Denominator:
Denominator for basic net income per share -- weighted 8,058,548
average shares
Effect of dilutive securities -- employee stock options 245,155
-----------
Denominator for diluted net income per share--adjusted
weighted-average shares and assumed conversions 8,303,703
===========
Basic net income per common share $ 0.23
Diluted net income per common share $ 0.23
The denominator for basic net income per share includes 24,746 and 48,759 shares
for the periods ended March 31, 1997 and 1998, respectively, resulting from
stock options issued within one year of the Company's public offering.
SUBSEQUENT EVENTS
The Company recently completed two acquisitions through which it
acquired two long-term care facilities (248 licensed beds) in Toledo, Ohio and
two long-term care facilities (267 licensed beds) in Warwick, Rhode Island. The
aggregate purchase price of these two acquisitions was approximately
$33,700,000, and the Company financed them through an expansion of funds
committed to its existing synthetic leasing facility (the "Leasing Facility").
The Ohio acquisition was completed on April 1 and the Rhode Island acquisition
on May 1. In connection with these acquisitions, the Company increased funds
committed by a bank group through its Leasing Facility to $59,250,000. In May
1998, the Company also increased funds committed by the bank group through its
revolving credit facility to $40,000,000.
6
<PAGE>
On April 16, 1998, the Company announced that it had accepted a buyout
offer of $25 per share from Investcorp S.A., an international investment firm.
Pursuant to the terms of the definitive agreement signed on April 15, 1998, upon
consummation of the transaction, Investcorp, its affiliates and certain other
international investors will acquire approximately 91% of the common stock of
the Company then outstanding. Management of the Company will retain
approximately 225,000 shares, or approximately 3% of the Company's then
outstanding common stock. Other stockholders of the Company may elect to receive
either $25 per share in cash or retain their shares on a pro-rated basis up to a
maximum aggregate amount equal to 6% of the common stock of the Company then
outstanding. Following the transaction, which is expected to close in the third
quarter of 1998, the Company expects to de-list its common stock from the New
York Stock Exchange. The transaction has been unanimously approved by the
Company's Board of Directors. In addition, holders of approximately 54% of the
Company's currently outstanding common stock have agreed, subject to certain
conditions, to vote their shares in favor of the transaction and have granted an
affiliate of Investcorp an irrevocable option to purchase such shares for $25
per share, subject to certain conditions. The transaction is subject to, among
other things, stockholder approval, regulatory approvals and other customary
closing conditions.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements including those
concerning Management's expectations regarding future financial performance and
future events. These forward-looking statements involve significant risk and
uncertainties, including those described herein and included under
"Forward-Looking Statements" below. Actual results may differ materially from
those anticipated by such forward-looking statements.
OVERVIEW
Harborside Healthcare provides high quality long-term care, subacute
care and other specialty medical services in five principal regions: the Midwest
(Ohio and Indiana), New England (Massachusetts and New Hampshire), the Northeast
(Connecticut and Rhode Island), the Mid-Atlantic (Maryland and New Jersey) and
the Southeast (Florida). As of March 31, 1998, the Company operated 45
facilities with a total of 5,468 licensed beds. The Company's operations include
two managed facilities with 178 licensed beds. During the second quarter of
1998, the Company acquired two additional facilities in Ohio with 248 licensed
beds and two facilities in Rhode Island with 267 licensed beds. The Company
provides traditional skilled nursing care, a wide range of subacute care
programs (such as orthopedic, CVA/stroke, cardiac, pulmonary and wound care), as
well as distinct programs for the provision of care to Alzheimer's and hospice
patients. In addition, the Company provides rehabilitation therapy at
Company-operated and non-affiliated facilities. As of March 31, 1998, the
Company provided rehabilitation therapy services to patients at 80
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 following table sets forth the number of facilities and the number
of licensed beds operated by the Company:
7
<PAGE>
As of March 31,
---------------------
1997 1998
-------- --------
Facilities operated (1): 31 45
Licensed Beds(1): 3,864 5,468
- ------------------
(1) In 1998, includes two managed facilities with 178 licensed beds.
The following table sets forth certain operating data for the periods
indicated:
For the three months ended March 31,
------------------------------------
1997 1998
------------- -------------
Patient Days (1):
Private and other 86,684 122,673
Medicare 33,906 49,852
Medicaid 181,252 270,647
------------- -------------
Total 301,842 443,172
============= =============
Average Occupancy rate (2) 92.3% 93.1%
Total net revenues (3):
Private and other 33.8% 32.4%
Medicare 29.0% 26.6%
Medicaid 37.2% 41.0%
------------- -------------
Total 100.0% 100.0%
============= =============
- ------------------
(1) "Patient days" excludes patient days for the managed facilities in 1998.
(2) "Average occupancy rate" excludes managed facilities, and is computed by
dividing the number of billed bed days by the total number of available
licensed bed days during each of the periods indicated.
(3) "Total net revenues" excludes managed facilities. "Private and other"
revenues consist primarily of revenues derived from private pay individuals,
managed care organizations, HMO's, hospice programs, commercial insurers,
management fees from managed facilities, and rehabilitation service therapy
revenues from non-affiliated facilities.
RESULTS OF OPERATIONS
The Company's total net revenues include net patient service revenues
and rehabilitation therapy service revenues from contracts with non-affiliated
long-term care facilities. Private net patient service revenues are recorded at
established per diem billing rates. Net patient service revenues to be
8
<PAGE>
reimbursed under contracts with third-party payers, primarily the Medicare and
Medicaid programs, are recorded at amounts estimated to be realized under these
contractual arrangements.
The Company's facility operating expenses consist primarily of payroll
and employee benefits related to nursing, housekeeping and dietary services
provided to patients, as well as maintenance and administration of the
facilities. Other significant facility operating expenses include the cost of
rehabilitation therapy services, medical and pharmacy supplies, food, utilities,
insurance and taxes. The Company's facility operating expenses also include the
general and administrative costs associated with the operation of the Company's
rehabilitation therapy business. The Company's general and administrative
expenses include all costs associated with its regional and corporate
operations.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
TOTAL NET REVENUES. Total net revenues increased by $25,070,000 or
52.9%, from $47,384,000 in the first quarter of 1997 to $72,454,000 in the first
quarter of 1998. This increase resulted primarily from the acquisition of the
Harford Gardens facility on March 1, 1997, the four Massachusetts facilities on
August 1,1997, the three Dayton, Ohio facilities on September 1, 1997 and the
five Connecticut facilities on December 1, 1997. Additionally, revenues
increased as the result of the generation of additional revenues from
rehabilitation therapy services provided to non-affiliated long-term care
facilities and increased net patient service revenues per patient day at the
Company's "same store" facilities. Of such increase, $1,329,000 or 5.3% of the
increase resulted from the operation of the Harford Gardens facility; $4,848,000
or 19.3% of the increase resulted from the operation of the Massachusetts
facilities; $3,769,000 or 15.0% of the increase resulted from the operation of
the Dayton, Ohio facilities, and $11,354,000 or 45.3% of the increase resulted
from the operation of the Connecticut facilities. Revenues generated by
providing additional rehabilitation therapy services at non-affiliated long-term
care facilities increased by $1,497,000, from $3,352,000 in the first quarter of
1997 to $4,849,000 in the first quarter of 1998. The remaining $2,273,000 or
9.1% of such increase, is largely attributable to higher average net patient
service revenues per patient day at the Company's "same store" facilities and
primarily due to increased levels of care provided to patients with medically
complex conditions. Average net patient service revenues per patient day at
"same store" facilities increased from $145.63 during the first quarter of 1997
to $151.77 during the first quarter of 1998. This increase was due to an
increase in occupancy at "same store" facilities from 92.3% during the first
quarter of 1997 to 92.9% during the first quarter of 1998. The average occupancy
rate at all of the Company's facilities increased from 92.3% during the first
quarter of 1997 to 93.1% during the first quarter of 1998. The Company's quality
mix of private, Medicare and insurance revenues was 62.8% for the three months
ended March 31, 1997 as compared to 59.0% in the same period of 1998. The
decrease in the quality mix percentage was primarily due to the acquisition of
facilities.
Facility Operating Expenses. Facility operating expenses increased by
$19,929,000, or 53.2%, from $37,452,000 in the first quarter of 1997 to
$57,381,000 in the first quarter of 1998. The operation of Harford Gardens
accounted for $1,064,000, or 5.3% of this increase, the operation of the
Massachusetts facilities accounted for $3,848,000 or 19.3% of this increase, the
operation of the Dayton, Ohio facilities accounted for $3,061,000 or 15.4% of
this increase, and the operation of the Connecticut facilities accounted for
$9,371,000 or 47.0% of this increase. Operating expenses associated with
additional non-affiliate therapy contracts increased by $957,000, accounting for
4.8% of the total increase. The remainder of the increase in facility operating
expenses, $1,628,000, 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 $976,000, or 40.9% from $2,389,000 in
the first quarter of 1997 to $3,365,000 in the first quarter of 1998. This
increase resulted from the acquisition of the new facilities resulting in the
expansion of regional and corporate support, and additional travel, consulting
and systems development expenses associated with the Company's growth. The
Company reimburses an affiliate for rent and other expenses related to its
corporate headquarters as well as for certain data processing
9
<PAGE>
and administrative services provided to the Company. During the first quarter of
1997, such reimbursements totaled $177,000 compared to $313,000 during the first
quarter of 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
from $922,000 in the first quarter of 1997 to $1,085,000 in the first quarter of
1998 primarily as a result of building improvements and investment in new
computers and software.
FACILITY RENT. Facility rent expense for the first quarter increased by
$2,934,000 from $2,622,000 in 1997 to $5,556,000 in 1998. The increase in rent
expense is the result of acquisitions made since the first quarter of 1997.
INTEREST EXPENSE, NET. Interest expense, net, increased from $1,392,000
in the first quarter of 1997 to $1,650,000 in the first quarter of 1998. This
net increase is primarily due to additional interest expense resulting from the
acquisition of Access Rehabilitation on July 1, 1997.
LOSS ON INVESTMENT IN LIMITED PARTNERSHIP. The Company accounts for its
investment in Bowie Center Limited Partnership using the equity method. The
Company recorded income of $31,000 in the first quarter of 1997 as compared to a
loss of $31,000 during the first quarter of 1998 in connection with this
investment.
INCOME TAXES. Income tax expense increased from $959,000 in the first
quarter of 1997 to $1,198,000 in the first quarter of 1998.
NET INCOME. Net income was $1,502,000 in the first quarter of 1997 as
compared to income of $1,875,000 in the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and acquisitions
growth through a combination of mortgage financing and operating leases. Leased
facilities are leased from either the owner of the facilities, from a real
estate investment trust which has purchased the facilities from the owner, or
through a synthetic leasing facility created in September 1997. In addition, in
1996 the Company financed the acquisition of four Ohio facilities from the owner
by means of a lease which is accounted for as a capital lease for financial
reporting purposes. The Company's existing facility leases generally require it
to make monthly lease payments, establish escrow funds to serve as debt service
reserve accounts, and pay all property operating costs. The Company generally
negotiates leases which provide for extensions beyond the initial lease term and
an option to purchase the leased facility. In some cases, the option to purchase
the leased facility is exercisable at a price based on the fair market value of
the facility at the time the option is exercised. In other cases, the lease for
the facility sets forth a fixed option purchase price which the Company believes
is equal to the fair market value of the facility at the inception of such
lease.
During the second quarter of 1998, the Company increased the funds
committed by a bank group through its synthetic leasing facility to $59,250,000.
The Company used this increased commitment to fund the acquisition of two
long-term care facilities (248 licensed beds) in Toledo, Ohio and two long-term
care facilities (267 licensed beds) in Warwick, Rhode Island. The aggregate
purchase price of these two acquisitions was approximately $33,700,000. In May
1998, the Company also increased funds committed by the bank group through its
revolving credit facility to $40,000,000.
At March 31, 1998, the Company had two mortgage loans outstanding
totaling $17,995,000 and another $15,600,000 in advances from its long-term
revolving credit facility. One mortgage loan had an outstanding principal
balance of $16,421,000 of which $15,140,000 is due at maturity in 2004. This
loan bears interest at an annual rate of 10.65% plus additional interest equal
to 0.3% of the difference between the annual operating revenues of the four
mortgaged facilities and actual revenues during a twelve-month base period. The
Company's other mortgage loan, which encumbers a single facility, had an
outstanding balance of $1,574,000 at March 31, 1998, of which $1,338,000 is due
in 2010.
10
<PAGE>
The Company's operating activities during the first three months of
1997 used net cash of $480,000 as compared to $1,702,000 in 1998, an increase of
$1,222,000. Most of the increase in cash used by operations was the result of
increases in accounts receivable associated with the acquisition of new
facilities, partially offset by an increase in employee compensation and
benefits at these facilities.
Net cash used by investing activities was $537,000 during the first
three months of 1997 as compared to $4,060,000 used in 1998. The primary use of
invested cash during these periods related to additions to property and
equipment ($848,000 in 1997 compared to $3,419,000 in 1998), additions to
intangible assets ($1,186,000 in 1997 compared to $404,000 in 1998) and
transfers to restricted cash.
Net cash used by financing activities was $950,000 in 1997 as compared
to $805,000 in 1998.
SEASONALITY
The Company's earnings generally fluctuate from quarter to quarter.
This seasonality is related to a combination of factors which include the timing
and amount of Medicaid rate increases, seasonal census cycles, and the number of
days in a given fiscal quarter.
INFLATION
The healthcare industry is labor intensive. Wages and other labor
related costs are especially sensitive to inflation. Certain of the Company's
other expense items, such as supplies and real estate costs are also sensitive
to inflationary pressures. Shortages in the labor market or general inflationary
pressure could have a significant effect on the Company. In addition, suppliers
pass along rising costs to the Company in the form of higher prices. When faced
with increases in operating costs, the Company has sought to increase its
charges for services and its requests for reimbursement from government
programs. The Company's private pay customers and third party reimbursement
sources may be less able to absorb increased prices for the Company's services.
The Company's operations could be adversely affected if it is unable to recover
future cost increases or experiences significant delays in increasing rates of
reimbursement of its labor or other costs from Medicare and Medicaid revenue
sources.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q, including information set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations," constitute "Forward-Looking Statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). The Company desires to take advantage of certain "safe harbor" provisions
of the Reform Act and is including this special note to enable the Company to do
so. Forward-looking statements included in this Form 10-Q, or hereafter included
in other publicly available documents filed with the Securities and Exchange
Commission, reports to the Company's stockholders and other publicly available
statements issued or released by the Company involve known and unknown risks,
uncertainties, and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ materially from
the future results, performance (financial or operating) or achievements
expressed or implied by such forward-looking statements. The Company believes
the following important factors could cause such a material difference to occur:
1. The Company's ability to grow through the acquisition and development
of long-term care facilities or the acquisition of ancillary
businesses.
2. The Company's ability to identify suitable acquisition candidates, to
consummate or complete construction projects, or to profitably operate
or successfully integrate enterprises into the Company's other
operations.
11
<PAGE>
3. The occurrence of changes in the mix of payment sources utilized by the
Company's patients to pay for the Company's services.
4. The adoption of cost containment measures by private pay sources such
as commercial insurers and managed care organizations, as well as
efforts by governmental reimbursement sources to impose cost
containment measures.
5. Changes in the United States healthcare system, including changes in
reimbursement levels under Medicaid and Medicare, and other changes in
applicable government regulations that might affect the profitability
of the Company.
6. The Company's continued ability to operate in a heavily regulated
environment and to satisfy regulatory authorities, thereby avoiding a
number of potentially adverse consequences, such as the imposition of
fines, temporary suspension of admission of patients, restrictions on
the ability to acquire new facilities, suspension or de-certification
from Medicaid or Medicare programs, and in extreme cases, revocation of
a facility's license or the closure of a facility, including as a
result of unauthorized activities by employees.
7. The Company's ability to secure the capital and the related cost of
such capital necessary to fund its future growth through acquisition
and development, as well as internal growth.
8. Changes in certificate of need laws that might increase competition in
the Company's industry, including, particularly, in the states in which
the Company currently operates or anticipates operating in the future.
9. The Company's ability to staff its facilities appropriately with
qualified healthcare personnel, including in times of shortages of such
personnel and to maintain a satisfactory relationship with labor
unions.
10. The level of competition in the Company's industry, including without
limitation, increased competition from acute care hospitals, providers
of assisted and independent living and providers of home healthcare and
changes in the regulatory system in the state in which the Company
operates that facilitate such competition.
11. The continued availability of insurance for the inherent risks of
liability in the healthcare industry.
12. Price increases in pharmaceuticals, durable medical equipment and other
items.
13. The Company's reputation for delivering high-quality care and its
ability to attract and retain patients, including patients with
relatively high acuity levels.
14. Changes in general economic conditions, including changes that pressure
governmental reimbursement sources to reduce the amount and scope of
healthcare coverage.
The foregoing review of significant factors should not be construed as
exhaustive or as an admission regarding the adequacy of disclosures previously
made by the Company.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
12
<PAGE>
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On April 16, 1998, the Company announced that it had accepted a buyout
offer of $25 per share from Investcorp S.A., an international
investment firm. Pursuant to the terms of the definitive agreement
signed on April 15, 1998, upon consummation of the transaction,
Investcorp, its affiliates and certain other international investors
will acquire approximately 91% of the common stock of the Company then
outstanding. Management of the Company will retain approximately
225,000 shares, or approximately 3% of the Company's then outstanding
common stock. Other stockholders of the Company may elect to receive
either $25 per share in cash or retain their shares on a pro-rated
basis up to a maximum aggregate amount equal to 6% of the common stock
of the Company then outstanding. Following the transaction, which is
expected to close in the third quarter of 1998, the Company expects to
de-list its common stock from the New York Stock Exchange. The
transaction has been unanimously approved by the Company's Board of
Directors. In addition, holders of approximately 54% of the Company's
currently outstanding common stock have agreed, subject to certain
conditions, to vote their shares in favor of the transaction and have
granted an affiliate of Investcorp an irrevocable option to purchase
such shares for $25 per share, subject to certain conditions. The
transaction is subject to, among other things, stockholder approval,
regulatory approvals and other customary closing conditions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
27.1 Financial Data Schedule
(b) Reports on 8-K
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Harborside Healthcare Corporation
By: /s/ Stephen L. Guillard
---------------------------
Stephen L. Guillard
Chairman, President, and Chief Executive
Officer
By: /s/ William H. Stephan
--------------------------
William H. Stephan
Senior Vice President and Chief Financial
Officer
DATE: May 14, 1998
14
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,180
<SECURITIES> 0
<RECEIVABLES> 42,189
<ALLOWANCES> (2,903)
<INVENTORY> 31,614<F1>
<CURRENT-ASSETS> 50,963
<PP&E> 99,361
<DEPRECIATION> 0
<TOTAL-ASSETS> 172,441
<CURRENT-LIABILITIES> 29,786
<BONDS> 88,974<F2>
0
0
<COMMON> 80
<OTHER-SE> 53,601<F3>
<TOTAL-LIABILITY-AND-EQUITY> 172,441
<SALES> 0
<TOTAL-REVENUES> 72,454
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 67,700
<LOSS-PROVISION> (31)<F4>
<INTEREST-EXPENSE> 1,650
<INCOME-PRETAX> 3,073
<INCOME-TAX> 1,198
<INCOME-CONTINUING> 1,875
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,875
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
<FN>
<F1>Includes the following assets: prepaid expenses and other of $6,590, prepaid
income taxes of $757, deferred income taxes--current of $2,150, deferred income
taxes--long-term of $71, restricted cash of $5,782, note receivable of $7,487,
investment in limited partnership of $36, and intangible assets, net of $8,741.
<F2>Includes the following long-term liabilities: deferred income of $3,431,
capital lease obligation of $52,147, and long-term debt of $33,396.
<F3>Includes the following equity accounts: additional paid-in capital of
$48,463 and retained earnings of $5,138.
<F4>Includes loss on investment in limited partnership of $31.
</FN>
</TABLE>
