<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ----------------------
Commission file number 01-14358
-----------------------
Harborside Healthcare Corporation
- - -------------------------------------------------------------------------------
Delaware 04-3307188
- - ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
470 Atlantic Avenue, Boston, Massachusetts 02210
- - ------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(617) 556-1515
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
----- -----
Number of shares of common stock, par value $0.01 per share outstanding as of
November 4, 1998: 7,261,332.
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Table of Contents
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I. Financial Information
Condensed Consolidated Balance Sheets
December 31, 1997 and September 30, 1998 3
Condensed Consolidated Statements of Operations
For the Three Months and Nine Months Ended
September 30, 1997 and 1998 4
Condensed Consolidated Statements of Changes
in Stockholders' Equity for the Nine Months
Ended September 30, 1998 5
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1997 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Part II Other Information 22
Signatures 23
</TABLE>
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- - -------
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 8,747 $ 5,786
Accounts receivable, net of allowances for doubtful
accounts of $1,871 and $2,263, respectively 32,416 44,756
Prepaid expenses and other 6,532 7,875
Prepaid income taxes 179 7,860
Deferred income taxes 2,150 2,150
-------- --------
Total current assets 50,024 68,427
Restricted cash 5,545 5,031
Property and equipment, net 96,872 159,570
Intangible assets, net 8,563 23,827
Note receivable 7,487 7,487
Deferred income taxes 71 71
-------- --------
Total assets $168,562 $264,413
======== ========
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 186 $ 203
Current portion of capital lease obligation 3,924 4,166
Accounts payable 7,275 7,135
Employee compensation and benefits 10,741 14,384
Other accrued liabilities 4,417 10,384
Accrued interest 251 462
Current portion of deferred income 609 389
-------- --------
Total current liabilities 27,403 37,123
Long-term portion of deferred income 3,559 2,460
Long-term debt 33,456 131,788
Long-term portion of capital lease obligation 52,361 51,503
-------- --------
Total liabilities 116,779 222,874
-------- --------
Exchangeable preferred stock, redeemable - 40,931
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 30,000,000 and
19,000,000 shares authorized, 8,008,665 and
7,261,332 shares issued and outstanding, respectively 80 146
Additional paid-in capital 48,440 205,972
Less common stock in treasury, at cost, 7,349,832 shares - (183,746)
Retained earnings (deficit) 3,263 (21,764)
-------- ---------
Total stockholders' equity 51,783 608
-------- ---------
Total liabilities and stockholders' equity $168,562 $ 264,413
======== =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------------------------
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total net revenues $57,964 $ 78,697 $155,640 $227,337
------- -------- -------- --------
Expenses:
Facility operating 46,556 62,887 124,073 179,917
General and administrative 2,756 3,625 7,479 11,100
Service charges paid to affiliate 177 313 531 941
Depreciation and amortization 989 2,021 2,871 4,284
Facility rent 3,031 5,465 8,340 17,086
Merger costs - 37,172 - 37,172
------- -------- -------- --------
Total expenses 53,509 111,483 143,294 250,500
------- -------- -------- --------
Income from operations 4,455 (32,786) 12,346 (23,163)
Other:
Interest expense, net 1,614 3,591 4,370 6,793
Other expense 68 (17) 129 55
------- -------- -------- --------
Income (loss) before income taxes 2,773 (36,360) 7,847 (30,011)
Income taxes (benefit) 1,081 (7,460) 3,060 (4,984)
------- -------- -------- --------
Net income (loss) $ 1,692 $(28,900) $ 4,787 $(25,027)
======= ========= ======== ========
Earnings (loss) per Common Share
(Note D):
Basic $ 0.21 $ (3.93) $ 0.60 $ (3.28)
======= ======== ======= ========
Diluted $ 0.21 $ (3.90) $ 0.59 $ (3.21)
======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(uNAUDITED)
(DOLLARS IN THOUSANDS)
-------------------------
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN TREASURY EARNINGS
STOCK CAPITAL STOCK (DEFICIT) TOTAL
------ ---------- ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Stockholders' equity, December 31, 1997 $ 80 $ 48,440 - $ 3,263 $ 51,783
Exercise of stock options - 29 - - 29
Issuance of common stock, net (6,600,000 shares) 66 158,434 - - 158,500
Purchase of treasury stock (7,349,832 shares) - - (183,746) - (183,746)
Accretion of Preferred stock dividends - (931) - - (931)
Net loss for the nine months ended
September 30, 1998 - - - (25,027) (25,027)
----- -------- --------- -------- ---------
Stockholders' equity, September 30, 1998 $ 146 $205,972 $(183,746) $(21,764) $ 608
===== ======== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-5-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
--------------------
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 1998
--------- --------
<S> <C> <C>
Operating activities:
Net income (loss) $ 4,787 $ (25,027)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation of property and equipment 2,568 3,238
Amortization of intangible assets 303 1,046
Amortization of deferred income (291) (453)
Amortization of loan costs and fees 66 33
Accretion of senior subordinated discount notes - 1,847
Accretion of interest on capital lease obligation 2,185 2,403
Other non-cash items, net - (350)
------- ---------
9,618 (17,263)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (5,331) (12,340)
(Increase) in prepaid expenses and other (2,995) (1,343)
Decrease in accounts payable (1,688) (140)
Increase in employee compensation and benefits 1,236 3,643
Increase in accrued interest 153 211
Increase in other accrued liabilities 3,473 5,967
Increase in prepaid income taxes (441) (7,681)
------- ---------
Net cash provided (used) by operating activities 4,025 (28,946)
------- ---------
Investing activities:
Additions to property and equipment (2,134) (65,936)
Additions to intangibles (4,749) (18,794)
Transfers to restricted cash, net (344) 514
Repayment of demand note 1,369 -
------- ---------
Net cash (used) by investing activities (5,858) (84,216)
------- ---------
Financing activities:
Borrowed on revolving line of credit 5,775 17,150
Repaid on revolving line of credit - (20,000)
Payment of long term debt (135) (141)
Proceeds from issuance of bonds payable - 99,493
Proceeds from issuance of preferred stock - 40,000
Purchase of treasury stock - (183,746)
Proceeds from sale of common stock - 158,500
Principal payments of capital lease obligation (2,950) (3,019)
Receipt of cash in connection with lease 1,298 1,935
Exercise of stock options 57 29
------- ---------
Net cash provided by financing activities 4,045 110,201
------- ---------
Net increase (decrease) in cash and cash equivalents 2,212 (2,961)
Cash and cash equivalents, beginning of period 9,722 8,747
------- ---------
Cash and cash equivalents, end of period $11,934 $ 5,786
======= =========
Supplimental Disclosure:
Interest paid $ 2,561 $ 3,217
========= ==========
Income taxes paid $ 3,501 $ 2,977
========= ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-6-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 and its subsequent filings on Forms S-4 and 8-K. In the opinion of
management, the accompanying unaudited financial statements reflect all
adjustments (consisting of only normal recurring accruals) necessary to present
fairly the Company's financial position as of September 30, 1998, the results
of its operations for the three-month and nine-month periods ended September 30,
1997 and 1998 and its cash flows for the nine-month periods ended September 30,
1997 and 1998. The results of operations for the three-month and nine-month
periods ended September 30, 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
On April 15, 1998, Harborside Healthcare Corporation ("Harborside") entered into
a Merger Agreement with HH Acquisition Corp. ("MergerCo"), an entity organized
for the sole purpose of effecting a merger on behalf of Investcorp S.A., certain
of its affiliates and certain other international investors (the "New
Investors"). On August 11, 1998, MergerCo merged with and into Harborside, with
Harborside as the surviving corporation. As a result of the transaction, and
pursuant to the Merger Agreement, the New Investors acquired approximately 91%
of the post-merger common stock of Harborside. The remaining 9% of the common
stock was retained by existing shareholders, including management. As a result
of the merger, Harborside shares have been de-listed from the New York Stock
Exchange.
The merger was approved by a majority of Harborside's shareholders at a
special meeting held on August 11, 1998. Each share not retained by existing
shareholders was converted into $25 in cash, representing in the aggregate, cash
payments of approximately $184 million. Holders of outstanding stock options of
the Company converted the majority of their options into cash at $25 per
underlying share (less applicable exercise price and withholding taxes) with
aggregate payments of approximately $8 million.
In connection with the transaction and prior to the merger, the New Investors
made cash common equity contributions of $165 million to MergerCo, and MergerCo
obtained gross proceeds of $99.5 million through the issuance of 11% Senior
Subordinated Discount Notes ("Discount Notes") due 2008 and $40 million through
the issuance of 13.5% Exchangeable Preferred Stock ("Preferred Stock")
mandatorily redeemable in 2010. In connection with the merger, Harborside also
entered into a new $250 million secured credit facility with Chase Securities
Inc., as Arranger, Morgan Stanley Senior Funding, Inc. and BT Alex. Brown
Incorporated, as Co-Arrangers, Bankers Trust Company, as Documentation Agent,
Morgan Stanley Senior Funding, Inc., as Syndication Agent, The Chase Manhattan
Bank, as Administration Agent and the lenders named therein. In connection with
the merger, Harborside recorded in the third quarter a charge to income from
operations of $37 million ($29 million after taxes) for direct and other costs
related to the merger transaction. In connection with the merger and the related
refinancings, the Company exercised purchase options for seven facilities which
had been financed through synthetic leases.
C. Significant Accounting Policies
Reclassifications have been made to conform prior periods' data to the current
period presentation.
D. Earnings (Loss) Per Common Share
The following table sets forth the computation of basic and diluted earnings
(loss) per Common Share for the periods ended September 30, 1997 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $1,692,000 $(28,900,000) $4,787,000 $(25,027,000)
Accrued dividends on Preferred Stock - (931,000) - (931,000)
---------- ------------ ---------- ------------
Earnings (loss) available for Common Shares $1,692,000 $(29,831,000) $4,787,000 $(25,958,000)
========== ============ ========== ============
</TABLE>
-7-
<PAGE>
D. Earnings (Loss) Per Common Share (continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Denominator:
Denominator for basic earnings (loss) per
Common Share weighted average shares 8,044,000 7,595,000 8,032,000 7,904,000
Effect of dilutive securities employee stock options 168,000 53,000 68,000 195,000
--------- --------- --------- ---------
Denominator for diluted earnings (loss) per Common
Share - adjusted weighted-average shares and
assumed conversions 8,212,000 7,648,000 8,100,000 8,099,000
========= ========= ========= =========
Basic earnings (loss) per Common Share $ 0.21 $ (3.93) $ 0.60 $ (3.28)
Diluted earnings (loss) per Common Share $ 0.21 $ (3.90) $ 0.59 $ (3.21)
</TABLE>
The denominator for basic earnings (loss) per Common Share includes 41,000
shares for the three months ended September 30, 1997, and 31,000 and 33,000
shares for the nine months ended September 30, 1997 and 1998, respectively,
resulting from stock options issued within one year of the Company's public
offering.
E. Equity
On April 15, 1998, the Company entered into a Merger Agreement with HH
Acquisition Corp. ("MergerCo"), an entity organized for the sole purpose of
effecting a merger on behalf of Investcorp S.A., certain of its affiliates and
certain other international investors (collectively, the "New Investors"). On
August 11, 1998, MergerCo merged with and into the Company, with the Company as
the surviving corporation. As a result of the merger, the New Investors
acquired approximately 91% of the post-merger common stock of the Company.
Certain pre-merger stockholders of the Company, including certain of the
Company's existing members of senior management, retained approximately 660,000
shares (or approximately 9%) of the Company's post-merger common stock. Each
other share of the Company's pre-merger common stock was converted into $25 in
cash, representing aggregate cash payments of approximately $184 million.
Holders of outstanding stock options of the Company converted the majority of
their options into cash at $25 per underlying share less the applicable option
exercise price and withholding taxes, representing aggregate cash payments of
approximately $8 million.
In connection with the transaction and prior to the merger, the New Investors
made cash common equity contributions of $165 million to MergerCo, and MergerCo
obtained gross proceeds of $99.5 million through the issuance of 11% senior
subordinated discount notes due 2008 and $40 million through the issuance of
13.5% exchangeable preferred stock mandatorily redeemable 2010. In connection
with the merger, the Company also entered into a new $250 million senior secured
credit facility with a group of banks.
F. Income taxes
The reconciliation of income tax computed at statutory rates to income tax
expense for the nine months ended September 30, 1998 is as follows:
<TABLE>
<S> <C> <C>
Statutory rate $(10,504,000) (35.0%)
State income tax, net of federal benefit (600,000) (2.0%)
Permanent differences 6,120,000 20.4%
------------- -------
$ (4,984,000) (16.6%)
============= =======
</TABLE>
G. Condensed Consolidating Financial Information
Certain of the Company's subsidiaries are precluded from guaranteeing the debt
of the parent company (the "Non-Guarantors"), based on current agreements in
effect. The Company's remaining subsidiaries (the "Guarantors") are not
restricted from serving as guarantors of the parent company debt. The Guarantors
are comprised of Harborside Healthcare Limited Partnership, Belmont Nursing
Center Corp., Orchard Ridge Nursing Center Corp., Oakhurst Manor Nursing Center
Corp., Riverside Retirement Limited Partnership, Harborside Toledo Limited
Partnership, Harborside Connecticut Limited Partnership, Harborside of Florida
Limited Partnership, Harborside of Ohio Limited Partnership,
-8-
<PAGE>
G. Condensed Consolidating Financial Information (continued)
Harborside Healthcare Baltimore Limited Partnership, Harborside of Cleveland
Limited Partnership, Harborside of Dayton Limited Partnership, Harborside
Massachusetts Limited Partnership, Harborside of Rhode Island Limited
Partnership, Harborside North Toledo Limited Partnership, Harborside Healthcare
Advisors Limited Partnership, Harborside Toledo Corp., KHI Corporation,
Harborside Acquisition Limited Partnership IV, Harborside Acquisition Limited
Partnership V, Harborside Acquisition Limited Partnership VI, Harborside
Acquisition Limited Partnership VII, Harborside Acquisition Limited Partnership
VIII, Harborside Acquisition Limited Partnership IX, Harborside Acquisition
Limited Partnership X, Sailors, Inc., New Jersey Harborside Corp., Bridgewater
Assisted Living Limited Partnership, Maryland Harborside Corp., Harborside
Homecare Limited Partnership, Harborside Rehabilitation Limited Partnership,
Harborside Healthcare Network Limited Partnership and Harborside Health I
Corporation.
The information which follows presents the condensed consolidating financial
position as of December 31, 1997 and September 30, 1998; the condensed
consolidating results of operations for the three and nine month periods ended
September 30, 1997 and 1998; and the consolidating cash flows for the nine
months ended September 30, 1997 and 1998 of (a) the parent company only ("the
Parent"), (b) the combined Guarantors, (c) the combined Non-Guarantors, (d)
eliminating entries and (e) the Company on a consolidated basis.
-9-
<PAGE>
G. Condensed Consolidating Financial Information (Continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31,1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 698 $ 4,383 $ 3,666 $ - $ 8,747
Receivables, net of allowance - 24,845 9,321 (1,750) 32,416
Intercompany receivable 31,289 - - (31,289) -
Prepaid expenses and other 4,875 4,604 1,761 (4,708) 6,532
Prepaid income taxes - - - 179 179
Deferred income taxes - 1,847 303 - 2,150
------- -------- ------- -------- --------
Total current assets 36,862 35,679 15,051 (37,568) 50,024
Restricted cash - 2,374 3,001 170 5,545
Investment in limited partnership 11,032 28,335 4,046 (43,413) -
Property and equipment, net - 79,529 17,343 - 96,872
Intangible assets, net 271 6,409 1,883 - 8,563
Note receivable - 7,487 - - 7,487
Deferred income taxes 71 - - - 71
------- -------- ------- -------- --------
Total assets $48,236 $159,813 $41,324 $(80,811) $168,562
======= ======== ======= ======== ========
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ - $ 20 $ 166 $ - $ 186
Current portion of capital lease
obligation - 3,924 - - 3,924
Accounts payable - 6,209 3,176 (2,110) 7,275
Intercompany payable - 38,424 4,630 (43,054) -
Employee compensation and benefits 280 7,075 3,386 - 10,741
Other accrued liabilities - 2,216 2,024 177 4,417
Accrued interest - 251 - - 251
Current portion of deferred income - 240 369 - 609
------- -------- ------- -------- --------
Total current liabilities 280 58,359 13,751 (44,987) 27,403
Long-term portion of deferred income - 980 2,579 - 3,559
Long-term debt - 17,162 16,294 - 33,456
Long-term portion of capital lease obligation - 52,353 8 - 52,361
------- -------- ------- -------- --------
Total liabilities 280 128,854 32,632 (44,987) 116,779
------- -------- ------- -------- --------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 30,000,000
shares authorized, 8,008,665 shares issued
and outstanding 80 2,569 3,885 (6,454) 80
Additional paid-in capital 48,213 - - 227 48,440
Retained earnings (deficit) (337) 4,175 (2,267) 1,692 3,263
Partners' equity - 24,215 7,074 (31,289) -
------- -------- ------- -------- --------
Total stockholders' equity 47,956 30,959 8,692 (35,824) 51,783
------- -------- ------- -------- --------
Total liabilities & stockholders'
equity $48,236 $159,813 $41,324 $(80,811) $168,562
======= ======== ======= ======== ========
</TABLE>
-10-
<PAGE>
G. Condensed Consolidating Financial Information (Continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 50 $ 1,730 $ 4,006 $ - $ 5,786
Receivables, net of allowance - 35,920 13,354 (4,518) 44,756
Intercompany receivable 110,213 - - (110,213) -
Prepaid expenses and other 2,773 2,718 1,910 474 7,875
Prepaid income taxes 7,860 - - - 7,860
Deferred income taxes 2,150 - - - 2,150
--------- -------- ------- --------- ---------
Total current assets 123,046 40,368 19,270 (114,257) 68,427
Restricted cash - 4,028 4,065 (3,062) 5,031
Investment in limited partnership 15,584 27,471 4,044 (47,099) -
Property and equipment, net - 143,788 18,585 (2,803) 159,570
Intangible assets, net 16,694 5,618 1,692 (177) 23,827
Note receivable - 7,487 - - 7,487
Deferred income taxes 71 - - - 71
--------- -------- ------- --------- ---------
Total assets $ 155,395 $228,760 $47,656 $(167,398) $ 264,413
========= ======== ======= ========= =========
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ - $ 22 $ 181 $ - $ 203
Current portion of capital lease
obligation - 4,166 - - 4,166
Accounts payable - 8,792 2,914 (4,571) 7,135
Intercompany payable - 114,026 12,016 (126,042) -
Employee compensation and benefits - 10,772 4,180 (568) 14,384
Other accrued liabilities 450 5,359 1,002 3,573 10,384
Accrued interest 703 1,606 - (1,847) 462
Current portion of deferred income - - - 389 389
--------- -------- ------- --------- ----------
Total current liabilities 1,153 144,743 20,293 (129,066) 37,123
Long-term portion of deferred income - 178 2,671 (389) 2,460
Long-term debt 112,243 1,362 16,348 1,835 131,788
Long-term portion of capital lease obligation - 54,459 - ( 2,956) 51,503
--------- -------- ------- --------- ----------
Total liabilities 113,396 200,742 39,312 (130,576) 222,874
--------- -------- ------- --------- ----------
Exchangeable preferred stock, redeemable 40,931 - - - 40,931
--------- -------- ------- --------- ----------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value,
19,000,000 shares authorized,
7,261,332 shares issued and outstanding 146 2,569 3,885 (6,454) 146
Additional paid-in capital 206,743 - - (771) 205,972
Treasury Stock, at cost, 7,349,832 Shares (183,746) - - - (183,746)
Partners equity - 24,215 7,074 (31,289) -
Retained earnings (22,075) 1,234 (2,615) 1,692 (21,764)
--------- -------- ------- --------- ---------
STOCKHOLDERS' EQUITY 1,068 28,018 8,344 (36,822) 608
--------- -------- ------- --------- ---------
TOTAL LIABILITIES & STOCKHOLDERS EQUITY $155,395 $228,760 $47,656 $(167,398) $ 264,413
========= ======== ======= ========= =========
</TABLE>
-11-
<PAGE>
G. Condensed Consolidating Financial Information (Continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the three months ended September 30, 1997:
<TABLE>
<CAPTION>
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total net revenues $ - $37,222 $25,523 $(4,781) $57,964
----- ------- ------- -------- -------
Expenses:
Facility operating - 30,115 21,222 (4,781) 46,556
General and administrative 165 2,544 47 - 2,756
Service charges paid to affiliate - 177 - - 177
Depreciation and amortization 4 644 341 - 989
Facility rent - 1,084 1,947 - 3,031
Management fees paid to affiliates - (1,517) 1,517 - -
----- ------- ------- ------- -------
Total expenses 169 33,047 25,074 (4,781) 53,509
----- ------- ------- ------- -------
Income (loss) from operations (169) 4,175 449 - 4,455
Interest expense, net 176 1,253 185 - 1,614
Other expense - 68 - - 68
----- ------- ------- -------- -------
Income (loss) before income taxes (345) 2,854 264 - 2,773
Income taxes (benefit) (135) 1,113 103 - 1,081
----- ------- ------- ------- -------
Net income (loss) $(210) $ 1,741 $ 161 - $ 1,692
===== ======= ======= ======= =======
</TABLE>
For the three months ended September 30, 1998:
<TABLE>
<CAPTION>
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total net revenues $ - $ 60,586 $25,541 $(7,430) $ 78,697
-------- -------- ------- ------- --------
Expenses:
Facility operating - 48,760 21,557 (7,430) 62,887
General and administrative (63) 3,632 56 - 3,625
Service charges paid to affiliate - 313 - - 313
Depreciation and amortization 448 1,155 418 - 2,021
Facility rent - 3,414 2,051 - 5,465
Merger Costs 23,486 13,435 251 - 37,172
Management fees paid to affiliates - (1,601) 1,601 - -
-------- -------- ------- ------- --------
Total expenses 23,871 69,108 25,934 (7,430) 111,483
-------- -------- ------- ------- --------
Income (loss) from operations (23,871) (8,522) (393) - (32,786)
Interest expense, net 771 2,645 175 - 3,591
Other expense - (17) - - (17)
-------- -------- ------- ------- --------
Income (loss) before income taxes (24,642) (11,150) (568) - (36,360)
Income taxes (benefit) (3,224) (4,122) (114) - (17,420)
-------- -------- ------- ------- --------
Net income (loss) $(21,418) $ (7,028) $ (454) $ - $(28,900)
======== ======== ======= ======= ========
</TABLE>
-12-
<PAGE>
G. Condensed Consolidating Financial Information (Continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total net revenues $ - $97,159 $75,245 $(16,764) $155,640
----- ------- ------- -------- --------
Expenses:
Facility operating - 78,575 62,262 (16,764) 124,073
General and administrative 386 6,896 197 - 7,479
Service charges paid to affiliate - 531 - - 531
Depreciation and amortization 6 1,875 990 - 2,871
Facility rent - 2,197 6,143 - 8,340
Management fees paid to affiliates - (4,479) 4,479 - -
----- ------- ------- -------- --------
Total expenses 392 85,595 74,071 (16,764) 143,294
----- ------- ------- -------- --------
Income (loss) from operations (392) 11,564 1,174 - 12,346
Interest expense, net 85 3,839 446 - 4,370
Other expense - 129 - - 3,060
----- ------- ------- -------- --------
Income (loss) before income taxes (477) 7,596 728 - 7,847
Income taxes (benefit) (186) 2,962 284 - 3,060
----- ------- ------- -------- --------
Net income (loss) $(291) $ 4,634 $ 444 $ - $ 4,787
===== ======= ======= ======== ========
</TABLE>
For the nine months ended September 30, 1998:
<TABLE>
<CAPTION>
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total net revenues $ - $171,957 $76,408 $(21,028) $227,337
-------- ------- ------- -------- --------
Expenses:
Facility operating - 136,985 63,960 (21,028) 179,917
General and administrative 153 10,720 227 - 11,100
Service charges paid to affiliate - 941 - - 941
Depreciation and amortization 462 2,664 1,158 - 4,284
Facility rent - 10,868 6,218 - 17,086
Merger Costs 23,486 13,435 251 - 37,172
Management fees paid to affiliates - (4,670) 4,670 - -
-------- ------- ------- -------- --------
Total expenses 24,101 170,943 76,484 (21,028) 250,500
-------- ------- ------- -------- --------
Income (loss) from operations (24,101) 1,014 (76) - (23,163)
Interest expense, net 771 5,554 468 - 6,793
Other expense - 55 - - 55
-------- ------- ------- -------- --------
Income (loss) before income taxes (24,872) (4,595) (544) - (30,011)
Income taxes (benefit) (3,134) (1,654) (196) - (4,984)
-------- ------- ------- -------- --------
Net income (loss) $(21,738) $ (2,941) $ (348) $ - $(25,027)
======== ======== ======= ======== ========
</TABLE>
-13-
<PAGE>
G. Condensed Consolidating Financial Information (Continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net cash provided (used) by operating activities: $1,516 $ 3,275 $(1,010) 244 $ 4,025
------ ------- ------- ------ -------
Investing activities:
Additions to property and equipment - (1,423) (711) - (2,134)
Additions to intangibles (113) (4,514) - (122) (4,749)
Transfers (to) from restricted cash, net - (226) 54 (172) (344)
Repayment of demand note - 1,369 - - 1,369
------ ------- ------- ------ -------
Net cash provided (used) by investing activities (113) (4,794) (657) (294) (5,858)
------ ------- ------- ------ -------
Financing activities:
Borrowed on revolving line of credit - 5,775 - - 5,775
Payment of long-term debt - (24) (111) - (135)
Principal payments of capital lease obligation - (2,950) - - (2,950)
Receipt of lease inducement - 1,298 - - 1,298
Redemption of options 57 - - - 57
------ ------- ------- ------ -------
Net cash provided by financing activities 57 4,099 (111) - 4,045
------ ------- ------- ------ -------
Net increase (decrease) in cash and cash equivalents 1,460 2,580 (1,778) (50) 2,212
Cash and cash equivalents, beginning of period 463 2,482 6,727 50 9,722
------ ------- ------- ------ -------
Cash and cash equivalents, end of period $1,923 $ 5,062 $ 4,949 $ - $11,934
====== ======= ======= ====== =======
Supplemental Disclosure:
Interest paid $ 50 $ 2,250 $ 261 $ - $ 2,561
====== ======= ======= ====== =======
Income taxes paid $3,501 $ - $ - $ - $ 3,501
====== ======= ======= ====== =======
</TABLE>
-14-
<PAGE>
G. Condensed Consolidating Financial Information (Continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net cash provided (used) by operating activities: $ (98,039) $ 71,446 $ 3,682 $(6,035) $ (28,946)
--------- -------- ------- ------- ---------
Investing activities:
Additions to property and equipment - (66,530) (2,209) 2,803 (65,936)
Additions to intangibles (16,885) (1,909) - - (18,794)
Transfers (to) from restricted cash, net - (1,654) (1,064) 3,232 514
--------- -------- ------- ------- ---------
Net cash (used) by investing activities (16,885) (70,093) (3,273) 6,035 (84,216)
--------- -------- ------- ------- ---------
Financing activities:
Borrowed on revolving line of credit - 17,150 - - 17,150
Repaid on revolving line of credit - (20,000) - - (20,000)
Payment of long-term debt - (72) (69) - (141)
Issuance of bonds payable 99,493 - - - 99,493
Issuance of preferred stock 40,000 - - - 40,000
Purchase of treasury stock (183,746) - - - (183,746)
Proceeds from sale of common stock 158,500 - - - 158,500
Principal payments of capital lease obligation - (3,019) - - (3,019)
Receipt of lease inducement - 1,935 - - 1,935
Redemption of options 29 - - - 29
--------- -------- ------- ------- ---------
Net cash provided (used) by financing activities 114,276 (4,006) (69) - 110,201
--------- -------- ------- ------- ---------
Net (decrease) in cash and cash equivalents (648) (2,653) 340 - (2,961)
Cash and cash equivalents, beginning of period 698 4,383 3,666 - 8,747
--------- -------- ------- ------- ---------
Cash and cash equivalents, end of period $ 50 $ 1,730 $ 4,006 $ - $ 5,786
========= ======== ======= ======= =========
Supplemental Disclosure:
Interest paid $ 268 $ 2,353 $ 596 $ - $ 3,217
========= ======== ======= ======= =========
Income taxes paid $ 2,977 $ - $ - $ - $ 2,977
========= ======== ======= ======= =========
</TABLE>
-15-
<PAGE>
Item 2.
- - ------
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements including those concerning
Management's expectations regarding future financial performance and future
events. These forward-looking statements involve significant risk and
uncertainties, including those described herein and included under "Special Note
Regarding Forward-Looking Statements" below. Actual results may differ
materially from those anticipated by such forward-looking statements.
OVERVIEW
Harborside Healthcare provides high quality long-term care, subacute care and
other specialty medical services in four principal regions: the Southeast, the
Midwest, New England and the Mid-Atlantic. As of September 30, 1998, the Company
operated 49 facilities with a total of 6,043 licensed beds. The Company provides
traditional skilled nursing care, a wide range of subacute care programs (such
as orthopedic, CVA/stroke, cardiac, pulmonary and wound care), as well as
distinct programs for the provision of care to Alzheimer's and hospice patients.
In addition, the Company provides rehabilitation therapy at Company- operated
and non-affiliated facilities. As of September 30, 1998, the Company provided
rehabilitation therapy services to patients at 52 non-affiliated long-term care
facilities. The Company seeks to position itself as the long-term care provider
of choice to managed care and other private referral sources in its target
markets by achieving a strong regional presence and by providing a full range of
high quality, cost effective nursing and specialty medical services.
During 1997 and 1998, the Company acquired 16 skilled nursing facilities with a
total of 1,989 beds (including six assisted living beds), an assisted living
facility with 115 beds and a rehabilitation services company. The 1997
acquisitions consisted of five skilled nursing facilities in Connecticut with a
total of 684 beds, four skilled nursing facilities in Massachusetts with a total
of 401 beds, two skilled nursing facilities in Ohio with a total of 226 beds
(including six assisted living beds), an assisted living facility in Ohio with
115 beds, one skilled nursing facility in Maryland with 163 beds and a
rehabilitation services company. In addition, in 1997 the Company entered into
contracts to manage two skilled nursing facilities in Massachusetts with a total
of 178 beds. In 1998, the Company acquired two skilled nursing facilities in
Rhode Island with a total of 267 beds and two skilled nursing facilities in Ohio
with a total of 248 beds. Additionally, on September 15, 1998, the Company's
Ocala facility opened a sixty bed addition.
The following table sets forth the number of facilities and the number of
licensed beds operated by the Company:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-------------------
1997 1998
-------------------
<S> <C> <C>
Facilities operated (1) 40 49
Licensed beds (1) 4,784 6,043
</TABLE>
The following table sets forth certain operating data for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ---------------------------------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Patient days:
Private and other 100,782 129,699 276,943 375,831
Medicare 31,978 47,810 98,946 147,008
Medicaid 215,999 306,767 586,364 862,540
------- ------- ------- ---------
Total 348,759 484,276 962,253 1,385,379
======= ======= ======= =========
Total net revenues:
Private and other 35.8% 30.0% 34.3% 31.2%
Medicare 23.8% 26.4% 26.9% 26.3%
Medicaid 40.4% 43.6% 38.8% 42.5%
------- ------- ------- ---------
Total 100.0% 100.0% 100.0% 100.0%
======= ======= ======= =========
Average Occupancy Rate (2) 92.0% 92.4% 91.9% 92.6%
Quality Mix (3) 59.6% 56.4% 61.2% 57.5%
</TABLE>
(1) Includes two managed facilities with 178 licensed beds.
(2) "Average Occupancy Rate" is computed by dividing the number of billed bed
days by the total number of available licensed bed days during each of the
periods indicated.
(3) "Quality Mix" consists of the percentage of revenues derived from Medicare,
commercial insurers and other private payors.
-16-
<PAGE>
RESULTS OF OPERATIONS
The Company's total net revenues include net patient service revenues and
rehabilitation therapy service revenues from contracts with non-affiliated long-
term care facilities. Private net patient service revenues are recorded at
established per diem billing rates. Net patient service revenues to be
reimbursed under contracts with third-party payers, primarily the Medicare and
Medicaid programs, are recorded at amounts estimated to be realized under these
contractual arrangements.
The Company's facility operating expenses consist primarily of payroll and
employee benefits related to nursing, housekeeping and dietary services provided
to patients, as well as maintenance and administration of the facilities. Other
significant facility operating expenses include the cost of rehabilitation
therapy services, medical and pharmacy supplies, food, utilities, insurance and
taxes. The Company's facility operating expenses also include the general and
administrative costs associated with the operation of the Company's
rehabilitation therapy business. The Company's general and administrative
expenses include all costs associated with its regional and corporate
operations.
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1998
Total Net Revenues. Total net revenues increased by $20,733,000 or 35.8%, from
$57,964,000 in the third quarter of 1997 to $78,697,000 in the third quarter of
1998. This increase resulted primarily from the acquisition of the four
Massachusetts facilities on August 1,1997, three Dayton, Ohio facilities on
September 1, 1997, five Connecticut facilities on December 1, 1997, two North
Toledo, Ohio facilities on April 1, 1998 and two Rhode Island facilities on May
8, 1998. Of this increase, $2,363,000 or 11.4% of the increase resulted from
the operation of the Massachusetts facilities, $3,039,000 or 14.7% of the
increase resulted from the operation of the Dayton, Ohio facilities, $11,870,000
or 57.3% of the increase resulted from the operation of the Connecticut
facilities, $2,831,000 or 13.7% of the increase resulted from the operation of
the North Toledo facilities and $2,820,000 or 13.6% of the increase resulted
from the operation of the Rhode Island facilities. Revenues generated by
providing rehabilitation therapy services at non-affiliated long-term care
facilities decreased by $2,413,000 or 42.4% from $5,697,000 in the third quarter
of 1997 to $3,284,000 in the third quarter of 1998. Occupancy rate at "same
store" facilities increased from 91.6% during the third quarter of 1997 to 92.5%
during the third quarter of 1998. The average occupancy rate at all of the
Company's facilities increased from 92.0% during the third quarter of 1997 to
92.4% during the third quarter of 1998. The Company's quality mix of private,
Medicare and insurance revenues was 59.6% for the three months ended September
30, 1997 as compared to 56.4% in the same period of 1998. The decrease in the
quality mix percentage was primarily due to the effects of acquired facilities.
Facility Operating Expenses. Facility operating expenses increased by
$16,331,000, or 35.1%, from $46,556,000 in the third quarter of 1997 to
$62,887,000 in the third quarter of 1998. The operation of the Massachusetts
facilities accounted for $2,184,000 or 13.4% of this increase , the operation of
the Dayton, Ohio facilities accounted for $2,126,000 or 13.0% of this increase,
the operation of the Connecticut facilities accounted for $9,314,000 or 57.0% of
this increase, the operation of the North Toledo facilities accounted for
$2,451,000 or 15.0% of this increase, and the operation of the Rhode Island
facilities accounted for $2,850,000 or 17.5% of this increase. The operating
expenses of rehabilitation therapy services at non-affiliated long-term care
facilities decreased by $2,548,000 or 52.2%, from $4,877,000 in the third
quarter of 1997 to $2,329,000 in the third quarter of 1998.
General and Administrative; Service Charges Paid to Affiliate. General and
administrative expenses increased by $869,000, or 31.5% from $2,756,000 in the
third quarter of 1997 to $3,625,000 in the third quarter of 1998. This increase
resulted from the acquisition of new facilities resulting in the expansion of
regional and corporate support, and additional travel, consulting and systems
development expenses associated with the Company's growth. The Company
reimburses an affiliate for rent and other expenses related to its corporate
headquarters as well as for certain data processing and administrative services
provided to the Company. During the third quarter of 1997, such reimbursements
totaled $177,000 compared to $313,000 during the third quarter of 1998.
Depreciation and Amortization. Depreciation and amortization increased from
$989,000 in the third quarter of 1997 to $2,021,000 in the third quarter of
1998. Depreciation increased primarily as the result of the addition of
buildings and building improvements acquired in connection with the merger and
the completion of the related refinancings through the exercise of purchase
options on facilities which had previously been financed through synthetic
leases. Amortization increased primarily as the result of increased deferred
financing costs incurred in connection with the merger and the related
refinancings.
Facility Rent. Facility rent expense for the third quarter increased by
$2,434,000 from $3,031,000 in 1997 to $5,465,000 in 1998. The increase in rent
expense is the result of the acquisition of new facilities in 1997 and 1998.
Merger costs. In connection with the merger completed on August 11, 1998, the
Company incurred merger costs of $37,172,000. Merger costs consisted of
transaction fees and expenses associated with the merger and the related
refinancings and the elimination of deferred financing costs related to debt
retired in connection with these events.
Interest Expense, net. Interest expense, net, increased from $1,614,000 in the
third quarter of 1997 to $3,591,000 in the third quarter of 1998. This net
increase is primarily due to additional interest expense resulting from the
issuance of the Senior Subordinated Discount Notes in connection with the
Merger.
-17-
<PAGE>
Income Taxes (Benefit). As a result of the loss incurred in the third quarter of
1998, an income tax benefit of $7,460,000 was recognized in the third quarter of
1998 as compared to income tax expense of $1,081,000 in the third quarter of
1997.
Net Income (Loss). Net income was $1,692,000 in the third quarter of 1997 as
compared to a loss of $28,900,000 in the third quarter of 1998. The net loss
reported in the third quarter of 1998 resulted from merger costs of $37,172,000
recognized in that quarter.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1998
Total Net Revenues. Total net revenues increased by $71,697,000 or 46.1%, from
$155,640,000 for the first nine months of 1997 to $227,337,000 for the first
nine months of 1998. This increase resulted primarily from the acquisition of
the Harford Gardens facility on March 1, 1997, four Massachusetts facilities on
August 1, 1997, three Dayton, Ohio facilities on September 1, 1997, five
Connecticut facilities on December 1, 1997, two North Toledo, Ohio facilities
on April 1, 1998 and two Rhode Island facilities on May 8, 1998. Of such
increase, $1,337,000 or 1.9% of the increase resulted from the operation of the
Harford Gardens facility, $11,803,000 or 16.5% of the increase resulted from the
operation of the Massachusetts facilities, $11,707,000 or 16.3% of the increase
resulted from the operation of the Dayton, Ohio facilities, $34,920,000 or 48.7%
of the increase resulted from the operation of the Connecticut facilities,
$5,610,000 or 7.8% of the increase resulted from the operation of the North
Toledo facilities and $4,566,000 or 6.4% of the increase resulted from the
operation of the Rhode Island facilities. Revenues generated by providing
rehabilitation therapy services at non-affiliated long-term care facilities
decreased by $321,000 or 2.6% from $12,465,000 in the nine months of 1997 to
$12,144,000 in the nine months of 1998. The remaining $2,075,000 or 2.9% 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 $148.51 for the first nine months of 1997 to $151.62 for the
first nine months of 1998. Occupancy rate at "same store" facilities increased
from 91.7% for the nine months of 1997 to 92.4% for the nine months of 1998.
The average occupancy rate at all of the Company's facilities increased from
91.9% for the first nine months of 1997 to 92.6% for the first nine months of
1998. The Company's quality mix of private, Medicare and insurance revenues was
61.2% for the first nine months ended September 30, 1997 as compared to 57.5% in
the same period of 1998.
Facility Operating Expenses. Facility operating expenses increased by
$55,844,000, or 45.0%, from $124,073,000 for the first nine months of 1997 to
$179,917,000 for the first nine months of 1998. The operation of the Harford
facility accounted for $1,604,000 or 2.9% of this increase, Massachusetts
facilities accounted for $9,981,000 or 17.9% of this increase, the operation of
the Dayton, Ohio facilities accounted for $8,784,000 or 15.7%. of this increase,
the operation of the Connecticut facilities accounted for $27,823,000 or 49.8%
of this increase, the operation of the North Toledo facilities accounted for
$4,323,000 or 7.7% of this increase, and the operation of the Rhode Island
facilities accounted for $3,853,000 or 6.9% of this increase. Operating expenses
associated with additional non-affiliate therapy contracts decreased $1,133,000,
or 11.2%. The remainder of the increase in facility operating expenses, $609,000
or 1.1%, is primarily due to increases in the costs of labor, medical supplies
and rehabilitation therapy services purchased from third parties at "same store"
facilities.
General and Administrative; Service Charges Paid to Affiliate. General and
administrative expenses increased by $3,621,000, or 48.4%, from $7,479,000 for
the first nine months of 1997 to $11,100,000 for the first nine months of 1998.
This increase resulted from the acquisition of new facilities resulting in the
expansion of regional and corporate support, and additional travel, consulting
and systems development expenses associated with the Company's growth. The
Company reimburses an affiliate for rent and other expenses related to its
corporate headquarters as well as for certain data processing and administrative
services provided to the Company. During the first nine months of 1997, such
reimbursements totaled $531,000 compared to $941,000 in 1998.
Depreciation and Amortization. Depreciation and amortization increased from
$2,871,000 for the first nine months of 1997 to $4,284,000 for the first nine
months of 1998. Depreciation increased primarily as the result of the addition
of buildings and building improvements acquired in connection with the merger
and the completion of the related refinancings through the exercise of purchase
options on facilities which had previously been financed through synthetic
leases. Amortization increased primarily as the result of increased deferred
financing costs incurred in connection with the merger and the related
refinancings.
Facility Rent. Facility rent expense for the first nine months increased by
$8,746,000 from $8,340,000 in 1997 to $17,086,000 in 1998. The increase in rent
expense is due to the acquisition of new facilities.
Merger costs. In connection with the merger completed on August 11, 1998, the
Company incurred merger costs of $37,172,000. Merger costs consisted of
transaction fees and expenses associated with the merger and the related
refinancings and the elimination of deferred financing costs related to debt
retired in connection with these events.
-18-
<PAGE>
Interest Expense, net. Interest expense, net, increased from $4,370,000 for the
first nine months of 1997 to $6,793,000 for the first nine months of 1998. This
net increase is primarily due to additional interest expense resulting from the
issuance of the Senior Subordinated Discount Notes in connection with the
Merger.
Income Taxes (Benefit). As a result of the loss incurred in the third quarter of
1998, an income tax benefit of $4,984,000 was recognized for the first nine
months of 1998 as compared to income tax expense of $3,060,000 for the first
nine months of 1997.
Net Income (Loss). Net income was $4,787,000 for the first nine months of 1997
as compared to a loss of $25,027,000 for the first nine months of 1998. The net
loss reported in 1998 resulted from merger costs of $37,172,000 recognized in
the third quarter.
LIQUIDITY AND CAPITAL RESOURCES
Harborside's primary cash needs are for acquisitions, capital expenditures,
working capital, debt service and general corporate purposes. Harborside has
historically financed these requirements primarily through a combination of
internally generated cash flow, mortgage financing and operating leases, in
addition to funds borrowed under a previously existing credit facility.
Harborside's leased facilities are currently leased from either the owner of the
facilities or from a real estate investment trust which has purchased the
facilities from the owner, though prior to the merger, some facilities had been
leased through a trust established in conjunction with Harborside's previously
existing synthetic lease facility that was entered into in September 1997. In
addition, in 1996, Harborside financed the acquisition of the 1996 Ohio
facilities from the owner by means of a lease which is accounted for as a
capital lease for financial reporting purposes. Harborside'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. Harborside 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 Harborside believes is equal to the fair market value of
the facility at the inception date of such lease, thus allowing Harborside to
realize the value appreciation, if any, of the facility while maintaining
financial flexibility.
The Company's operating activities during the first nine months of 1998 required
the use of net cash of $28.9 million as compared to the generation of net cash
of $4.0 million during the same period in 1997. The decrease in net cash
generated by operations during the first nine months of 1998 was the result of
the recognition of $37.2 million of transaction costs associated with the merger
that was completed on August 11, 1998. Partially offsetting these non-recurring
costs were non-cash addbacks totaling $8.5 million and including depreciation
and amortization, and the addback of non-cash components of interest expense.
Accounts receivable increased by $12.3 million during the first nine months of
1998, primarily as the result of the acquisition of new facilities. The effect
of this increase was mostly offset by related increases in the accruals for
employee compensation and other liabilities totaling $9.6 million. Prepaid
income taxes increased by $7.7 million as a result of the recognition of a tax
benefit that resulted from the loss caused by the non-recurring merger costs.
Net cash used by investing activities was $84.2 million during the first nine
months of 1998 as compared to $5.9 million used during the same period in 1997.
The primary use of cash for investing purposes during 1998 was the addition of
$65.9 million of property, plant and equipment primarily related to the exercise
of purchase options on facilities previously leased through the Company's prior
synthetic leasing facility. Additions to property, plant and equipment totaled
$2.1 million in the prior year period. Additions to intangible assets during the
first nine months of 1998 were $18.8 million. Most of these additions related to
deferred financing costs incurred in connection with the issuance of the
Company's Senior Subordinated Discount Notes and Preferred Stock and the
establishment of a $250 million credit facility. Additions to intangible assets
totaled $4.7 million in the prior year period, most of which also related to the
costs of various financings.
Net cash provided by financing activities during the first nine months of 1998
was $110.2 million as compared to $4.0 million during the first nine months of
1997. During the first nine months of 1998 the Company borrowed $4.4 million
under its previously existing credit facility. The Company repaid the borrowings
under that credit facility at the date of the merger, at which time it also
borrowed $12.8 million under its new credit facility. In connection with the
merger, the Company received gross proceeds of $99.5 million through the
issuance of its Senior Subordinated Discount Notes. The Company also received
gross proceeds of $40.0 million through the issuance of its Preferred Stock in
connection with the merger. In connection with these transactions and prior to
the merger, the New Investors made common equity cash contributions totaling
$165.0 million ($158.5 million, net of issuance costs). The merger required the
use of $183.7 million of cash to redeem previously outstanding shares of the
Company's common stock.
At September 30, 1998, the Company had two mortgage loans outstanding in the
aggregate amount of $17.9 million, in addition to advances outstanding under its
new credit facility, and $55.7 million of capital lease obligations. One of the
Company's mortgage loans had an outstanding balance of $16.3 million, of which
$15.1 million is due at maturity in 2004. This loans 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 four mortgaged facilities and the actual
revenues of these facilities during a twelve month base period. The Company's
other mortgage loan, which encumbers a single facility, had an outstanding
principal balance of $1.6 million, of which $1.3 million is due in 2010.
-19-
<PAGE>
The Company expects that its capital expenditures for 1998, excluding
acquisitions of new long-term care facilities, will aggregate approximately
$10.0 million, $7.0 million of which had already been invested through September
30, 1998. The Company's expected capital expenditures will relate to, among
other things, maintenance capital expenditures, systems enhancements, special
construction projects and other capital improvements. The Company expects that
the majority of its facility acquisitions will be financed with borrowings under
its credit facility. However, the Company may be required to assume debt or to
obtain other debt and/or equity financing to finance any significant
acquisitions or real estate/construction projects in the future.
The Company's principal sources of funds are cash flow from operations and
borrowings under its credit facility. These funds are being used to finance
working capital, meet debt service and capital expenditure requirements, and for
general corporate purposes. It is anticipated that these funds will also be
used to finance acquisitions and lease real estate. The Company believes that
operating cash flow and availability under its credit facility will be adequate
to meet its liquidity needs for the foreseeable future, although no assurance
can be given in this regard.
YEAR 2000 DISCLOSURE
Harborside is preparing all of its software products and internal computer
systems to be Year 2000 compliant. Harborside has replaced its financial
reporting and payroll systems with systems that are Year 2000 compliant.
Harborside is in the process of evaluating several clinical information software
products, including one which has been installed in 13 of its facilities, with
the expectation that it will identify a Year 2000 compliant standard clinical
information and patient billing system which will be implemented at each of
Harborside's facilities. Harborside currently estimates that it will complete
the selection of the standard clinical information and patient billing software
during 1998 and finalize the conversion of its existing systems to the new
platform during 1999. Although Harborside does not expect the cost of the
conversion of its clinical and patient billing systems to have a material
adverse effect on its business or future results of operations, there can be no
assurance that Harborside will not be required to incur significant
unanticipated costs in relation to its compliance obligations.
Harborside currently estimates that compliance will be achieved during 1999;
however, there can be no assurance that Harborside will be able to complete the
conversion in a timely manner or that third party software suppliers will be
able to provide Year 2000 compliant products for Harborside to install.
Harborside currently estimates the cost of preparing its systems to be Year
2000 compliant to be approximately $1.0 million. Harborside will fund the costs
associated with these system conversions through cash flows from operations or
borrowings under its Credit Facility. Harborside's ongoing facility acquisition
strategy will require it to evaluate acquisition candidates for Year 2000
compliance.
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.
-20-
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q, including information set forth under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations", constitute "Forward-Looking Statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The
Company desires to take advantage of certain "safe harbor" provisions of the
Reform Act and is including this special note to enable the Company to do so.
Forward-looking statements included in this Form 10-Q, or hereafter included in
other publicly available documents filed with the Securities and Exchange
Commission, reports to the Company's stockholders and other publicly available
statements issued or released by the Company involve known and unknown risks,
uncertainties, and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ materially from
the future results, performance (financial or operating) or achievements
expressed or implied by such forward-looking statements. The Company believes
the following important factors could cause such a material difference to occur:
1. The Company's ability to grow through the acquisition and development of
long-term care facilities or the acquisition of ancillary businesses.
2. The Company's ability to identify suitable acquisition candidates, to
consummate or complete construction projects, or to profitably operate or
successfully integrate enterprises into the Company's other operations.
3. The occurrence of changes in the mix of payment sources utilized by the
Company's patients to pay for the Company's services.
4. The adoption of cost containment measures by private pay sources such as
commercial insurers and managed care organizations, as well as efforts by
governmental reimbursement sources to impose cost containment measures.
5. Changes in the United States healthcare system, including changes in
reimbursement levels under Medicaid and Medicare, and other changes in
applicable government regulations that might affect the profitability of
the Company.
6. The Company's continued ability to operate in a heavily regulated
environment and to satisfy regulatory authorities, thereby avoiding a
number of potentially adverse consequences, such as the imposition of
fines, temporary suspension of admission of patients, restrictions on the
ability to acquire new facilities, suspension or de-certification from
Medicaid or Medicare programs, and in extreme cases, revocation of a
facility's license or the closure of a facility, including as a result of
unauthorized activities by employees.
7. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth through acquisition and
development, as well as internal growth.
8. Changes in certificate of need laws that might increase competition in the
Company's industry, including, particularly, in the states in which the
Company currently operates or anticipates operating in the future.
9. The Company's ability to staff its facilities appropriately with qualified
healthcare personnel, including in times of shortages of such personnel and
to maintain a satisfactory relationship with labor unions.
10. The level of competition in the Company's industry, including without
limitation, increased competition from acute care hospitals, providers of
assisted and independent living and providers of home healthcare and
changes in the regulatory system in the state in which the Company operates
that facilitate such competition.
11. The continued availability of insurance for the inherent risks of liability
in the healthcare industry.
12. Price increases in pharmaceuticals, durable medical equipment and other
items.
13. The Company's reputation for delivering high-quality care and its ability
to attract and retain patients, including patients with relatively high
acuity levels.
14. Changes in general economic conditions, including changes that pressure
governmental reimbursement sources to reduce the amount and scope of
healthcare coverage.
The foregoing review of significant factors should not be construed as
exhaustive or as an admission regarding the adequacy of disclosures previously
made by the Company.
-21-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Harborside Healthcare Corporation held a special meeting of
shareholders on August 11, 1998 to approve a plan of merger and certain
amendments of its certificate of incorporation. Present at the special
meeting in person or by proxy were 6,881,435 shares of the Company's
common stock, which represented 85.8% of the 8,011,164 shares of Common
stock outstanding and eligible to vote, and which constituted a quorum.
The results of these votes follow:
Proposal I (To approve and adopt the Agreement and Plan of Merger)
For: 6,876,636; Against: 1,950; Abstain: 2,849
Proposal II (To approve certain amendments to the Company's certificate
of incorporation)
For: 6,875,686; Against: 1,900: Abstain: 3,849
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on 8-K
Filed August 26, 1998
-22-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Harborside Healthcare Corporation
By: /s/ Stephen L. Guillard
--------------------------------------------
Stephen L. Guillard
Chairman, President, and Chief Executive
Officer
By: /s/ William H. Stephan
--------------------------------------------
William H. Stephan
Senior Vice President and Chief Financial
Officer
DATE: November 16, 1998
-23-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,786
<SECURITIES> 0
<RECEIVABLES> 47,019
<ALLOWANCES> (2,263)
<INVENTORY> 54,301<F1>
<CURRENT-ASSETS> 68,427
<PP&E> 159,570
<DEPRECIATION> 0
<TOTAL-ASSETS> 264,413
<CURRENT-LIABILITIES> 37,123
<BONDS> 185,751<F2>
0
40,931
<COMMON> 146
<OTHER-SE> 462<F3>
<TOTAL-LIABILITY-AND-EQUITY> 264,413
<SALES> 0
<TOTAL-REVENUES> 227,337
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 250,555
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,793
<INCOME-PRETAX> 0
<INCOME-TAX> (4,984)
<INCOME-CONTINUING> (25,027)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,027)
<EPS-PRIMARY> (3.28)
<EPS-DILUTED> (3.21)
<FN>
<F1>Includes the following assets: prepaid expenses and other of $7,875,
prepaid income taxes of $7,860, deferred income taxes--current of $2,150,
deferred income taxes--long-term of $71, restricted cash of $5,031, note
receivable of $7,487, and intangible assets, net of $23,827.
<F2>Includes the following long-term liabilities: deferred income of $2,460,
capital lease obligation of $51,503, and long-term debt of $131,788.
<F3>Includes the following equity accounts: additional paid-in capital of
$205,972, treasury stock $(183,746), and retained earnings of $(21,764)
</FN>
</TABLE>
