UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 01-14358
Harborside Healthcare Corporation
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3307188
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(State or other jurisdiction of (IRS Employer incorporation or
organization) Identification No.)
470 Atlantic Avenue, Boston, Massachusetts 02210
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Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (617) 556-1515
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Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class On which registered
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Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
At March 31, 1998, the registrant had 8,008,665 shares of Common Stock
outstanding. The aggregate market value on February 28, 1998 of the registrant's
Common Stock held by non-affiliates of the registrant was $80,978,000 (based on
the closing price of these shares as quoted on such date on the New York Stock
Exchange and 3,608,665 shares of common stock held by non-affiliates).
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DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy statement for the
Annual Meeting of Stockholders to be held on May 13, 1998 are incorporated into
Part III of this Form 10-K.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K, including information set forth under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations", constitute "Forward-Looking Statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The
Company desires to take advantage of certain "safe harbor" provisions of the
Reform Act and is including this special note to enable the Company to do so.
Forward-looking statements included in this Form 10-K, or hereafter included in
other publicly available documents filed with the Securities and Exchange
Commission, reports to the Company's stockholders and other publicly available
statements issued or released by the Company involve known and unknown risks,
uncertainties, and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ materially from
the future results, performance (financial or operating) or achievements
expressed or implied by such forward-looking statements. The Company believes
the following important factors could cause such a material difference to occur:
1. The Company's ability to grow through the acquisition and development of
long-term care facilities or the acquisition of ancillary businesses.
2. The Company's ability to identify suitable acquisition candidates, to
consummate or complete construction projects, or to profitably operate or
successfully integrate enterprises into the Company's other operations.
3. The occurrence of changes in the mix of payment sources utilized by the
Company's patients to pay for the Company's services.
4. The adoption of cost containment measures by private pay sources such as
commercial insurers and managed care organizations, as well as efforts by
governmental reimbursement sources to impose cost containment measures.
5. Changes in the United States healthcare system, including changes in
reimbursement levels under Medicaid and Medicare, and other changes in
applicable government regulations that might affect the profitability of
the Company.
6. The Company's continued ability to operate in a heavily regulated
environment and to satisfy regulatory authorities, thereby avoiding a
number of potentially adverse consequences, such as the imposition of
fines, temporary suspension of admission of patients, restrictions on the
ability to acquire new facilities, suspension or decertification from
Medicaid or Medicare programs, and in extreme cases, revocation of a
facility's license or the closure of a facility, including as a result of
unauthorized activities by employees.
7. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth through acquisition and
development, as well as internal growth.
8. Changes in certificate of need laws that might increase competition in the
Company's industry, including, particularly, in the states in which the
Company currently operates or anticipates operating in the future.
9. The Company's ability to staff its facilities appropriately with qualified
healthcare personnel, including in times of shortages of such personnel and
to maintain a satisfactory relationship with labor unions.
10. The level of competition in the Company's industry, including without
limitation, increased competition from acute care hospitals, providers of
assisted and independent living 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.
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TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 4.1 EXECUTIVE OFFICERS OF THE REGISTRANT
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
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ITEM 1. BUSINESS
GENERAL OVERVIEW
Harborside Healthcare (the "Company") was created in March 1996, in
anticipation of an initial public offering (the "Offering"), in order to combine
under its control the operations of various long-term care facilities and
ancillary businesses (the "Predecessor Entities") which had operated since 1988.
The Company completed the Offering on June 14, 1996 and issued 3,600,000 shares
of common stock at $11.75 per share. Immediately prior to the Offering the
owners of the Predecessor Entities contributed their interests in such
Predecessor Entities to the Company and received 4,400,000 shares of the
Company's common stock (the "Reorganization").
Harborside Healthcare provides high quality long-term care, subacute care and
other specialty medical services in five principal regions: the Southeast
(Florida), the Midwest (Ohio and Indiana), New England (Massachusetts and New
Hampshire), the Northeast (Connecticut and Rhode Island), and the Mid-Atlantic
(New Jersey and Maryland). Within these regions, as of December 31, 1997, the
Company operated 43 licensed long-term care facilities (13 owned and 30 leased)
with a total of 5,290 licensed beds. The Company provides traditional skilled
nursing care, a wide range of subacute care programs (such as orthopedic,
CVA/stroke, cardiac, pulmonary and wound care), as well as distinct programs for
the provision of care to Alzheimer's and hospice patients. In addition, the
Company provides certain rehabilitation therapy services both at
Company-operated and non-affiliated facilities. As of December 31, 1997, the
Company provided rehabilitation services to patients at 80 non-affiliated
long-term care facilities. From December 31, 1993 to December 31, 1997, the
Company increased its overall patient capacity by approximately 3,141 licensed
beds, or approximately 150%.
PATIENT SERVICES
Basic Patient Services
Basic patient services are those traditionally provided to elderly patients in
long-term care facilities to assist with the activities of daily living and to
provide general medical care. The Company provides 24-hour skilled nursing care
by registered nurses, licensed practical nurses and certified nursing aides in
all of its facilities. Each facility is managed by an on-site licensed
administrator who is responsible for the overall operation of the facility,
including the quality of care provided. The medical needs of patients are
supervised by a medical director, who is a licensed physician. Although
treatment of patients is the responsibility of their own attending physicians,
who are not employed by the Company, the medical director monitors all aspects
of delivery of care. The Company also provides support services, including
dietary services, therapeutic recreational activities, social services,
housekeeping and laundry services, pharmaceutical and medical supplies and
routine rehabilitation therapy.
Each facility offers a number of individualized therapeutic activities
designed to enhance the quality of life of its patients. These activities
include entertainment events, musical productions, trips, arts and crafts and
volunteer and other programs that encourage community interaction.
Specialty Medical Services
Specialty medical services are those provided to patients with medically
complex needs, who generally require more extensive treatment and a higher level
of skilled nursing care. These services typically generate higher net patient
service revenues per patient day than basic patient services as a result of
increased levels of care and the provision of ancillary services.
Subacute Care. Subacute care is goal-oriented, comprehensive care designed for
an individual who has had an acute illness, injury, or exacerbation of a disease
process. Subacute care is typically rendered immediately after, or instead of,
acute hospitalization in order to treat one or more specific, active, complex
medical conditions or in order to administer one or more technically complex
treatments. The Company provides subacute care services at all but two of its
existing facilities in such areas as complex medical, cardiac recovery,
digestive, immuno-suppressed disease, post-surgical, wound, CVA/stroke care,
hemodialysis, infusion therapy, and diabetes and pain management.
In facilities that have shown strong demand for subacute services, the Company
has developed distinct subacute programs marketed under the name "COMprehensive
Patient Active Subacute System" or "COMPASS." COMPASS programs are specially
staffed and equipped for the delivery of subacute care. COMPASS patients
typically range in age from late teens to the elderly, and typically require
high levels of nursing care and the services of physicians, therapists,
dietitians, clinical pharmacists or psycho/social counselors. Certain patients
may also require life support or monitoring equipment. Because patient goals are
generally rehabilitation-oriented, lengths of stay for COMPASS programs are
generally expected to be less than 30 days each.
The Company has designed clinical pathways for these COMPASS programs in the
areas of orthopedic rehabilitation,
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CVA/stroke recovery, cardiac recovery, pulmonary rehabilitation and wound care
management. These clinical pathways are designed to achieve specified measurable
outcomes in an efficient and cost-effective manner. The Company's COMPASS
programs and the clinical pathways used by these programs are designed to
attract commercial insurance and managed care organizations, such as HMOs and
PPOs. The Company has personnel dedicated to actively marketing its COMPASS
programs to commercial insurers and managed care organizations. The Company will
continue to develop additional clinical pathways based on market opportunities.
Alzheimer's and Hospice Care. The Company has also developed distinct units
that provide care for patients with Alzheimer's disease and hospice units for
patients with terminal illnesses. As of December 31, 1997, the Company operated
dedicated Alzheimer's units at eight facilities. The Company also operates
distinct hospice units at three of its facilities, where it provides care to
terminally ill patients and counseling to their families.
OPERATIONS
Facilities. Each of the Company's facilities is supervised by a licensed
facility administrator who is responsible for all aspects of the facility's
operations. The facility administrator oversees (i) a director of nursing who
supervises a staff of registered nurses, licensed practical nurses and certified
nursing aides, (ii) a director of admissions who is responsible for developing
local marketing strategies and programs and (iii) various other departmental
supervisors. The Company also contracts with one or more licensed physicians at
each facility to serve as medical directors for the purpose of supervising the
medical management of patients. Facilities with subacute or specialty medical
units or programs may also contract with physician specialists to serve as
rehabilitation or specialty program medical directors in areas such as physiatry
(physical medicine), neurology or gero-psychology. Facilities may also employ or
contract for additional clinical staff such as case managers, therapists and
program directors. Department supervisors at each of the Company's facilities
oversee personnel who provide dietary, maintenance, laundry, housekeeping,
therapy and social services. In addition, a business office staff at each
facility routinely performs administrative functions, including billing, payroll
and accounts payable processing. The Company's corporate and regional staff
provide support services such as quality assurance, management training,
clinical consultation and support, management information systems, risk
management, human resource policies and procedures, operational support,
accounting and reimbursement expertise.
Regions. The Company seeks to cluster its long-term care facilities and
therapy services in selected geographic regions to establish a strong
competitive position as well as to position the Company as a healthcare provider
of choice to managed care and private payors in these markets. The Company's
facilities currently serve five principal geographic regions: the Southeast
(Florida), the Midwest (Ohio and Indiana), New England (Massachusetts and New
Hampshire), Northeast (Connecticut and Rhode Island), and the Mid-Atlantic (New
Jersey and Maryland). The Company maintains regional operating offices in
Clearwater, Florida; Indianapolis, Indiana; Topsfield, Massachusetts; West
Hartford, Connecticut, and Peterborough, New Hampshire and Bridgewater, New
Jersey. Each region is supervised by a regional director of operations who
directs the efforts of a team of professional support staff in the areas of
clinical services, marketing, bookkeeping, human resources and engineering.
Other Company staff, who are principally based in Boston and the regions,
provide support and assistance to all of the Company's facilities in the areas
of subacute services, managed care contracting, reimbursement services, risk
management, data processing and training. Financial control is maintained
through financial and accounting policies established at the corporate level for
use at each facility. The Company has standardized operating policies and
procedures and continually monitors operating performance to assure consistency
and quality of operations. The Company's therapy services business maintains
offices in Palm Harbor, Florida, and Indianapolis, Indiana.
Continuous Quality Improvement Program. The Company has developed a continuous
quality improvement program which is designed to monitor, evaluate and improve
the delivery of patient care. The program is supervised by the Company's Vice
President of Professional Services and consists of the standardization of
policies and procedures, routine site visits and assessments and a quality
control system for patient care and physical plant compliance. Pursuant to its
quality control system, the Company routinely collects information from
patients, family members, referral sources, employees and state survey agencies
which is then compiled, analyzed and distributed throughout the Company in order
to monitor the quality of care and services provided.
The Company's continuous quality improvement program is modeled after
guidelines for long-term care and subacute facilities promulgated by the Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO"), a nationally
recognized accreditation agency for hospitals and other healthcare
organizations. The Company believes that JCAHO accreditation is an important
factor in gaining provider contracts from managed care and commercial insurance
companies. Accordingly, in late 1995 the Company began a program to seek
accreditation from JCAHO for the Company's facilities. As of December 31, 1997,
28 of the Company's facilities had received accreditation, and of these 17 had
received accreditation "with commendation".
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MARKETING
The Company's marketing program is designed to attract patients who will have
a favorable impact on the Company's profits and quality mix of revenues. The
Company establishes monthly occupancy and revenue goals for each of its
facilities and maintains marketing objectives to be met by each facility. The
Company's Vice President of Marketing is principally responsible for the
development and implementation of the Company's marketing program. Regional
marketing directors provide routine support to the facility-based admissions
directors through the development of facility-based marketing strategies,
competitive assessments and routine visits.
The Company uses a decentralized marketing approach in order to capitalize on
each facility's strengths and reputation in the community it serves. Admissions
staff at each facility are primarily responsible for marketing basic medical
services and developing semi-annual marketing plans in consultation with the
Company's regional marketing and operations staff. Basic medical services are
marketed to area physicians, hospital discharge planning personnel, individual
patients and their families and community referral sources. Facility personnel
also market the Company's specialty medical services to these sources. Corporate
and regional personnel who specialize in subacute care, managed care and
reimbursement also assist in the marketing of specialty medical services.
The Company believes its marketing program has demonstrated its effectiveness.
The Company's average annual occupancy rates for the fiscal years ended December
31, 1995, 1996 and 1997 were 92.5%, 92.6% and 92.3%. In comparison, a study of
approximately 1,500 nursing facilities conducted by the U.S. Department of
Health and Human Services found that in 1995 nursing facilities operated at
approximately 87% of capacity.
Since June 1994, the Company has maintained a dedicated managed care marketing
group, led by the Senior Vice President of Marketing and Managed Care, whose
primary purpose is to solicit managed care and commercial insurance contracts.
The Company's regional and corporate staff attend trade shows and events for
managed care, commercial insurance companies and case managers in order to
broaden the Company's overall presence and recognition with these groups.
SOURCES OF REVENUES
The Company derives its revenues primarily from private pay sources, the
Federal Medicare program for certain elderly and disabled patients and state
Medicaid programs for indigent patients. The Company's revenues are influenced
by a number of factors, including (i) the licensed bed capacity of its
facilities, (ii) occupancy rates, (iii) the mix of patients and the rates of
reimbursement among payor categories (private and other, Medicare and Medicaid)
and (iv) the extent to which subacute and other specialty medical and ancillary
services are utilized by the patients and paid for by the respective payment
sources. The Company employs specialists to monitor reimbursement rules,
policies and related developments in order to comply with all reporting
requirements and to assist the Company in receiving reimbursements.
The following table identifies the Company's total net revenues attributable
to each of its payor sources for the periods indicated:
TOTAL NET REVENUES(1)
YEAR ENDED DECEMBER 31,
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1995 1996 1997
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Private and other..........................35.1% 35.5% 34.1%
Medicare...................................31.7 26.3 25.9
Medicaid...................................33.2 38.2 40.0
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Total...................................100.0% 100.0% 100.0%
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(1) Total net revenues exclude net revenues of the Larkin Chase Center which is
owned by the Bowie Center Limited Partnership ("Bowie L.P."). The Company owns a
75% partnership interest in Bowie L.P. but records its investment in Bowie L.P.
using the equity method. See Note D to the Company's consolidated financial
statements included elsewhere in this report.
<PAGE>
Private and Other. Private and other net revenues include payments from
individuals who pay directly for services without governmental assistance and
payments from commercial insurers, HMOs, PPOs, Blue Cross organizations,
workers' compensation programs, hospice programs and other similar payment
sources. The Company's rates for private pay patients are typically higher than
rates for patients eligible for assistance under state Medicaid programs. The
Company's private pay rates vary from facility to facility and are influenced
primarily by the rates charged by other providers in the local market and by the
Company's ability to distinguish its services from those provided by its
competitors. Although private pay rates are generally established on a
facility-specific fee schedule, rates charged for individual cases may vary
widely because, in the case of managed care, they are either negotiated on a
case-by-case basis with the payor or are fixed by contract. Rates charged to
private pay patients are not subject to regulatory control in any of the states
in which the Company operates.
Medicare. All but two of the Company's facilities are certified Medicare
providers. The Company does not expect to seek Medicare certification for these
two facilities because all of the patients currently at these facilities are
private pay patients. Medicare is a Federally funded and administered health
insurance program primarily designed for individuals who are age 65 or over and
are entitled to receive Social Security benefits. The Medicare program consists
of two parts. The first part, Part A, covers inpatient hospital services and
certain services furnished by other institutional healthcare providers, such as
long-term care facilities. The second part, Part B, covers the services of
doctors, suppliers of medical items and services and various types of outpatient
services. Part B services include physical, speech and occupational therapy and
durable medical equipment and other ancillary services of the type provided by
long-term care or acute care facilities. Part A coverage, as applied to services
delivered in a long-term care facility, is limited to skilled nursing and
rehabilitative care related to a recent hospitalization and is limited to a
specified term (generally 100 days per calendar year), requires beneficiaries to
share some of the cost of covered services through the payment of a deductible
and a co-insurance payment and requires beneficiaries to meet certain qualifying
criteria. There are no limits on duration of coverage for Part B services, but
there is a co-insurance requirement for most services covered by Part B.
The method used in determining Medicare reimbursement for rehabilitation
therapy services furnished in the Company's facilities depends on the type of
therapy provided. Medicare currently applies salary equivalency guidelines to
determine the reasonable cost of physical therapy services and respiratory
therapy services provided on a contract basis, which is the cost that would be
incurred if the therapist were employed at the facility, plus an amount designed
to compensate the provider for certain general and administrative overhead
costs. Medicare pays for occupational therapy and speech language pathology
services on a reasonable cost basis, subject to the so-called "prudent buyer"
rule for evaluating the reasonableness of the costs. During the first quarter of
1998, the Health Care Financing administration ("HCFA") proposed rules which
would establish new guidelines for reimbursement for rehabilitation therapy
services provided at skilled nursing facilities. These new guidelines would
revise the existing salary equivalency rules for physical and respiratory
therapies and extend the salary equivalency methodology to speech and
occupational therapy services as well. The Company does not believe that the
proposed rules will have a material adverse effect on its operations. Further,
the salary equivalency guidelines will not apply to skilled nursing facilities
when the provisions of the Balanced Budget Act of 1997 become effective. See
"Governmental Regulation."
Under the Medicare Part A program, the Company is reimbursed for its direct
costs (which consist of routine, ancillary and capital expenses) plus an
allocation of indirect costs. The total of routine costs and the respective
allocated overhead is subject to a regional routine cost limit. As the Company
expands its subacute care and other specialty medical services, the costs of
care for these patients have exceeded and are expected to continue to exceed the
regional reimbursement routine cost limits. In order to recover these costs, the
Company is required to submit routine cost limit exception requests to recover
the excess costs from Medicare. There can be no assurance that the Company will
be able to recover such excess costs under any pending or future requests. The
failure to recover these excess costs in the future could materially adversely
affect the Company. Under current regulations, new long-term care facilities
are, in certain limited circumstances, able to apply for a three year exemption
from routine cost limits. The Company has applied for, been denied and is now
appealing such exemptions for two of its facilities. Unless and until such
exemptions are granted, these facilities can only recover excess costs through
routine cost limit exception requests. The Balanced Budget Act of 1997 (the
"BBA") substantially amends the current Medicare reimbursement methodology and
eliminates the process of applying for and receiving routine cost limit
exceptions and exemptions.
The BBA was enacted in August 1997 and significantly amends the reimbursement
methodology of the Medicare program. In addition to offering new Medicare health
plan options and increasing the penalties related to healthcare fraud and abuse,
the BBA provides for a prospective payment system for skilled nursing facilities
to be implemented for cost report periods beginning on or after July 1, 1998.
The BBA also mandates a 10% reduction in Part B therapy costs for the period
January 1, 1998 through July 1, 1998. Subsequent to July 1, 1998, skilled
nursing facilities will be reimbursed for Part B therapy services which will be
determined from fee schedules to be established by HCFA. The BBA further limits
reimbursement for Part B therapy services by establishing annual limitations on
Part B therapy charges per beneficiary. The BBA also requires skilled nursing
facilities to institute "consolidated billing" for non-physician Part B
services. Under consolidated billing payments for non-physician Part B services
will be made directly to the skilled nursing facility whether or not the service
was provided directly by the skilled nursing facility or by others under a
contractual arrangement. Payments for such services provided after July 1, 1998
will be made based on a fee schedule established by HCFA. Many of the details of
this prospective payment system are will not be
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available until certain regulations are released. These regulations are expected
to be published on May 1, 1998 and will be subect to a sixty-day comment period
prior to implementation. In the absence of final and complete regulations, the
Company has not been able to fully assess and quantify the ultimate impact of
the BBA on the Company's consolidated financial position, results of operations
or liquidity.
Medicaid. Medicaid includes the various state-administered reimbursement
programs for indigent patients created by Federal law. Although Medicaid
programs vary from state to state, they are partially subsidized by Federal
funds. Although reimbursement rates are determined by the state, the Federal
government retains the right to approve or disapprove individual state plans.
For Medicaid recipients, providers must accept reimbursement from Medicaid as
payment in full for the services rendered, because the provider may not bill the
patient for more than the amount of the Medicaid payment received. All but two
of the Company's facilities participate in the Medicaid program of the states in
which they are located. These two facilities are currently occupied solely by
private pay patients.
Under the Boren Amendment, a Federal Medicaid statute, and related
regulations, state Medicaid programs were required to provide reimbursement
rates that were reasonable and adequate to cover the costs that would be
incurred by efficiently and economically operated facilities in providing
services in conformity with state and Federal laws, regulations and quality and
safety standards. Furthermore, payments were required to be sufficient to enlist
enough providers so that services under the state's Medicaid plan were available
to recipients at least to the extent that those services are available to the
general population. However, there can be no assurance that payments under
Medicaid programs will be sufficient to cover the costs allocable to patients
eligible for reimbursement pursuant to such programs. In the past, several
states healthcare provider organizations have initiated litigation challenging
the Medicaid reimbursement methodologies employed in such states, asserting that
reimbursement payments are not adequate to reimburse an efficiently operated
facility for the costs of providing Medicaid covered services.
The BBA repealed the Boren Amendment effective October 1, 1997 and allows the
states to develop their own standards for determining Medicaid payment rates.
The BBA provides certain procedural restrictions on the states' ability to amend
state Medicaid programs by requiring that the states use a public process to
establish payment methodologies including a public comment and review process.
The repeal of the Boren Amendment provides states with greater flexibility to
amend individual state programs and potentially reduce state Medicaid payments
to skilled nursing facilities.
The Medicaid programs in the states in which the Company operates pay a per
diem rate for providing services to Medicaid patients based on the facility's
reasonable allowable costs incurred in providing services, subject to cost
ceilings applicable to patient care, other operating and capital costs. Many
state Medicaid programs currently include incentive allowances for providers
whose costs are less than certain ceilings and who meet other requirements.
There are generally two types of Medicaid reimbursement rates: retrospective
and prospective, although many states have adopted plans that have both
retrospective and prospective features. A retrospective rate is determined after
completion of a cost report by the service provider and is designed to reimburse
expenses. Typically, an interim rate, based upon historical cost factors and
inflation is paid by the state during the cost reporting period and a cost
settlement is made following an audit of the filed cost report. Such adjustments
may result in additional payments being made to the Company or in recoupments
from the Company, depending on actual performance and the limitations within an
individual state plan.
The more prevalent type of Medicaid reimbursement rate is the prospective
rate. Under a prospective plan, the state sets its rate of payment for the
period in advance of services rendered. Actual costs incurred by operators
during a period are used by the state to establish the prospective rate for a
subsequent period. The provider must accept the prospective rate as payment in
full for all services rendered. Although there is usually no settlement based
upon actual costs incurred subsequent to the cost report filing, subsequent
audits may provide a basis for the state program to retroactively recoup monies.
To date, adjustments from Medicaid audits have not had a material adverse
effect on the Company. Although there can be no assurance that future
adjustments will not have a material adverse effect on the Company, the Company
believes that it has properly applied the various payment formulas and that it
is not likely that audit adjustments would have a material adverse effect on the
Company.
Therapy Services to Non-Affiliates. The Company generates revenues from
services to non-affiliates from its rehabilitation therapy business which
provides services to patients at long-term care facilities not operated by the
Company. In general, payments for these services are received directly from the
non-affiliated long-term care facilities, which in turn are reimbursed by
Medicare or other payors. The Company's revenues from non-affiliates, though not
directly regulated, are effectively limited by competitive market factors and
regulatory reimbursement policies imposing salary equivalency guidelines and
prudent buyer concepts on the long-term care facilities that contract for these
therapy services. In addition, the revenues that the Company derives for these
services are subject to adjustment in the event the facility is denied
reimbursement by Medicare or any other applicable payor on the basis that the
services provided by the Company were not medically necessary.
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GOVERNMENTAL REGULATION
The Federal government and all states in which the Company operates regulate
various aspects of the Company's business. In addition to the regulation of
rates by governmental payor sources, the development and operation of long-term
care facilities and the provision of long-term care services are subject to
Federal, state and local licensure and certification laws which regulate with
respect to a facility, among other matters, the number of beds, the services
provided, the distribution of pharmaceuticals, equipment, staffing requirements,
patients' rights, operating policies and procedures, fire prevention measures,
environmental matters and compliance with building and safety codes. There can
be no assurance that Federal, state or local governmental regulations will not
change or be subjected to new interpretations that impose additional
restrictions which might adversely affect the Company's business.
All of the facilities operated by the Company are licensed under applicable
state laws and possess the required CONs from responsible state authorities. As
previously noted, all but two of the Company's facilities are certified or
approved as providers under the Medicaid and Medicare programs. Both the initial
and continuing qualification of a long-term care facility to participate in such
programs depend upon many factors, including accommodations, equipment,
services, non-discrimination policies against indigent patients, patient care,
quality of life, patients' rights, safety, personnel, physical environment and
adequacy of policies, procedures and controls. Licensing, certification and
other applicable standards vary from jurisdiction to jurisdiction and are
revised periodically. State agencies survey or inspect all long-term care
facilities on a regular basis to determine whether such facilities are in
compliance with the requirements for participation in government-sponsored
third-party payor programs. In some cases, or upon repeat violations, the
reviewing agency has the authority to take various adverse actions against a
facility, including the imposition of fines, temporary suspension of admission
of new patients to the facility, suspension or decertification from
participation in the state Medicaid or the Medicare program, offset of amounts
due against future billings to the Medicare or Medicaid programs, denial of
payments under Medicaid for new admissions, reduction of payments, restrictions
on the ability to acquire new facilities and, in extreme circumstances,
revocation of a facility's license or closure of a facility. The compliance
history of a prior operator may be used by state or Federal regulators in
determining possible action against a successor operator.
The Company believes that its facilities are in substantial compliance with
all statutes, regulations, standards and requirements applicable to its
business, including applicable Medicaid and Medicare regulatory requirements.
However, in the ordinary course of its business, the Company from time to time
receives notices of deficiencies for failure to comply with various regulatory
requirements. In most cases, the Company and the reviewing agency will agree
upon corrective measures to be taken to bring the facility into compliance.
Although the Company has been subject to some fines, statements of deficiency
and other corrective actions have not had a material adverse effect on the
Company. There can be no assurance that future agency inspections will not have
a material adverse effect on the Company.
Certificates of Need. All states in which the Company operates have adopted
CON or similar laws which generally require that a state agency determine that a
need exists prior to the construction of new facilities, the addition or
reduction of licensed beds or services, the implementation of other changes, the
incurrence of certain capital expenditures, the approval of certain acquisitions
and changes in ownership or, in certain states, the closure of a facility. State
CON approval is generally issued for a specific project or number of beds,
specifies a maximum expenditure, is sometimes subject to an inflation
adjustment, and requires implementation of the proposal within a specified
period of time. Failure to obtain the necessary state approval can result in the
inability of the facility to provide the service, operate the facility or
complete the acquisition, addition or other change and can also result in
adverse reimbursement action or the imposition of sanctions or other adverse
action on the facility's license.
Medicare and Medicaid. Effective October 1, 1990, the Omnibus Budget
Reconciliation Act of 1987 ("OBRA") eliminated the different certification
standards for "skilled" and "intermediate care" nursing facilities under the
Medicaid program in favor of a single "nursing facility" standard. This standard
requires, among other things, that the Company have at least one registered
nurse on each day shift and one licensed nurse on each other shift and also
increased training requirements for nurses aides by requiring a minimum number
of training hours and a certification test before a nurses aide can commence
work. In order to obtain Medicare reimbursement, states continue to be required
to certify that nursing facilities provide "skilled care." The Omnibus Budget
Reconciliation Act of 1993 ("OBRA 93") affected Medicare reimbursement for
skilled nursing services in two ways, neither of which have had a material
adverse effect on the Company's revenues. First, the limits on the portion of
the Medicare reimbursement known as "routine service costs" (excluding
capital-related expenses) were frozen for two consecutive cost report years
beginning October 1, 1993. Second, the return on equity component of Medicare
reimbursement was eliminated beginning October 1, 1993. Although the Company
believes that it is in substantial compliance with the current requirements of
OBRA and OBRA 93, it is unable to predict how future interpretation and
enforcement of regulations promulgated under OBRA and OBRA 93 by the state and
Federal governments could affect the Company in the future.
Effective July 1, 1995, HCFA promulgated new survey, certification and
enforcement rules governing long-term care facilities participating in the
Medicare and Medicaid programs, which impose significant new burdens on
long-term care facilities and which may require state survey agencies to take
aggressive enforcement actions. Among other things, the HCFA rules governing
<PAGE>
survey and certification requirements define or redefine a number of terms used
in the survey and certification process. The rules require states to amend their
state plans (as required by Federal law) to incorporate the provisions of the
new rules. The regulations may require state survey agencies to take aggressive
enforcement actions.
Under the survey rules, unannounced standard surveys of facilities must be
conducted at least once every 15 months with a state-wide average of 12 months.
In addition to the standard survey, survey agencies have the authority to
conduct surveys as frequently as necessary to determine whether facilities
comply with participation requirements, to determine whether facilities have
corrected past deficiencies and to monitor care if a change occurs in the
ownership or management of a facility. Furthermore, the state survey agency must
review all complaint allegations and conduct a standard or an abbreviated survey
to investigate such complaints if a review of the complaint shows that a
deficiency in one or more of the Federal requirements may have occurred and only
a survey will determine whether a deficiency or deficiencies exist. If a
facility has been found to furnish substandard care, it is subject to an
extended survey. The extended survey is intended to identify the policies and
procedures that caused a facility to furnish substandard care.
HCFA's new rules substantially revised provisions regarding the enforcement of
compliance requirements for long-term care facilities with deficiencies. The
rules allow either HCFA or state agencies to impose one or more remedies
provided under the rules for any particular deficiency. Facilities must provide
a plan of correction for all deficiencies regardless of whether a remedy is
imposed. At a minimum, the following remedies are available: termination of
provider agreement; temporary management; denial of payment for new admissions;
civil monetary penalties; closure of the facility in emergencies or transfer of
patients or both; and on-site state monitoring. States may also adopt optional
remedies. The new rules divided remedies into three categories. Category 1
remedies include directed plans of correction, state monitoring and directed
in-service training. Category 2 remedies include denial of payments for new
admissions, denial of payments for all individuals (imposed only by HCFA) and
civil money penalties of $50 to $3,000 per day. Category 3 remedies include
temporary management, immediate termination or civil money penalties of $3,050
to $10,000 per day. The rules define situations in which one or more of the
penalties must be imposed.
The Balanced Budget Act of 1997 (the "BBA") was enacted in August 1997 and
significantly amends the reimbursement methodology of the Medicare program. In
addition to offering new Medicare health plan options and increasing the
penalties related to healthcare fraud and abuse, the BBA provides for a
prospective payment system for skilled nursing facilities to be implemented for
cost report periods beginning on or after July 1, 1998. The BBA also mandates a
10% reduction in Part B therapy costs for the period January 1, 1998 through
July 1, 1998. Subsequent to July 1, 1998 skilled nursing facilities will be
reimbursed for Part B therapy services will be determined from fee schedules to
be established by HCFA. The BBA further limits reimbursement for Part B therapy
services by establishing annual limitations on Part B therapy charges per
beneficiary. The BBA also requires skilled nursing facilities to institute
"consolidated billing" for non-physician Part B services. Under consolidated
billing payments for non-physician Part B services will be made directly to the
skilled nursing facility whether or not the service was provided directly by the
skilled nursing facility or by others under a contractual arrangement. Payments
for such services provided after July 1, 1998 will be made based on a fee
schedule established by HCFA.
The new Medicare prospective payment system (" Medicare PPS") will be phased
in over a four year transition period, beginning with cost report periods ending
on or after July 1, 1998. As a result, PPS will not effect the Company's
Medicare reimbursement until the fiscal year beginning January 1, 1999. The
Medicare PPS will result in each skilled nursing facility being reimbursed on a
per diem rate basis with an acuity-based per diem rate being established for
each Medicare Part A beneficiary being cared for by the skilled nursing
facility. The per diem rate will be an all-inclusive rate through which the
skilled nursing facility is reimbursed for its routine, ancillary and capital
costs. Throughout the transition period the per diem rate for each facility will
consist of a blending of facility specific costs and a "federal per diem rate".
<PAGE>
This federal per diem rate has not yet been established., although it will be
based on a weighted average of the costs of all skilled nursing facilities. The
federal portion will be adjusted for each patient's acuity. The facility
- -specific portion will be based on each facility's 1995 Medicare cost report,
updated for inflation based on the skilled nursing facility market basket index.
In the first year of the transition to Medicare PPS, the per diem rate will
consist of a blend of 25% federal rate per diem and 75% facility specific-costs.
Thereafter the facility-specific cost portion will decrease by 25% per year
until in the fourth year, the rate will be 100% based on the federal per diem
rate.
Many of the details of this prospective payment system will not be available
until certain regulations are released. These regulations are expected to be
published on May 1, 1998 and will be subject to a sixty-day comment period prior
to implementation. In the absence of final and complete regulations, the Company
has not been able to fully assess and quantify the ultimate impact of the BBA on
the Company's consolidated financial position, results of operations or
liquidity.
Fee Splitting and Referrals. The Company is also subject to Federal and state
laws that govern financial and other arrangements between healthcare providers.
Federal laws, as well as the laws of certain states, prohibit direct or indirect
payments or fee splitting arrangements between healthcare providers that are
designed to induce or encourage the referral of patients to, or the
recommendation of, a particular provider for medical products and services.
These laws include the Federal "anti-kickback law"
<PAGE>
which prohibits, among other things, the offer, payment, solicitation or receipt
of any form of remuneration in return for the referral of Medicare and Medicaid
patients. A wide array of relationships and arrangements, including ownership
interests in a company by persons in a position to refer patients and personal
service agreements have, under certain circumstances, been alleged to violate
these provisions. Certain discount arrangements may also violate these laws.
Because of the broad reach of these laws, the Federal government has published
certain "safe harbors," which set forth the requirements under which certain
relationships will not be considered to violate such laws. One of these safe
harbors protects investment interests in certain large, publicly traded entities
which meet certain requirements regarding the marketing of their securities and
the payment of returns on the investment. A second safe harbor protects payments
for management services which are set in advance at a fair market rate and which
do not vary with the value or volume of services referred, so long as there is a
written contract which meets certain requirements. A safe harbor for discounts,
which focuses primarily on appropriate disclosure, is also available. A
violation of the Federal anti-kickback law could result in the loss of
eligibility to participate in Medicare or Medicaid, or in criminal penalties.
Violation of state anti-kickback laws could lead to loss of licensure,
significant fines and other penalties.
Various Federal and state laws regulate the relationship between healthcare
providers and physicians, including employment or service contracts and
investment relationships. These laws include the broadly worded fraud and abuse
provisions of the Medicaid and Medicare statutes, which prohibit various
transactions involving Medicaid or Medicare covered patients or services. In
particular, OBRA 93 contains provisions which greatly expand the Federal
prohibition on physician referrals to entities with which they have a financial
relationship. Effective January 1, 1995, OBRA 93 prohibits any physician with a
financial relationship (defined as a direct or indirect ownership or investment
interest or compensation arrangement) with an entity from making a referral for
"designated health services" to that entity and prohibits that entity from
billing for such services. "Designated health services" do not include skilled
nursing services but do include many services which long-term care facilities
provide to their patients, including infusion therapy and enteral and parenteral
nutrition. Various exceptions to the application of this law exist, including
one that protects physician ownership in publicly traded companies which in the
past three years have had average shareholder equity exceeding $75 million and
one which protects the payment of fair market compensation for the provision of
personal services, so long as various requirements are met. Violations of these
provisions may result in civil or criminal penalties for individuals or entities
and/or exclusion from participation in the Medicaid and Medicare programs.
Various state laws contain analogous provisions, exceptions and penalties. The
Company believes that in the past it has been, and in the future it will be,
able to arrange its business relationships so as to comply with these
provisions.
Each of the Company's long-term care facilities has at least one medical
director that is a licensed physician. The medical directors may from time to
time refer their patients to the Company's facilities in their independent
professional judgment. The physician anti-referral restrictions and prohibitions
could, among other things, require the Company to modify its contractual
arrangements with its medical directors or prohibit its medical directors from
referring patients to the Company. From time to time, the Company has sought
guidance as to the interpretation of these laws. However, there can be no
assurance that such laws will ultimately be interpreted in a manner consistent
with the practices of the Company.
Healthcare Reform. In addition to extensive existing governmental healthcare
regulation, there are numerous legislative and executive initiatives at the
Federal and state levels for comprehensive reforms affecting the payment for and
availability of healthcare services. It is not clear at this time what
proposals, if any, will be adopted or, if adopted, what effect such proposals
would have on the Company's business. Aspects of certain of these proposals,
such as reductions in funding of the Medicare and Medicaid programs, interim
measures to contain healthcare costs such as a short-term freeze on prices
charged by healthcare providers or changes in the administration of Medicaid at
the state level, could materially adversely affect the Company. Additionally,
the BBA repealed the Boren Amendment effective October 1, 1997 and allows the
states to develop their own standards for determining Medicaid payment rates.
The BBA provides certain procedural restrictions on the states' ability to amend
state Medicaid programs by requiring that the states use a public process to
establish payment methodologies including a public comment and review process.
The repeal of the Boren Amendment provides states with greater flexibility to
amend individual state programs and potentially reduce state Medicaid payments
to skilled nursing facilities. There can be no assurance that currently proposed
or future healthcare legislation or other changes in the administration or
interpretation of governmental healthcare programs will not have an adverse
effect on the Company.
Environmental and Other. The Company is also subject to a wide variety of
Federal, state and local environmental and occupational health and safety laws
and regulations. Among the types of regulatory requirements faced by healthcare
providers are: air and water quality control requirements, waste management
requirements, specific regulatory requirements applicable to asbestos,
polychlorinated biphenyls and radioactive substances, requirements for providing
notice to employees and members of the public about hazardous materials and
wastes and certain other requirements.
In its role as owner and/or operator of properties or facilities, the Company
may be subject to liability for investigating and remedying any hazardous
substances that have come to be located on the property, including such
substances that may have migrated off of, or emitted, discharged, leaked,
escaped or been transported from, the property. The Company's operations may
involve the handling, use, storage, transportation, disposal and/or discharge of
hazardous, infectious, toxic, radioactive, flammable and other hazardous
materials, wastes, pollutants or contaminants. Such activities may harm
individuals, property or
<PAGE>
the environment; may interrupt operations and/or increase their costs; may
result in legal liability, damages, injunctions or fines; may result in
investigations, administrative proceedings, penalties or other governmental
agency actions; and may not be covered by insurance. The cost of any required
remediation or removal of hazardous or toxic substances could be substantial and
the liability of an owner or operator for any property is generally not limited
under applicable laws and could exceed the property's value. Although the
Company is not aware of any material liability under any environmental or
occupational health and safety laws, there can be no assurance that the Company
will not encounter such liabilities in the future, which could have a material
adverse effect on the Company.
COMPETITION
The long-term care industry is highly competitive. The Company competes with
other providers of long-term care on the basis of the scope and quality of
services offered, the rate of positive medical outcomes, cost-effectiveness and
the reputation and appearance of its long-term care facilities. The Company also
competes in recruiting qualified healthcare personnel, in acquiring and
developing additional facilities and in obtaining CONs. The Company's current
and potential competitors include national, regional and local long-term care
providers, some of whom have substantially greater financial and other resources
and may be more established in their communities than the Company. The Company
also faces competition from assisted living facility operators as well as
providers of home healthcare. In addition, certain competitors are operated by
not-for-profit organizations and similar businesses which can finance capital
expenditures and acquisitions on a tax-exempt basis or receive charitable
contributions unavailable to the Company.
The Company expects competition for the acquisition and development of
long-term care facilities to increase in the future as the demand for long-term
care increases. Construction of new (or the expansion of existing) long-term
care facilities near the Company's facilities could adversely affect the
Company's business. State regulations generally require a CON before a new
long-term care facility can be constructed or additional licensed beds can be
added to existing facilities. CON legislation is in place in all states in which
the Company operates or expects to operate. The Company believes that these
regulations reduce the possibility of overbuilding and promote higher
utilization of existing facilities. However, a relaxation of CON requirements
could lead to an increase in competition. In addition, as cost containment
measures have reduced occupancy rates at acute care hospitals, a number of these
hospitals have converted portions of their facilities into subacute units.
Competition from acute care hospitals could adversely affect the Company.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 7,331
facility-based personnel on a full- and part-time basis. The Company's corporate
and regional staff consisted of 94 persons as of such date. Approximately 270
employees at three of the Company's facilities are covered by collective
bargaining agreements. Although the Company believes that it maintains good
relationships with its employees and the unions that represent certain of its
employees, it cannot predict the impact of continued or increased union
representation or organizational activities on its future operations.
The Company believes that the attraction and retention of dedicated, skilled
and experienced nursing and other professional staff has been and will continue
to be a critical factor in the successful growth of the Company. The Company
believes that its wage rates and benefit packages for nursing and other
professional staff are commensurate with market rates and practices.
The Company competes with other healthcare providers in attracting and
retaining qualified or skilled personnel. The long-term care industry has, at
times, experienced shortages of qualified personnel. A shortage of nurses or
other trained personnel or general economic inflationary pressures may require
the Company to enhance its wage and benefits package in order to compete with
other employers. There can be no assurance that the Company's labor costs will
not increase or, if they do, that they can be matched by corresponding increases
in private payor revenues or governmental reimbursement. Failure by the Company
to attract and retain qualified employees, to control its labor costs or to
match increases in its labor expenses with corresponding increases in revenues
could have a material adverse effect on the Company.
INSURANCE
The Company carries general liability, professional liability, comprehensive
property damage and other insurance coverages that management considers adequate
for the protection of its assets and operations based on the nature and risks of
its business, historical experience and industry standards. There can be no
assurance, however, that the coverage limits of such policies will be adequate
or that insurance will continue to be available to the Company on commercially
reasonable terms in the future. A successful claim against the Company not
covered by, or in excess of, its insurance coverage could have a material
adverse effect on the Company. Claims against the Company, regardless of their
merit or eventual outcome, may also have a material adverse effect on the
Company's business and reputation, may lead to increased insurance premiums and
may require the Company's management to devote time and attention to matters
unrelated to the Company's business. The Company is self-insured (subject to
contributions by covered employees) with respect to most of the healthcare
benefits and workers' compensation benefits
<PAGE>
available to its employees. The Company believes that it has adequate resources
to cover any self-insured claims and the Company maintains excess liability
coverage to protect it against unusual claims in these areas. However, there can
be no assurance that the Company will continue to have such resources available
to it or that substantial claims will not be made against the Company.
<PAGE>
ITEM 2. PROPERTIES
The following table summarizes certain information regarding the Company's
facilities as of December 31, 1997:
SUMMARY OF FACILITIES
LICENSED YEAR OWNED/
FACILITY LOCATION ACQUIRED LEASED BEDS
- -------- -------- -------- ------ ----
SOUTHEAST REGION
FLORIDA
Brevard Rockledge 1994 Leased 100
Clearwater Clearwater 1990 Owned 120
Gulf Coast New Port Richey 1990 Owned 120
Naples Naples 1989 Leased 120
Ocala Ocala 1990 Owned 120
Palm Harbor Palm Harbor 1990 Owned 120
Pinebrook Venice 1989 Leased 120
Sarasota Sarasota 1990 Leased 120
Tampa Bay Oldsmar 1990 Owned 120
----
1,060
MIDWEST REGION
OHIO
Defiance Defiance 1993 Leased 100
Northwestern Ohio Bryan 1993 Leased 189
Swanton Swanton 1995 Leased 100
Toledo Perrysburg 1990 Owned 100
Troy Troy 1989 Leased 195
Beachwood Beachwood 1996 Owned 274
Broadview Broadview Heights 1996 Owned 159
Westlake I Westlake 1996 Owned 153
Westlake II Westlake 1996 Owned 106
Dayton Dayton 1997 Leased 100
Laurelwood Dayton 1997 Leased 115
New Lebanon New Lebanon 1997 Leased 126
INDIANA
Decatur Indianapolis 1988 Owned 88
Indianapolis Indianapolis 1988 Leased 104
New Haven New Haven 1990 Leased 120
Terre Haute Terre Haute 1990 Owned 120
----
2,149
NEW ENGLAND REGION
NEW HAMPSHIRE
Applewood Winchester 1996 Leased 70
Crestwood Milford 1996 Leased 82
Milford Milford 1996 Leased 52
Northwood Bedford 1996 Leased 147
Pheasant Wood Peterborough 1996 Leased 99
Westwood Keene 1996 Leased 87
MASSACHUSETTS
Amesbury Amesbury 1997 Leased 120
Cedar Glen Danvers 1997 Leased 100
Danvers Danvers 1997 Leased 101
North Shore Saugus 1997 Leased 80
---
938
NORTHEAST REGION
CONNECTICUT
Arden House Hamden 1997 Leased 360
Governor's House Simsbury 1997 Leased 73
<PAGE>
Willows Woodbridge 1997 Leased 86
Madison House Madison 1997 Leased 90
The Reservoir West Hartford 1997 Leased 75
---
684
MID-ATLANTIC REGION
MARYLAND
Larkin Chase Center Bowie 1994 Owned(1) 120
Harford Gardens Baltimore 1997 Leased 163
NEW JERSEY
Woods Edge Bridgewater 1988 Leased 176
---
459
TOTAL 5,290
=====
(1) Owned by Bowie L.P. The Company's interest in Bowie L.P. is pledged to the
facility's mortgage lender. The Company has guaranteed the indebtedness of Bowie
L.P.
The Company's corporate offices in Boston are subleased from an affiliate. The
Company also leases regional offices in Clearwater, Florida and Indianapolis,
Indiana, and owns a regional office in Peterborough, New Hampshire. The
Company's therapy services company lease offices in Palm Harbor, Florida and
Indianapolis, Indiana. The Company considers its properties to be in good
operating condition and suitable for the purposes for which they are being used.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to claims and legal actions arising in the ordinary
course of business. Management does not believe that unfavorable outcomes in any
such matters, individually or in the aggregate, would have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
last quarter of the Company's fiscal year ended December 31, 1997.
ITEM 4.1 EXECUTIVE MANAGEMENT OF THE REGISTRANT
The following table sets forth certain information with respect to the executive
officers of the Company:
NAME AGE POSITION
- ---- --- --------
Stephen L. Guillard 48 Chairman, President, Chief Executive
Officer and Director
Damian N. Dell'Anno 38 Executive Vice President of Operations
William H. Stephan 41 Senior Vice President and Chief
Financial Officer
Bruce J. Beardsley 34 Senior Vice President of Acquisitions
Michael E. Gomez, R.P.T. 36 Senior Vice President of Rehabilitation
Services
Stephen L. Guillard has served as President and Chief Executive Officer of the
Company since March 21, 1996 and of the predecessors of the Company since May
1988 and as a Director and Chairman of the Board of the Company since its
incorporation. Mr. Guillard previously served as Chairman, President and Chief
Executive Officer of Diversified Health Services ("DHS"), a long-term care
company which Mr. Guillard co-founded in 1982. DHS operated approximately 7,500
long-term care and assisted living beds in five states. Mr. Guillard has a total
of 25 years of experience in the long-term care industry and is a licensed
Nursing Home Administrator.
Damian N. Dell'Anno has served as Executive Vice President of Operations of
the Company since March 21, 1996 and its predecessors since 1994. From 1993 to
1994, he served as the head of the specialty services group for the predecessors
of the Company and was instrumental in developing the Company's rehabilitation
therapy business. From 1989 to 1993, Mr. Dell'Anno was Vice President of
Reimbursement for the predecessors of the Company. From 1988 to 1989, Mr.
Dell'Anno served as Director of Budget, Reimbursement and Cash Management for
The Mediplex Group, Inc. ("Mediplex"), a long-term care company. Mr. Dell'Anno
has a total of 15 years of experience in the long-term care industry.
<PAGE>
William H. Stephan has served as Senior Vice President and Chief Financial
Officer since March 21, 1996 and its predecessors since joining the Company in
1994. From 1986 to 1994, Mr. Stephan was a Manager in the health care practice
of Coopers & Lybrand L.L.P. His clients there included long-term care
facilities, continuing care retirement centers, physician practices and acute
care hospitals. Mr. Stephan is a Certified Public Accountant and a member of the
Healthcare Financial Management Association.
Bruce J. Beardsley has served as Senior Vice President of Acquisitions since
March 21, 1996 and its predecessors since 1994. From 1992 to 1994, he was Vice
President of Planning and Development of the Company with responsibility for the
development of specialized services, planning and engineering. From 1990 to
1992, he was an Assistant Vice President of the Company responsible for risk
management and administrative services. From 1988 to 1990, Mr. Beardsley served
as Special Projects Manager of the Company. Prior to joining the Company in
1988, Mr. Beardsley was a commercial and residential real estate appraiser.
Michael E. Gomez, R.P.T. has served as the Company's Senior Vice President of
Rehabilitation Services since March 21, 1996 and its predecessors since 1994.
From 1993 to 1994, Mr. Gomez served as Director of Therapy Services for the
Company with responsibility for overseeing the coordination and direction of
physical, occupational and speech therapy services. From 1991 to 1993, Mr. Gomez
was Director of Rehabilitation Services at Mary Washington Hospital in
Fredericksburg, Virginia. From 1988 to 1990, he was Physical Therapy State
Manager for Pro-Rehab, a contract therapy company based in Boone, North
Carolina. Mr. Gomez is a licensed physical therapist.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS
The Company's common stock is listed on the New York Stock Exchange under the
symbol "HBR". The following table sets forth, for the periods indicated, the
high and low sale price per share of the Company's common stock as reported on
the New York Stock Exchange composite tape.
1996 1997
High Low High Low
---- --- ---- ---
First quarter $12.875 $11.00
Second quarter $11.00 $ 9.50 14.375 11.125
Third quarter 10.75 9.50 18.75 14.25
Fourth quarter 12.25 9.00 21.75 16.75
The Company completed its initial public offering on June 14, 1996. The
Company's shares also began trading on June 14, 1996.
There were approximately 1,500 holders of record of the Company's common stock
as of February 28, 1998.
The Company has never declared or paid any dividends on its common stock since
its formation in 1996. The Company does not anticipate paying cash dividends on
its Common Stock for the foreseeable future and intends to retain all of its
earnings for reinvestment in the operations and activities of the Company. Any
future decision as to the payment of dividends will be at the discretion of the
Company's Board of Directors. The Company's ability to pay dividends is also
limited by the terms of current (and possibly future) lease and financing
arrangements that restrict, among other things, the ability of the Company's
subsidiaries to distribute funds to the Company.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated financial data for the
Company. The selected historical consolidated financial data for each of the
years in the five year period ended December 31, 1997 have been derived from the
Company's consolidated financial statements, which have been audited by Coopers
& Lybrand L.L.P., independent accountants. The financial data set forth below
should be read in conjunction with the Consolidated Financial Statements and the
Notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this filing.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND OTHER DATA)
<TABLE>
<CAPTION>
ENDED DECEMBER 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Total net revenues $75,101 $86,376 $109,425 $165,412 $221,777
Expenses:
Facility operating 57,412 68,951 89,378 132,207 176,404
General and administrative 3,092 3,859 5,076 7,811 10,953
Service charges paid to affiliate 746 759 700 700 708
Special compensation and other - - - 1,716 -
Depreciation and amortization 4,304 4,311 4,385 3,029 4,074
Facility rent 525 1,037 1,907 10,223 12,446
Total expenses 66,079 78,917 101,446 155,686 204,585
Income from operations 9,022 7,459 7,979 9,726 17,192
Other:
Interest expense, net (4,740) (4,609) (5,107) (4,634) (5,853)
Loss on investment in limited
partnership - (448) (114) (263) (189)
Gain on sale of facilities, net - - 4,869 - -
Loss on refinancing of debt - (453) - - -
Minority interest in net income (2,297) (1,575) (6,393) - -
Income before income taxes and
extraordinary loss 1,985 374 1,234 4,829 11,150
Income taxes - - - (809) (4,347)
Income before extraordinary loss 1,985 374 1,234 4,020 6,803
Extraordinary loss on early
retirement of debt, net of tax - - - (1,318) -
Net income 1,985 374 1,234 2,702 6,803
Net income per share - basic $ 0.85
Net income per share - diluted $ 0.84
Pro forma data:
Historical income before income
taxes and extraordinary loss 1,985 374 1,234 4,829
Pro forma income taxes (774) (146) (481) (799)
Pro forma income before
extraordinary loss 1,211 228 753 4,030
Extraordinary loss, net of tax - - - (1,318)
Pro forma net income $1,211 $ 228 $ 753 $2,712
Pro forma net income per share (basic
and diluted):
Pro forma income before extraordinary loss $ 0.05 $ 0.17 $ 0.63
Extraordinary loss - - 0.21
Pro forma net income $ 0.05 $ 0.17 $ 0.42
Weighted average number of common shares
used in per share computations (2):
Basic 4,425,000 4,425,000 6,396,142 8,037,026
Diluted 4,425,000 4,425,000 6,396,142 8,138,793
</TABLE>
<PAGE>
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND OTHER DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operational data (as of end of year) (3):
Facilities 17 19 20 30 43
Licensed beds 2,149 2,365 2,471 3,700 5,290
Average occupancy rate (4) 93.7% 92.6% 92.5% 92.6% 92.3%
Patient days (4):
Private and other 262,210 261,054 261,488 335,363 394,151
Medicare 60,459 68,256 90,107 108,229 138,023
Medicaid 371,150 409,995 437,325 653,222 834,637
------- ------- ------- ------- -------
Total 693,819 739,305 788,920 1,096,814 1,366,811
Sources of total net revenues:
Private and other (5) 39.9% 37.4% 35.1% 35.5% 34.1%
Medicare 21.2% 24.8% 31.7% 26.3% 25.9%
Medicaid 38.9% 37.8% 33.2% 38.2% 40.0%
BALANCE SHEET DATA (1):
Working capital $ 6,511 $ 13,915 $ 10,735 $ 16,826 $ 22,554
Total assets 85,472 93,876 92,632 141,799 168,562
Total debt 40,708 53,296 43,496 18,208 33,642
Capital lease obligation - - - 57,277 56,285
Stockholders' equity 4,918 2,866 4,130 44,880 51,783
</TABLE>
(1) In 1993, 1994 and 1995, financial and operating data combine the historical
results of various legal entities (the "Predecessor Entities") that became
subsidiaries of Harborside Healthcare Corporation (the "Company") through a
reorganization (the "Reorganization") that occurred immediately prior to the
Company's initial public offering on June 14, 1996 (the "Offering"). Prior to
the Reorganization, the Predecessor Entities (primarily partnerships and
subchapter S corporations) were not directly subject to Federal or state income
taxation. A pro forma income tax expense has been reflected for each year
presented as if the Company had always owned the Predecessor Entities.
(2) Through the Offering, the Company issued 3,600,000 shares of common stock.
Pro forma net income per share for 1994 and 1995 is calculated based on the
4,400,000 shares of common stock issued through the Reorganization. For 1996 the
calculation is based upon 4,400,000 shares outstanding for the entire year and
the appropriate weighting for shares issued through the Offering.
(3) In 1997,excludes two managed facilities with 178 licensed beds.
(4) "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. Prior to 1997, "average occupancy rate" had been calculated
based on the number of "occupied" bed days. This change in methodology was made
to conform with current industry practice. "Patient days" and "average occupancy
rate" statistics for prior years have been restated to conform with the new
methodology.
(5) Consists primarily of revenues derived from private pay individuals, managed
care organizations, HMO's, hospice programs, commercial insurers, management
fees from managed facilities, and rehabilitation therapy revenues from
nonaffiliated facilities.
<PAGE>
ITEM 7.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Harborside Healthcare provides high quality long-term care, subacute care and
other specialty medical services in five principal regions: the Southeast
(Florida), the Midwest (Ohio and Indiana), New England (Massachusetts and New
Hampshire), the Northeast (Connecticut and Rhode Island), and the Mid-Atlantic
(New Jersey and Maryland). As of December 31, 1997, the Company operated 43
facilities (13 owned and 30 leased) with a total of 5,290 licensed beds.
Additionally, the Company manages two facilities with 178 licensed beds. As
described in Note D to the accompanying financial statements, the Company
accounts for its investment in one of its owned facilities using the equity
method. The Company provides traditional skilled nursing care, a wide range of
subacute care programs (such as orthopedic, CVA/stroke, cardiac, pulmonary and
wound care), as well as distinct programs for the provision of care to
Alzheimer's and hospice patients. In addition, the Company provides
rehabilitation therapy at Company-operated and non-affiliated facilities. As of
December 31, 1997, 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 and cost
effective nursing and specialty medical services.
The Company was created in March 1996, in anticipation of an initial public
offering (the "Offering"), in order to combine under its control the operations
of various long-term care facilities and ancillary businesses (the "Predecessor
Entities") which had operated since 1988. The Company completed the Offering on
June 14, 1996 and issued 3,600,000 shares of common stock at $11.75 per share.
The owners of the Predecessor Entities contributed their interests in such
Predecessor Entities to the Company and received 4,400,000 shares of the
Company's common stock.
The Company's financial statements for periods prior to the Offering have been
prepared by combining the historical financial statements of the Predecessor
Entities, similar to a pooling of interests presentation. The Company's
financial statements prior to the date of the Offering do not include a
provision for Federal or state income taxes because the Predecessor Entities
(primarily partnerships and subchapter S corporations) were not directly subject
to Federal or state income taxation. The Company's combined financial statements
for periods prior to the date of the Offering include a pro forma income tax
expense for each period presented, as if the Company had always owned the
Predecessor Entities (see Note L to the accompanying financial statements).
One of the Predecessor Entities was the general partner of the Krupp Yield Plus
Limited Partnership ("KYP"), which owned seven facilities (the "Seven
Facilities") until December 31, 1995. The Company held a 5% interest in KYP
while the remaining 95% was owned by the limited partners of KYP (the
"Unitholders"). As described in Note P to the accompanying financial statements,
effective December 31, 1995, KYP sold the Seven Facilities and a subsidiary of
the Company began leasing the facilities from the buyer. Prior to December 31,
1995 the accounts of KYP were included in the Company's combined financial
statements and the interest of the Unitholders was reflected as minority
interest. The net gain of $4,869,000 recognized by KYP in connection with the
sale of the Seven Facilities was allocated to the KYP Unitholders and is
reflected in "minority interest in net income." In March of 1996, a liquidating
distribution was paid to the Unitholders.
RESULTS OF OPERATIONS
The Company's total net revenues include net patient service revenues, and
beginning in 1995, rehabilitation therapy 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.
<PAGE>
Year 2000 Disclosure
The Company is preparing all of its software products and internal computer
systems to be Year 2000 compliant. The Company has replaced its payroll, general
ledger and accounts payable systems and is currently planning to replace its
clinical and billing systems. Although the Company does not expect the cost of
this conversion to have a material adverse effect on its business or future
results of operations, there can be no assurance that the Company will not be
required to incur significant unanticipated costs in relation to its compliance
obligations. The Company currently estimates that compliance will be achieved
during 1999; however, there can be no assurances that the Company 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 the Company
to install. The Company's ongoing facility acquisition strategy will require it
to evaluate acquisition candidates for year 2000 compliance.
New Accounting Pronouncements
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." These pronouncements are effective for financial statement
periods beginning after December 15, 1997. The Company does not believe that
these new pronouncements will have a material effect on its future financial
statements.
<PAGE>
ITEM 7
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to Year Ended December 31, 1997
Total Net Revenues. Total net revenues increased by $56,365,000 or 34.1%, from
$165,412,000 in 1996 to $221,777,000 in 1997. This increase resulted primarily
from the acquisition of four Ohio facilities on July 1, 1996, the Harford
Gardens facility on March 1, 1997, four Massachusetts facilities on August 1,
1997, three Dayton, Ohio facilities on September 1, 1997, and five Connecticut
facilities on December 1, 1997. Additionally, revenues increased as the result
of the generation of revenues from rehabilitation therapy services provided to
additional non-affiliated long-term care facilities and increased net patient
service revenues per patient day at the Company's "same store" facilities. Of
such increase, $19,147,000, or 34.0% of the increase, resulted from the
operation of the four Ohio facilities for a full year in 1997; $6,245,000, or
11.1% of the increase, resulted from the operation of the Harford Gardens
facility; $8,079,000, or 14.3% of the increase, resulted from the operation of
the Massachusetts facilities; $4,539,000, or 8.1% of the increase, resulted from
the operation of the Dayton, Ohio facilities, and $3,871,000, or 6.9% of the
increase, resulted from the operation of the Connecticut facilities. Revenues
generated by providing rehabilitation therapy services at non-affiliated
long-term care facilities increased by $7,333,000, from $10,295,000 in 1996 to
$17,628,000 in 1997. The remaining $7,151,000, or 12.7% of such increase, is
largely attributable to higher average net patient service revenues per patient
day at the Company's "same store" facilities, primarily resulting from increased
levels of care provided to patients with medically complex conditions. Average
net patient service revenues per patient day at "same store" facilities
increased from $138.31 in 1996 to $147.96 in 1997. Partially offsetting this
increase was a reduction in occupancy at "same store" facilities from 92.6% in
1996 to 91.7% in 1997. The average occupancy rate at all of the Company's
facilities decreased from 92.6% in 1996 to 92.3% in 1997. The Company's quality
mix of private, Medicare and insurance revenues was 61.8% for the year ended
December 31, 1996 as compared to 60.0% for the year ended December 31, 1997. The
decrease in the quality mix percentage was primarily due to dilution resulting
from the acquisition of new facilities.
Facility Operating Expenses. Facility operating expenses increased by
$44,197,000, or 33.4%, from $132,207,000 in 1996 to $176,404,000 in 1997. The
operation of the four Ohio facilities for a full year in 1997 accounted for
$13,499,000, or 30.5% of this increase; the operation of Harford Gardens
accounted for $4,726,000, or 10.7% of this increase; the operation of the
Massachusetts facilities accounted for $6,034,000, or 13.7% of this increase;
the operation of the Dayton, Ohio facilities accounted for $3,442,000, or 7.8%
of this increase, and the operation of the Connecticut facilities accounted for
$3,109,000, or 7.0% of this increase. Operating expenses associated with
non-affiliate therapy contracts increased as a result of additional contracts.
Operating expenses associated with these contracts accounted for $6,394,000, or
14.5%, of the total increase in costs. The remainder of the increase in facility
operating expenses, $6,993,000, is primarily due to increases in the costs of
labor, medical supplies and rehabilitation therapy services purchased from third
parties at "same store" facilities.
General and Administrative; Service Charges Paid to Affiliate. General and
administrative expenses increased by $3,142,000, or 40.2%, from $7,811,000 in
1996 to $10,953,000 in 1997. This increase resulted from the acquisition of new
facilities resulting in the expansion of regional and corporate support, and
additional travel, consulting and systems development expenses associated with
the Company's growth. The Company reimburses an affiliate for rent and other
expenses related to its corporate headquarters as well as for certain data
processing and administrative services provided to the Company. During 1996,
such reimbursements totaled $700,000 as compared to $708,000 in 1997.
Special Compensation and Other. In connection with the Offering and corporate
reorganization, the Company recorded $1,716,000 of non-recurring charges in
1996. Of this amount, $1,524,000 consisted of compensation earned by key members
of management as a result of the successful Offering and the corporate
restructuring which preceded the Offering.
Depreciation and Amortization. Depreciation and amortization increased from
$3,029,000 in 1996 to $4,074,000 in 1997 primarily as a result of the
acquisition of the four Ohio facilities on July 1, 1996.
Facility Rent. Facility rent expense increased by $2,223,000 from $10,223,000
in 1996 to $12,446,000 in 1997. The increase in rent expense is due to the
acquisition of new facilities.
Interest Expense, net. Interest expense, net, increased from $4,634,000 in
1996 to $5,853,000 in 1997. This net increase is primarily due to additional
interest expense resulting from the acquisition of the four Ohio facilities on
July 1, 1996.
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Loss on Investment in Limited Partnership. The Company accounts for its
investment in the Larkin Chase Center using the equity method. The Company
recorded a loss of $263,000 in 1996 as compared to a loss of $189,000 in 1997 in
connection with this investment.
Extraordinary Loss on Early Retirement of Debt. During the second quarter of
1996, the Company repaid $25,000,000 of long-term debt using proceeds from the
Offering. In connection with this early repayment, the Company recorded an
extraordinary loss of $2,161,000 ($1,318,000, net of the related tax benefit) as
the result of a prepayment penalty paid to the lender and the write-off of
deferred financing costs.
Income Taxes. Income tax expense increased from $809,000 in 1996 to $4,347,000
in 1997. Prior to the date of the Offering, the Company's financial statements
did not include a provision for Federal or state income taxes because the
Predecessor Entities were not directly subject to Federal or state income
taxation. The provision for income taxes in 1996 consisted of a provision for
income taxes for the period after the Offering less a tax benefit resulting from
book-tax differences inherited as part of the Company's Reorganization.
Net Income. Net income was $2,702,000 in 1996 as compared to $6,803,000 in
1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total Net Revenues. Total net revenues increased by $55,987,000, or 51.2%,
from $109,425,000 in 1995 to $165,412,000 in 1996. This increase resulted
primarily from the acquisition of six New Hampshire facilities on January 1,
1996 and four Ohio facilities on July 1, 1996, the generation of revenues from
rehabilitation therapy services provided under contracts to additional
non-affiliated long-term care facilities and increased net patient service
revenues per patient day at the Company's same store facilities. Of such
increase, $23,245,000, or 41.5% of the increase, resulted from the operation of
the New Hampshire facilities, and $17,493,000, or 31.2% of the increase,
resulted from the operation of the four Ohio facilities.
Revenues generated by providing rehabilitation therapy services under
contracts with non-affiliated facilities increased by $7,250,000, from
$3,045,000 in 1995 to $10,295,000 in 1996, primarily the result of additional
contracts. The remaining $7,999,000, or 14.3% of the increase in revenues, is
attributable to higher average net patient service revenues per patient day at
the Company's "same store" facilities, primarily resulting from increased care
levels provided to patients with higher acuity conditions. Average net patient
service revenues per patient day at "same store" facilities increased by 6.0%
from $132.99 in 1995 to $141.10 in 1996. The average occupancy rate at all of
the Company's facilities increased from 92.5% in 1995 to 92.6% in 1996, also
contributing to the increase in revenues. The Company's quality mix of private,
Medicare and insurance revenues was 66.8% for the year ended December 31, 1995
as compared to 61.8% for the year ended December 31, 1996. The decrease in the
quality mix percentage was primarily due to the acquisition of the New Hampshire
facilities, which at the time of the acquisition did not participate in the
Medicare program.
Facility Operating Expenses. Facility operating expenses increased by
$42,829,000, or 47.9%, from $89,378,000 in 1995 to $132,207,000 in 1996. The
acquisition of the New Hampshire facilities accounted for $17,909,000, or 41.8%,
of the increase in facility operating expenses while the four Ohio facilities
accounted for $13,712,000, or 32.0% of this increase. Operating expenses
associated with non-affiliated therapy contracts increased as a result of
additional contracts. Operating expenses associated with these contracts
increased from $3,290,000 in 1995 to $8,212,000 in 1996. The remainder of the
increase in facility operating expenses, approximately $2,996,000, is due to
increases in the costs of labor, medical supplies and rehabilitation therapy
services purchased from third parties at "same store" facilities.
General and Administrative; Service Charges Paid to Affiliate. General and
administrative expenses increased by $2,735,000, or 53.9%, from $5,076,000 in
1995 to $7,811,000 in 1996. Approximately $787,000 of this increase resulted
from the acquisition of the New Hampshire facilities, and $290,000 from the
acquisition of the four Ohio facilities. Most of the remainder was associated
with the expansion of regional and corporate support, increases in salaries, and
additional travel and consulting expenses associated with the Company's growth.
The Company reimburses an affiliate for rent and other expenses related to its
corporate headquarters, as well as for certain data processing and
administrative services provided to the Company. In 1995 and 1996, such
reimbursements totaled $700,000.
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Special Compensation and Other. In connection with the Offering and corporate
reorganization, the Company recorded $1,716,000 of non-recurring charges in
1996. Of this amount, $1,524,000 consisted of compensation earned by key members
of management as a result of the successful Offering and the corporate
restructuring which preceded the Offering.
Depreciation and Amortization. Depreciation and amortization decreased from
$4,385,000 in 1995 to $3,029,000 in 1996 as a net result of the sale of the
Seven Facilities effective December 31, 1995 and the acquisition of the four
Ohio facilities on July 1, 1996 which is accounted for as a capital lease.
Facility Rent. Facility rent expense increased by $8,316,000 from $1,907,000
in 1995 to $10,223,000 in 1996. The increase in rent expense is the result of
the sale and subsequent leaseback of the Seven Facilities and the acquisition of
the six New Hampshire facilities on January 1, 1996 pursuant to an operating
lease financing.
Interest Expense, net. Interest expense, net, decreased by $473,000 from
$5,107,000 in 1995 to $4,634,000 in 1996. This decrease is due to the net result
of the pay down of the Seven Facilities debt, the repayment of $25,000,000 of
long-term debt using proceeds from the Offering and additional interest expense
resulting from the acquisition of the four Ohio facilities.
Loss on Investment in Limited Partnership. The Company accounts for its
investment in the Larkin Chase Center using the equity method. The Company
recorded a loss of $114,000 in 1995 as compared to a loss of $263,000 during
1996 in connection with this investment.
Extraordinary Loss on Early Retirement of Debt. During the second quarter of
1996, the Company repaid $25,000,000 of long-term debt using proceeds from the
Offering. In connection with this early repayment, the Company recorded an
extraordinary loss of $2,161,000 ($1,318,000 net of the related tax benefit) as
the result of a prepayment penalty paid to the lender and the write-off of
deferred financing costs.
Income Taxes. Prior to the date of the Offering, the Company's financial
statements did not include a provision for income taxes because the Predecessor
Entities were not directly subject to Federal or state income taxation. The
provision for income taxes in 1996 was $809,000 and consisted of a provision for
income taxes for the period after the Offering less a tax benefit resulting from
book-tax differences inherited as part of the Company's Reorganization.
Net Income. Net income was $1,234,000 in 1995 as compared to $2,702,000 in
1996. The increase of $1,468,000 was primarily the result of increased operating
income in 1996 and the elimination of the minority interest charge resulting
from the liquidation of KYP.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and acquisitions growth
through a combination of mortgage financing and operating leases. Leased
facilities are leased from either the seller of the facilities, from a real
estate investment trust which has purchased the facilities from the seller, or
through a recently created synthetic leasing facility. In addition, in 1996 the
Company financed the acquisition of the four Ohio facilities from the seller by
means of a lease which is accounted for as a capital lease for financial
reporting purposes. The Company's existing facility leases generally require it
to make monthly lease payments, establish escrow funds to serve as debt service
reserve accounts, and pay all property operating costs. The Company generally
negotiates leases which provide for extensions beyond the initial lease term and
an option to purchase the leased facility. The Company expects that various
forms of leasing arrangements will continue to provide it with an attractive
form of financing to support its growth. In April of 1997, the Company obtained
a three-year $25 million revolving credit facility from a commercial bank.
Borrowings under this facility will be used to provide working capital for
existing operations and acquisitions and to finance a portion of future
acquisitions. During September 1997, the Company increased the number of
commercial banks party to its revolving credit facility from one to four,
amended certain terms of the revolving credit facility (including financial
covenants) and extended its maturity date through September 1, 2002.
Additionally, the Company also arranged a $25,000,000 synthetic leasing facility
with the same group of commercial banks. The leasing facility will be used to
finance the acquisition of long-term care facilities. Substantially all of the
$25,000,000 leasing facility commitment was used in connection with the
acquisition of the Dayton facilities. During the first quarter of 1998, the
Company expects to increase the funds committed by the bank group under the two
facilities. The Company plans to use the increase in the synthetic leasing
facility commitment to finance the acquisition of two pending acquisitions (two
facilities located in Rhode Island and two facilities located in Ohio - see Note
T). From time to time, the Company expects to pursue certain expansion and new
development opportunities associated with existing facilities. In connection
with a Certificate of Need received by its Ocala facility, the Company commenced
<PAGE>
construction of a sixty-bed addition and a rehabilitation therapy area during
the fourth quarter of 1997. The costs of this project are estimated to be
approximately $4,200,000, of which approximately $1,400,000 had been incurred as
of December 31, 1997. The Company has been and will continue to be dependent on
third-party financing to fund its acquisition strategy, and there can be no
assurances that such financing will be available to the Company on acceptable
terms, or at all.
At December 31, 1997, the Company had two mortgage loans outstanding for
$18,042,000 and another $15,600,000 in advances on its long-term revolving
credit facility. One mortgage loan had an outstanding principal balance of
$16,461,000 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 the twelve-month base period. The
Company's other mortgage loan, which encumbers a single facility, had an
outstanding principal balance of $1,581,000 at December 31, 1997, of which
$1,338,000 is due in 2010.
The Company's operating activities in 1996 generated net cash of $1,405,000 as
compared to $5,621,000 in 1997, an increase of $4,216,000. Most of the increase
in cash provided by operations was the result of increased net income.
Net cash used by investing activities was $4,050,000 during 1996 as compared
to $19,487,000 used in 1997. The primary use of invested cash during these
periods related to additions to property and equipment ($5,104,000 in 1996
compared to $5,274,000 in 1997), additions to intangible assets ($950,000 in
1996 compared to $6,301,000 in 1997), and a loan of $7,487,000 in connection
with the acquisition of the five Connecticut facilities on December 1, 1997.
Net cash used by financing activities was $27,790,000 in 1996 as compared to
$12,891,000 provided in 1997. The early retirement of debt and the incurrence of
a related prepayment penalty required the use of $26,517,000 in 1996. During
1996, the Company received $37,160,000 in net proceeds from the Offering and a
cash payment of $3,685,000 from the landlord in connection with the leasing of
the New Hampshire Facilities. During 1996 the Company also received $803,000
from the sale of equity interests to an officer and a director of the Company.
In March of 1996 a liquidating distribution of $33,727,000 was paid to the KYP
Unitholders. During 1997, the Company borrowed $15,600,000 under its revolving
credit facility, most of which was used to finance the acquisitions of five
Connecticut facilities and a therapy services company; made principal payments
of $3,944,000 on its capital lease obligation, and received cash payments
totaling $1,301,000 from its landlords in connection with the lease of the
Massachusetts and Dayton facilities.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1995, 1996
and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997
Notes to Consolidated Financial Statements
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Harborside Healthcare Corporation:
We have audited the accompanying consolidated financial statements of
Harborside Healthcare Corporation and subsidiaries (the "Company") as listed in
Item 14 (a) of this Form 10-K. These financial satements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Harborside
Healthcare Corporation and subsidiaries as of December 31, 1996 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand
- ---------------------
Coopers & Lybrand
Boston, Massachusetts
February 13, 1998
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
FOR THE YEARS ENDED DECEMBER 31,
1996 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 9,722 $ 8,747
Accounts receivable, net of allowances for doubtful
accounts of $1,860 and $1,871, respectively 22,984 32,416
Prepaid expenses and other 3,570 6,644
Demand note due from limited partnership (Note D) 1,369 -
Deferred income taxes (Note L) 1,580 2,150
Total current assets 39,225 49,957
Restricted cash (Note C) 3,751 5,545
Investment in limited partnership (Note D) 256 67
Property and equipment, net (Note E) 95,187 96,872
Intangible assets, net (Note F) 3,004 8,563
Note receivable (Note G) - 7,487
Deferred income taxes (Note L) 376 71
Total assets $141,799 $168,562
LIABILITIES
Current liabilities:
Current maturities of long-term debt (Note I) $ 169 $ 186
Current portion of capital lease obligation (Note J) 3,744 3,924
Accounts payable 6,011 7,275
Employee compensation and benefits 8,639 10,741
Other accrued liabilities 2,177 4,417
Accrued interest 19 251
Current portion of deferred income 368 609
Income taxes payable (Note L) 1,272 -
Total current liabilities 22,399 27,403
Long-term portion of deferred income (Note H) 2,948 3,559
Long-term debt (Note I) 18,039 33,456
Long-term portion of capital lease obligation (Note J) 53,533 52,361
Total liabilities 96,919 116,779
Commitments and contingencies (Notes D, H and N)
STOCKHOLDERS' EQUITY (NOTE M)
Common stock, $.01 par value, 30,000,000 shares authorized,
8,000,000 and 8,008,665 shares issued and outstanding 80 80
Additional paid-in capital 48,340 48,440
Retained earnings (deficit) (3,540) 3,263
Total stockholders' equity 44,880 51,783
Total liabilities and stockholders' equity $141,799 $168,562
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Total net revenues $ 109,425 $ 165,412 $221,777
Expenses:
Facility operating 89,378 132,207 176,404
General and administrative 5,076 7,811 10,953
Service charges paid to affiliate (Note Q) 700 700 708
Special compensation and other (Note M) - 1,716 -
Depreciation and amortization 4,385 3,029 4,074
Facility rent 1,907 10,223 12,446
Total expenses 101,446 155,686 204,585
Income from operations 7,979 9,726 17,192
Other:
Interest expense, net (5,107) (4,634) (5,853)
Loss on investment in limited partnership (Note D) (114) (263) (189)
Gain on sale of facilities, net (Note P) 4,869 - -
Minority interest in net income (Notes B and P) (6,393) - -
Income before income taxes and extraordinary loss 1,234 4,829 11,150
Income taxes (Note L) - (809) (4,347)
Income before extraordinary loss 1,234 4,020 6,803
Extraordinary loss on early retirement of debt,
net of taxes of $843 (Note I) - (1,318) -
Net income $ 1,234 $ 2,702 $ 6,803
Net income per share - basic $ .85
Net income per share - diluted $ .84
Pro forma data (unaudited--Notes B and L):
Historical income before income taxes and
extraordinary loss $ 1,234 $ 4,829
Pro forma income taxes (481) (799)
Pro forma income before extraordinary loss 753 4,030
Extraordinary loss, net - (1,318)
Pro forma net income $ 753 $ 2,712
Pro forma net income per share (basic and diluted):
Pro forma income before extraordinary loss $ 0.17 $ 0.63
Extraordinary loss, net - 0.21
Pro forma net income $ 0.17 $ 0.42
Weighted average number of common shares used in per share
computations:
Basic 4,425,000 6,396,142 8,037,026
Diluted 4,425,000 6,396,142 8,138,793
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Additional Retained
Common Paid-in Earnings
Stock Capital (Deficit) Total
----- ------- --------- -----
<S> <C> <C> <C> <C>
Stockholders' equity, December 31, 1994 $ 44 $ 10,298 $ (7,476) $ 2,866
Net income for the year ended December 31, 1995 - - 1,234 1,234
Contributions - 30 - 30
Stockholders' equity, December 31, 1995 44 10,328 (6,242) 4,130
Net income for the year ended December 31, 1996 - - 2,702 2,702
Purchase of equity interests - 1,028 - 1,028
Distributions - (140) - (140)
Proceeds of initial public offering, net 36 37,124 - 37,160
Stockholders' equity, December 31, 1996 80 48,340 (3,540) 44,880
Net income for the year ended December 31, 1997 - - 6,803 6,803
Exercise of stock options - 100 - 100
Stockholders' equity, December 31, 1997 $ 80 $ 48,440 $ 3,263 $ 51,783
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 1,234 $ 2,702 $ 6,803
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest 6,393 234 -
Gain on sale of facilities, net (4,869) - -
Loss on refinancing of debt - 1,318 -
Depreciation of property and equipment 3,924 2,681 3,589
Amortization of intangible assets 461 348 485
Amortization of deferred income - (369) (449)
Loss from investment in limited partnership 114 263 189
Amortization of loan costs and fees 109 103 257
Accretion of interest on capital lease obligation - 1,419 2,952
Deferred interest - (114) -
Common stock grant - 225 -
Other 14 - -
7,380 8,810 13,826
Changes in operating assets and liabilities:
(Increase) in accounts receivable (7,573) (13,017) (9,432)
(Increase) in prepaid expenses and other (456) (1,780) (3,074)
(Increase) in deferred income taxes - (1,956) (265)
Increase in accounts payable 1,345 1,977 1,264
Increase in employee compensation and benefits 1,385 4,144 2,102
Increase (decrease) in accrued interest (490) (6) 232
Increase in other accrued liabilities 295 1,118 2,240
Increase (decrease) in income taxes payable - 2,115 (1,272)
Net cash provided by operating activities 1,886 1,405 5,621
Investing activities:
Additions to property and equipment (3,081) (5,104) (5,274)
Facility acquisition deposits (3,000) 3,000 -
Additions to intangibles (1,202) (950) (6,301)
Transfers to restricted cash, net (760) (996) (1,794)
Receipt of note receivable - - (7,487)
Repayment of demand note from limited partnership - - 1,369
Issuance of Demand note from limited partnership (1,255) - -
Payment of costs related to sale of facilities (884) - -
Proceeds from sale of facilities 47,000 - -
Net cash provided (used) by investing activities 36,818 (4,050) (19,487)
Financing activities:
Borrowings under revolving line of credit - - 15,600
Payment of long-term debt (9,800) (25,288) (166)
Principal payments of capital lease obligation - (6,766) (3,944)
Debt prepayment penalty (1,154) (1,517) -
Note payable to an affiliate 2,000 (2,000) -
Receipt of cash in connection with lease - 3,685 1,301
Dividend distribution - (140) -
Distributions to minority interest (3,636) (33,727) -
Purchase of equity interests and other contributions 30 803 -
Exercise of stock options - - 100
Proceeds from sale of common stock - 37,160 -
Net cash provided (used) by financing activities (12,560) (27,790) 12,891
<PAGE>
Net increase (decrease) in cash and cash equivalents 26,144 (30,435) (975)
Cash and cash equivalents, beginning of year 14,013 40,157 9,722
Cash and cash equivalents, end of year $40,157 $ 9,722 $ 8,747
Supplemental Disclosure:
Interest paid $ 6,208 $ 4,060 $ 3,371
Income taxes paid $ - $ 760 $ 5,783
Noncash investing and financing activities:
Property and equipment additions by capital lease $ - $57,625 $ -
Capital lease obligation incurred $ - $57,625 $ -
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
A. NATURE OF BUSINESS
Harborside Healthcare Corporation and its subsidiaries (the "Company") operate
long-term care facilities and provide rehabilitation therapy services. As of
December 31, 1997, the Company owned thirteen facilities, operated thirty
additional facilities under various leases and owned a rehabilitation therapy
services company. The Company accounts for its investment in one of its owned
facilities using the equity method (see Note D).
B. BASIS OF PRESENTATION
The Company was incorporated as a Delaware corporation on March 19, 1996, and
was formed as a holding company, in anticipation of an initial public offering
(the "Offering"), to combine under the control of a single corporation the
operations of various business entities (the "Predecessor Entities") which were
all under the majority control of several related stockholders. Immediately
prior to the Offering, the Company executed an agreement (the "Reorganization
Agreement") which resulted in the transfer of ownership of the Predecessor
Entities to the Company in exchange for 4,400,000 shares of the Company's common
stock. The Company's financial statements for periods prior to the Offering have
been prepared by combining the historical financial statements of the
Predecessor Entities, similar to a pooling-of-interests presentation. On June
14, 1996, the Company completed the issuance of 3,600,000 shares of common stock
through the Offering, resulting in net proceeds to the Company (after deducting
underwriters' commissions and other offering expenses) of approximately
$37,160,000. A portion of the proceeds was used to repay some of the Company's
long-term debt (see Note I).
One of the Predecessor Entities was the general partner of the Krupp Yield
Plus Limited Partnership ("KYP"), which owned seven facilities (the "Seven
Facilities") until December 31, 1995. The Company held a 5% interest in KYP,
while the remaining 95% was owned by the limited partners of KYP (the
"Unitholders"). Effective December 31, 1995, KYP sold the Seven Facilities and a
subsidiary of the Company began leasing the facilities from the buyer. Prior to
December 31, 1995, the accounts of KYP were included in the Company's combined
financial statements and the interest of the Unitholders was reflected as
minority interest. In March 1996, a liquidating distribution was paid to the
Unitholders (see Notes H and P).
The Company's financial statements prior to the date of the Offering do not
include a provision for Federal or state income taxes because the Predecessor
Entities (primarily partnerships and subchapter S corporations) were not
directly subject to Federal or state income taxation. The Company's combined
financial statements include a pro forma income tax provision for each period
presented, as if the Company had always owned the Predecessor Entities (see Note
L).
C. SIGNIFICANT ACCOUNTING POLICIES
The Company uses the following accounting policies for financial reporting
purposes:
Principles of Consolidation
The consolidated financial statements (combined prior to June 14, 1996)
include the accounts of the Company and its subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Total Net Revenues
Total net revenues include net patient service revenues, rehabilitation
therapy service revenues from contracts to provide services to non-affiliated
long-term care facilities and management fees from the facility owned by Bowie
L.P. (see Note D) and two additional facilities (See Note H).
Net patient service revenues payable by patients at the Company's facilities
are recorded at established billing rates. Net patient service revenues to be
reimbursed by contracts with third-party payors, primarily the Medicare and
Medicaid programs, are recorded at the amount estimated to be realized under
these contractual arrangements. Revenues from Medicare and Medicaid are
generally based on reimbursement of the reasonable direct and indirect costs of
providing services to program participants or a prospective payment system. The
Company separately estimates revenues due from each third party with which it
has a contractual arrangement and records anticipated settlements with these
parties in the contractual period during which services were rendered. The
amounts actually reimbursable under Medicare and Medicaid are determined by
filing cost reports which are then audited and generally retroactively adjusted
by the payor. Legislative changes to state or Federal reimbursement systems may
also retroactively affect recorded revenues. Changes in estimated revenues due
in connection with Medicare and Medicaid
<PAGE>
may be recorded by the Company subsequent to the year of origination and prior
to final settlement based on improved estimates. Such adjustments and final
settlements with third party payors, which could materially and adversely affect
the Company, are reflected in operations at the time of the adjustment or
settlement. Accounts receivable, net, at December 31, 1996 and 1997 includes
$10,667,000 and $8,296,000, respectively, of estimated settlements due from
third party payors and $5,194,000 and $6,115,000, respectively, of estimated
settlements due to third party payors.
In addition, direct and allocated indirect costs reimbursed under the Medicare
program are subject to regional limits. The Company's costs generally exceed
these limits and accordingly, the Company is required to submit exception
requests to recover such excess costs. The Company believes it will be
successful in collecting these receivables; however, the failure to recover
these costs in the future could materially and adversely affect the Company.
Beginning in 1995, total net revenues includes revenues recorded by the
Company's rehabilitation therapy subsidiary (which does business under the name
"Theracor") for therapy services provided to non-affiliated long-term care
facilities.
Concentrations
A significant portion of the Company's revenues are derived from the Medicare
and Medicaid programs. There have been, and the Company expects that there will
continue to be, a number of proposals to limit reimbursement allowable to
long-term care facilities under these programs. On August 5, 1997, the Balanced
Budget Act of 1997 (the "Balanced Budget Act") was signed into law. This act is
effective for cost reporting periods beginning after July 1, 1998 and as such
will not affect the Company until January 1, 1999. The Balanced Budget Act
amends Medicare reimbursement methodology, converting it from a cost-based
system to a prospective payment system. Approximately 65%, 65%, and 66% of the
Company's net revenues in the years ended December 31, 1995, 1996 and 1997,
respectively, are from the Company's participation in the Medicare and Medicaid
programs. As of December 31, 1996 and 1997, $17,560,000 and $20,936,000,
respectively, of net accounts receivable were due from the Medicare and Medicaid
programs.
Facility Operating Expenses
Facility operating expenses include expenses associated with the normal
operations of a long-term care facility. The majority of these costs consist of
payroll and employee benefits related to nursing, housekeeping and dietary
services provided to patients, as well as maintenance and administration of the
facilities. Other significant facility operating expenses include: the cost of
rehabilitation therapies, medical and pharmacy supplies, food and utilities.
Beginning in 1995, facility operating expenses include expenses associated with
services rendered by Theracor to non-affiliated facilities.
Provision for Doubtful Accounts
Provisions for uncollectible accounts receivable of $1,240,000, $1,116,000 and
$1,188,000 are included in facility operating expenses for the years ended
December 31, 1995, 1996 and 1997, respectively. Individual patient accounts
deemed to be uncollectible are written off against the allowance for doubtful
accounts.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the period reported. Actual results could differ
from those estimates. Estimates are used when accounting for the collectibility
of receivables, depreciation and amortization, employee benefit plans, taxes and
contingencies.
Net Income (Pro Forma Net Income) Per Share
In February 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share", which revised the methodology of calculating net income per share. The
Company adopted SFAS No. 128 in the fourth quarter of 1997. All net income per
share and pro forma net income per share amounts for all periods have been
presented in accordance with, and where appropriate have been restated to
conform with, the requirements of SFAS No. 128.
Basic net income per share is computed by dividing net income by the weighted
average number of common shares outstanding during 1997. The computation of
diluted net income per share is similar to that of basic net income per share
except that the number of shares is increased to reflect the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. Dilutive potential common shares for
the Company consist of shares issuable upon exercise of the Company's stock
options. Pro forma net income per share for the years ended December 31, 1995
and 1996 is
<PAGE>
calculated based upon the common shares of the Company (4,400,000) issued in
accordance with the Reorganization Agreement. Pursuant to Securities and
Exchange Commission staff requirements, stock options issued within one year of
an initial public offering, calculated using the treasury stock method and the
initial public offering price of $11.75 per share, have been included in the
calculation of pro forma net income per common share as if they were outstanding
for all periods presented.
Property and Equipment
Property and equipment are stated at cost. Expenditures that extend the lives
of affected assets are capitalized, while maintenance and repairs are charged to
expense as incurred. Upon the retirement or sale of an asset, the cost of the
asset and any related accumulated depreciation are removed from the balance
sheet, and any resulting gain or loss is included in net income.
Depreciation expense includes the amortization of capital assets and is
estimated using the straight-line method. These estimates are calculated using
the following estimated useful lives:
Buildings and improvements 31.5 to 40 years
Furniture and equipment 5 to 10 years
Leasehold improvements over the life of the lease
Land improvements 8 to 40 years
Intangible Assets
Intangible assets consist of amounts identified in connection with certain
facility acquisitions accounted for under the purchase method and certain
deferred costs which were incurred in connection with various financings (see
Notes F and I).
In connection with each of its acquisitions, the Company reviewed the assets
of the acquired facility and assessed its relative fair value in comparison to
the purchase price. Certain acquisitions resulted in the allocation of a portion
of the purchase price to the value associated with the existence of a workforce
in place, residents in place at the date of acquisition and covenants with
sellers which limit their ability to engage in future competition with the
Company's facilities. The assets recognized from an assembled workforce and
residents in place are amortized using the straight-line method over the
estimated periods (from three to seven years) during which the respective
benefits would be in place. Covenants not-to-compete are being amortized using
the straight-line method over the period during which competition is restricted.
Goodwill resulted from the acquisition of certain assets for which the
negotiated purchase prices exceeded the allocations of the fair market value of
identifiable assets. The Company's policy is to evaluate each acquisition
separately and identify an appropriate amortization period for goodwill based on
the acquired property's characteristics. Goodwill is being amortized using the
straight-line method over a 20 to 40 year period.
Costs incurred in obtaining financing (including loans, letters of credit and
facility leases) are amortized as interest expense using the straight-line
method (which approximates the interest method) over the term of the related
financial obligation.
Assessment of Long-Lived Assets
The Company periodically reviews the carrying value of its long-lived assets
(primarily property and equipment and intangible assets) to assess the
recoverability of these assets; any impairments would be recognized in operating
results if a diminution in value considered to be other than temporary were to
occur. As part of this assessment, the Company reviews the expected future net
operating cash flows from its facilities, as well as the values included in
appraisals of its facilities, which have periodically been obtained in
connection with various financial arrangements. The Company has not recognized
any adjustments as a result of these assessments.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with maturities
of three months or less at the date of their acquisition by the Company.
Restricted Cash
Restricted cash consists of cash set aside in escrow accounts as required by
several of the Company's leases and other financing arrangements.
<PAGE>
New Accounting Pronouncements
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." These pronouncements are effective for financial statement periods
beginning after December 15, 1997. The Company does not believe that these new
pronouncements will have material effect on its future financial statements.
D. INVESTMENT IN LIMITED PARTNERSHIP
In April 1993, a subsidiary of the Company acquired a 75% partnership interest
in Bowie L.P., which developed a 120-bed long-term care facility in Maryland
that commenced operations on May 1, 1994. The remaining 25% interest in Bowie
L.P. is owned by a non-affiliated party. The Company records its investment in
Bowie L.P. using the equity method. Although the Company owns a majority
interest in Bowie L.P., the Company only maintains a 50% voting interest and
accordingly does not exercise control over the operations of Bowie L.P. In
addition, the non-affiliated party has the option to purchase the Company's
partnership interest during the sixty-day period prior to the seventh
anniversary of the facility's opening and each subsequent anniversary
thereafter. If the option is exercised, the purchase price would be equal to the
fair market value of the Company's interest at the date on which the option is
exercised. The Company is entitled to 75% of the facility's net income and
manages this facility in return for a fee equal to 5.5% of the facility's net
revenues (effective September 1995). Prior to this date, the management fee
approximated $10,000 per month. The Company recorded $234,000, $445,000 and
$445,000 in management fees from this management contract for the years ended
December 31, 1995, 1996 and 1997, respectively.
Bowie L.P. obtained a $4,377,000 construction loan from a bank to finance the
construction of the facility. Bowie L.P. also obtained a $1,000,000 line of
credit from the bank to finance pre-opening costs and working capital
requirements. On July 31, 1995, the line of credit converted to a term loan. In
March of 1997, the entire loan was repaid with the proceeds of a $6,400,000 note
from another bank. As of December 31, 1996 and 1997, Bowie L.P. owed $4,964,000
and $6,300,000, respectively, on these loans. Interest on the loan is payable
monthly at the bank's prime rate or a LIBOR rate plus 1.5%. This loan limits
Bowie L.P.'s ability to borrow additional funds and to make acquisitions,
dispositions and distributions. Additionally, the loan contains covenants with
respect to maintenance of specified levels of net worth, working capital and
debt service coverage.
The loan is collateralized by each partner's partnership interest as well as
all of the assets of Bowie L.P. These loan is also guaranteed by the Company and
additional collateral pledged by the non-affiliated partner. The Bowie L.P.
partnership agreement states that each partner will contribute an amount in
respect of any liability incurred by a partner in connection with a guarantee of
the partnership's debt, so that the partners each bear their proportionate share
of the liability based on their percentage ownership of the partnership.
The results of operations of Bowie L.P. are summarized below:
For the years ended December 31,
1995 1996 1997
Net operating revenues $7,595,000 $8,104,000 $8,311,000
Net operating expenses 7,236,000 7,758,000 8,052,000
Net loss (152,000) (351,000) (252,000)
The financial position of Bowie L.P. was as follows:
As of December 31,
1996 1997
Current assets $2,511,000 $2,275,000
Non-current assets 4,882,000 4,695,000
Current liabilities 2,335,000 722,000
Non-current liabilities 4,716,000 6,158,000
Partners' equity 342,000 90,000
On December 28, 1995, the Company advanced $1,255,000 to Bowie L.P. to support
additional facility working capital requirements by means of a demand note
bearing interest at 9.0% per annum. This advance was repaid by Bowie L.P. during
1997.
<PAGE>
E. PROPERTY AND EQUIPMENT
The Company's property and equipment are stated at cost and consist of the
following as of December 31:
1996 1997
Land $ 2,994,000 $ 3,270,000
Land improvements 3,077,000 3,387,000
Leasehold improvements 2,371,000 3,157,000
Buildings and improvements 28,764,000 30,529,000
Equipment, furnishings and fixtures 7,835,000 9,565,000
Assets under capital lease 63,125,000 63,532,000
---------- ----------
108,166,000 113,440,000
Less accumulated depreciation 12,979,000 16,568,000
---------- ----------
$ 95,187,000 $ 96,872,000
============ ============
F. INTANGIBLE ASSETS
Intangible assets are stated at cost and consist of the following as of
December 31:
1996 1997
Patient lists $ 1,459,000 $ 1,459,000
Assembled workforce 930,000 930,000
Covenant not to compete 1,838,000 1,838,000
Organization costs 256,000 380,000
Goodwill - 2,166,000
Deferred financing costs 2,563,000 6,574,000
--------- ---------
7,046,000 13,347,000
Less accumulated amortization 4,042,000 4,784,000
--------- ---------
$ 3,004,000 $ 8,563,000
============ ============
G. NOTE RECEIVABLE
In connection with the acquisition of five Connecticut facilities on December
1, 1997 (see Note H), the Company received a note receivable from the owners in
the amount of $7,487,000. Interest is earned at the rate of 9% per annum, and
payments are due monthly, in arrears, commencing January 1, 1998 and continuing
until November 30, 2010, at which time the entire principal balance is due. The
proceeds of the note were used to repay certain indebtedness. The note is
collateralized by various mortgage interests and other collateral.
H. OPERATING LEASES
In March 1993, a subsidiary of the Company entered into an agreement with a
non-affiliated entity to lease two long-term care facilities in Ohio with 289
beds for a period of ten years. The lease agreement, which became effective in
June 1993, provides for fixed annual rental payments of $900,000. At the end of
the ten-year period, the Company has the option to acquire the facilities for
$8,500,000, or to pay a $500,000 termination fee and relinquish the operation of
the facilities to the lessor. On the effective date of the lease, the subsidiary
paid $1,200,000 to the lessor for a covenant not-to-compete which remains in
force through June 2003.
Effective October 1, 1994, a subsidiary of the Company entered into an
agreement with a related party to lease a 100 bed long-term care facility in
Florida for a period of ten years. The lease agreement provides for annual
rental payments of $551,250 in the initial twelve-month period and annual
increases of 2% thereafter. The Company has the option to exercise two
consecutive five-year lease renewals. The Company also has the right to purchase
the facility at fair market value at any time after the fifth anniversary of the
commencement of the lease. The lease agreement also required the Company to
escrow funds equal to three months' base rent.
Effective April 1, 1995, a subsidiary of the Company entered into an agreement
with Meditrust to lease a 100-bed long-term
<PAGE>
care facility in Ohio for a period of ten years. The lease agreement provides
for annual rental payments of $698,400 in the initial twelve-month period. The
Company is also required to make additional rental payments beginning April 1,
1996 in an amount equal to 5.0% of the difference between the facility's
operating revenues in each applicable year and the operating revenues in the
twelve-month base period which commenced on April 1, 1995. The annual additional
rent payment will not exceed $14,650. At the end of the initial lease period,
the Company has the option to exercise two consecutive five-year lease renewals.
The lease agreement also required the Company to escrow funds equal to three
months base rent. The Company's obligations under the lease are collateralized
by, among other things, an interest in any property improvements made by the
Company and by a second position on the facility's accounts receivable. The
Company also has the right to purchase the facility at its fair market value on
the eighth and tenth anniversary dates of the commencement of the lease and at
the conclusion of each lease renewal.
Effective January 1, 1996, a subsidiary of the Company entered into an
agreement with Meditrust to lease the Seven Facilities formerly owned by KYP
(see Note P). The lease agreement provides for annual rental payments of
$4,582,500 in the initial twelve-month period and annual increases based on
changes in the consumer price index thereafter. The lease has an initial term of
ten years with two consecutive five-year renewal terms exercisable at the
Company's option. The lease agreement also required the Company to escrow funds
in an amount equal to three months base rent. The Company's obligations under
the lease are collateralized by, among other things, an interest in any property
improvements made by the Company and by a second position on the related
facilities' accounts receivable. In conjunction with the lease, the Company was
granted a right of first refusal and an option to purchase the facilities as a
group, which option is exercisable at the end of the eighth year of the initial
term and at the conclusion of each renewal term. The purchase option is
exercisable at the greater of the fair market value of the facilities at the
time of exercise or Meditrust's original investment.
Effective January 1, 1996, a subsidiary of the Company entered into an
agreement with Meditrust to lease six long-term care facilities with a total of
537 licensed beds in New Hampshire. The lease agreement provides for annual
rental payments of $2,324,000 in the initial twelve-month period and annual
rental increases based on changes in the consumer price index thereafter. The
lease has an initial term of ten years with two consecutive five-year renewal
terms exercisable at the Company's option. The lease agreement also required the
Company to escrow funds in an amount equal to three months base rent. In
addition, the lease agreement required the Company to establish a renovation
escrow account in the amount of $560,000 to fund facility renovations identified
in the agreement. The renovation escrow funds are released upon completion of
the required renovations. As of December 31, 1997, $325,000 of these funds
remained in escrow pending completion of the specified renovations. The
Company's obligations under the lease are collateralized by, among other things,
an interest in any property improvements made by the Company and by a second
position on the related facilities' accounts receivable. In conjunction with the
lease, the Company was granted a right of first refusal and an option to
purchase the facilities as a group, which is exercisable at the end of the
eighth year of the initial term and at the conclusion of each renewal term. The
purchase option is exercisable at the greater of 90% of the fair market value of
the facilities at the time of exercise or Meditrust's original investment. In
connection with this lease, the Company received a cash payment of $3,685,000
from Meditrust which was recorded as deferred income and is being amortized over
the ten-year initial lease term as a reduction of rental expense.
The Meditrust leases contain cross-default and cross-collateralization
provisions. A default by the Company under one of these leases could adversely
affect a significant number of the Company's properties and result in a loss to
the Company of such properties. In addition, the leases permit Meditrust to
require the Company to purchase the facilities upon the occurrence of a default.
Effective March 1, 1997, the Company entered into an agreement with a
non-affiliated party to lease one long-term care facility with 163 beds in
Baltimore, Maryland for a period of ten years. The lease agreement provides for
fixed annual rental payments of $900,000 for the first three years and annual
increases based on changes in the consumer price index thereafter. From July 1,
1999 through August 28, 2000, the Company has the option to acquire the facility
for $10,000,000. After August 28, 2000, the purchase price escalates in
accordance with a schedule. On the effective date of the lease, the Company paid
$1,000,000 to the lessor in exchange for the purchase option. This option
payment is being amortized over the life of the lease.
As of August 1, 1997, the Company acquired four long-term care facilities with
401 beds in Massachusetts. The Company financed this acquisition through an
operating lease with a real estate investment trust (the "REIT"). The lease
provides for annual rental payments of $1,576,000 in the initial twelve-month
period and annual increases based on changes in the consumer price index
thereafter. The lease has an initial term of ten years with, at the Company's
option, eight consecutive five-year renewal terms. In conjunction with the
lease, the Company was granted a right of first refusal and an option to
purchase the facilities as a group, which option is exercisable at the end of
the initial lease term and at the conclusion of each renewal term. The purchase
option is exercisable at the fair market value of the facilities at the time of
exercise.
On August 28, 1997, the Company obtained a five-year $25,000,000 synthetic
leasing facility (the "Leasing Facility") from the same group of banks that
provided the "Credit Facility" (see Note I). The Company used $23,600,000 of the
funds available through the Leasing Facility to acquire the Dayton, Ohio
facilities in September 1997. Acquisitions made through the Leasing Facility are
accounted for financial reporting purposes as operating leases with an initial
lease term, which expires at the
<PAGE>
expiration date of the leasing facility. Annual rent for properties acquired
through the Leasing Facility is determined based on the purchase price of the
facilities acquired and an interest rate factor which varies with the Company's
leverage ratio (as defined) and which is based on LIBOR, or at the Company's
option, the agent bank's prime rate. As of December 31, 1997 the interest rate
for amounts outstanding under this facility was approximately 7.5%. The Company
has the right to purchase facilities acquired through the Leasing Facility for
an amount equal to the purchase price at the date of acquisition. The Company's
obligations under the lease are collateralized by a collateral pool which also
collateralizes the Company's borrowings under its Credit Facility.
Under the terms of each of the facility leases described above, the Company is
responsible for the payment of all real estate and personal property taxes, as
well as other reasonable costs required to operate, maintain, insure and repair
the facilities.
Future minimum rent commitments under the Company's non-cancelable operating
leases as of December 31, 1997 are as follows:
1998 $ 19,423,000
1999 19,617,000
2000 19,811,000
2001 20,005,000
2002 20,199,000
Thereafter 76,545,000
$175,600,000
I. LONG-TERM DEBT
In October 1994, certain of the Predecessor Entities refinanced $29,189,000 of
the then outstanding bank debt, and as a result, recorded a loss of $453,000.
This loss included a payment of $384,000 upon the termination of a related
interest rate protection agreement, which was required pursuant to the terms of
the bank debt in order to effectively fix the interest rate on such debt. The
retirement of this debt was financed by the concurrent borrowing of $42,300,000
from Meditrust. Using proceeds from the Offering, on June 14, 1996 the Company
repaid $25,000,000 of this debt, incurring a prepayment penalty of $1,517,000.
Additionally, the Company wrote-off $544,000 of deferred financing costs related
to the retired debt and incurred $100,000 of additional transaction costs. The
loss on this early retirement of debt totaled $2,161,000 and is presented as an
extraordinary loss in the Statement of Operations for the year ended December
31, 1996 net of the related estimated income tax benefit of $843,000. The
Meditrust debt was collateralized by the assets of certain of the Predecessor
Entities (the "Seven S Corporations"), and subsequent to the debt paydown, the
remaining debt is cross-collateralized by the assets of four facilities (the
"Four Facilities"). The Meditrust debt bears interest at the annual rate of
10.65%. Additional interest payments are also required commencing on January 1,
1997 in an amount equal to 0.3% of the difference between the operating revenues
of the Four Facilities in each applicable year and the operating revenues of the
Four Facilities during a twelve-month base period which commenced October 1,
1995. The Meditrust debt is cross-collateralized by the assets of each of the
Four Facilities. The loan agreement with Meditrust places certain restrictions
on the Four Facilities; among them, the agreement restricts their ability to
incur additional debt or to make significant dispositions of assets. The Four
Facilities are also required to maintain a debt service coverage ratio of at
least 1.2 to 1.0 (as defined in the loan agreement) and a current ratio of at
least 1.0 to 1.0. The Meditrust loan agreement contains a prepayment penalty,
which decreases from 1.5% of the then outstanding balance in the sixth year to
none in the ninth year.
A subsidiary of the Company assumed a first mortgage note (the "Note") with a
remaining balance of $1,775,000 as part of the acquisition of a long-term care
facility in 1988. The Note requires the annual retirement of principal in the
amount of $20,000. The Company pays interest monthly at the rate of 14% per
annum on the outstanding principal amount until maturity in October 2010, when
the remaining unpaid principal balance of $1,338,000 is due. The Note is
collateralized by the property and equipment of the facility.
In April of 1997, the Company obtained a three-year $25,000,000 revolving
credit facility (the "Credit Facility") from a commercial bank. On August 28,
1997, the Company amended the Credit Facility to add three additional banks as
parties to the Credit Facility, extended the maturity to five years and made
certain additional amendments to the terms of the agreement. Borrowings under
this facility are collateralized by patient accounts receivable and certain real
estate. The assets which collateralize the Credit Facility also collateralize
the Company's obligation under the Leasing Facility. The facility matures in
September 2002 and provides for prime and LIBOR interest rate options which vary
with the Company's leverage ratio (as defined). As of December 31, 1997, the
interest rate for amounts outstanding under this facility was approximately
7.3%. The Credit Facility contains covenants which, among other things, imposes
certain financial ratios and imposes certain limitations or prohibitions on the
Company's ability to incur indebtedness, pay dividends, make investments or
dispose of assets. The Credit Facility requires the Company to maintain a debt
service coverage ratio (as defined) of at least 1.25 and a maximum leverage
ratio (as defined) of 5.0. As of December 31, 1997, $15,600,000 was outstanding
on the Credit Facility and $9,400,00
<PAGE>
remained available. During 1997, the maximum balance borrowed under this
facility was $15,600,000. A commitment fee of 0.20% to 0.50% on unused
availability is charged depending on the Company's leverage ratio.
Interest expense charged to operations for the years ended December 31, 1995,
1996 and 1997 was $5,830,000, $5,576,000, and $6,681,000, respectively.
As of December 31, 1997, future long-term debt maturities associated with the
Company's debt are as follows:
1998 $ 186,000
1999 205,000
2000 226,000
2001 248,000
2002 15,874,000
Thereafter 16,903,000
----------
$33,642,000
===========
Substantially all of the Company's assets are subject to liens under long-term
debt or operating lease agreements.
J. CAPITAL LEASE OBLIGATION
On July 1, 1996, a subsidiary of the Company began leasing four long-term care
facilities in Ohio (the "Ohio Facilities"). This transaction is being accounted
for as a capital lease as a result of a bargain purchase option exercisable at
the end of the lease. The initial term of the lease is five years and during the
final six months of the initial term, the Company may exercise an option to
purchase the Ohio Facilities for a total price of $57,125,000. If the Company
exercises the purchase option but is unable to obtain financing for the
acquisition, the lease may be extended for up to two additional years, during
which time the Company must obtain financing and complete the purchase of the
facilities. The annual rent under the agreement is $5,000,000 during the initial
term and $5,500,000 during the extension term. The Company is also responsible
for facility expenses such as taxes, maintenance and repairs. The Company agreed
to pay $8,000,000 for the option to purchase these facilities. Of this amount,
$5,000,000 was paid prior to the closing on July 1, 1996, and the remainder,
$3,000,000, is due at the end of the initial lease term whether or not the
Company exercises its purchase option. The following is a schedule of future
minimum lease payments required by this lease together with the present value of
the minimum lease payments:
1998 $ 5,000,000
1999 5,000,000
2000 5,000,000
2001 57,625,000
----------
72,625,000
Less amount representing interest (16,340,000)
----------
56,285,000
Less current portion (3,924,000)
----------
Long-term portion of capital lease obligation $52,361,000
===========
K. RETIREMENT PLANS
The Company maintains an employee 401(k) defined contribution plan. All
employees who have worked at least one thousand hours and have completed one
year of continuous service are eligible to participate in the plan. The plan is
subject to the provisions of the Employee Retirement Income Security Act of
1974. Employee contributions to this plan may be matched at the discretion of
the Company. The Company contributed $120,000, $180,000 and $365,000 to the plan
in 1995, 1996 and 1997, respectively.
During September 1995, the Company established a Supplemental Executive
Retirement Plan (the "SERP") to provide benefits to key employees. Participants
may defer up to 25% of their compensation which is matched by the Company at a
rate of 50% (up to 10% of base salary). Vesting in the matching portion occurs
in January of the second year following the plan year in which contributions
were made.
L. INCOME TAXES
Pro Forma Income Taxes (Unaudited)
The financial statements of the Company for the periods prior to the
Reorganization do not include a provision for income taxes because the
Predecessor Entities (primarily partnerships and subchapter S corporations) were
not directly subject to Federal or
<PAGE>
state taxation. For financial reporting purposes, for the years ended December
31, 1995 and 1996, a pro forma provision for income taxes has been reflected in
the accompanying statements of operations based on taxable income for financial
statement purposes and an estimated effective Federal and state income tax rate
of 39% which would have resulted if the Predecessor Entities had filed corporate
income tax returns during those years.
Effective with the Reorganization described in Note B, the Company became
subject to Federal and state income taxes. The historical provision for income
taxes for the year ended December 31, 1996 reflects the recording of a one-time
Federal and state income tax benefit of $1,400,000 upon the change in the tax
status of the entity as required by SFAS No. 109, "Accounting for Income Taxes".
Significant components of the Company's deferred tax assets as of December 31,
1996 and 1997 are as follows:
1996 1997
Deferred Tax Assets:
Reserves $1,144,000 $1,755,000
Rental payments 358,000 79,000
Interest payments 376,000 376,000
Other 78,000 11,000
Total deferred tax assets $1,956,000 $2,221,000
Significant components of the provision for income taxes for the years ended
December 31, 1996 and 1997 are as follows:
1996 1997
Current:
Federal $2,229,000 $3,893,000
State 536,000 719,000
Total current 2,765,000 4,612,000
Deferred:
Federal (1,648,000) (223,000)
State (308,000) (42,000)
Total deferred (1,956,000) (265,000)
Total income tax expense $ 809,000 $4,347,000
The reconciliation of income tax computed at statutory rates to income tax
expense for the years ended December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C> <C> <C>
Statutory rate $1,699,000 35.0% $3,903,000 35.0%
State income tax, net of federal benefit 148,000 3.1 440,000 3.9%
Permanent differences 100,000 2.1 4,000 0.1%
Deferred tax asset resulting from change
in tax status (1,256,000) (25.9) - -
Other 118,000 2.4 - -
$ 809,000 16.7% $4,347,000 39.0%
</TABLE>
M. CAPITAL STOCK
Common Stock
On June 14, 1996, the Company completed its initial public offering (the
"Offering"). Through the Offering the Company issued 3,600,000 shares at $11.75
per share resulting in net proceeds to the Company (after deducting
underwriters' commissions and other offering expenses) of approximately
$37,160,000. A portion of the proceeds was used to repay some of the Company's
long-term debt (see Note I) and the remainder to fund acquisitions.
The Company's Board of Directors is authorized to issue up to 1,000,000 shares
of Preferred Stock in one or more series with such dividend rates, number of
votes, conversion rights, preferences or such other terms or conditions as are
permitted under the laws of the State of Delaware.
<PAGE>
Special Compensation
The Predecessor Entities maintained an executive long-term incentive plan (the
"Executive Plan") which granted an economic interest in the appreciation of the
Predecessor Entities above a baseline valuation of $23,000,000 to certain senior
level management personnel upon the successful completion of an initial public
offering at a minimum retained equity valuation above $43,000,000. A pool of
three percent of the retained equity above $23,000,000 was reserved and
allocated to the eligible recipients. In June, 1996, subsequent to the Offering,
payments totaling $861,000 were made to the personnel who participated in the
Executive Plan and that plan was terminated. Additionally, the Company made a
bonus payment in the form of common stock valued at $225,000 to an officer of
the Company in connection with his employment agreement. These expenses are
included in the Statement of Operations for the year ended December 31, 1996, in
the line "Special Compensation and Other."
On December 31, 1995, certain of the Predecessor Entities (the "S
Corporations") issued a 6% equity interest in the S Corporations to the
president of the Company amounting to $438,000 and a 5% equity interest in the S
Corporations to the president of an affiliate amounting to $365,000. The
issuance amounts represented the fair market value of these interests at the
date of issuance based on an independent appraisal obtained by the Company.
Payment for the issuance of these shares was due within 90 days; and
accordingly, the amounts receivable from these individuals were reflected as a
contra-equity subscription receivable with no net increase to stockholders'
equity at December 31, 1995. Subsequent to year-end and in connection with the
execution of the 1996 employment agreement of the Company's president, the
Company granted a special bonus to the president equal to the cost of the shares
issued. This expense is included in the Statement of Operations for the year
ended December 31, 1996 in the line "Special Compensation and Other."
In February 1996, one of the Predecessor Entities, Harborside Healthcare
Limited Partnership ("HHLP"), granted an option to purchase a 1.36% limited
partnership interest in HHLP to each of two members of senior management. The
exercise price per percentage limited partnership interest under each such
option was $239,525 per percentage interest, which represented the fair market
value of a 1% limited partnership interest in HHLP at the date of grant based on
an independent appraisal obtained by the Company. The options vested in equal
one-third portions on each anniversary of the date of grant over a three-year
period and expired ten years from the date of grant. With the completion of the
Offering, the option grants in HHLP were converted on a pro rata basis to
options to acquire shares of the Company's common stock.
Stock Option Plans
During 1996, the Company established two stock option plans, the 1996 Stock
Option Plan for Non-employee Directors (the "Director Plan") and the 1996
Long-Term Stock Incentive Plan (the "Stock Plan"). Directors of the Company who
are not employees, or affiliates of the Company, are eligible to participate in
the Director Plan. On the date of the Offering, each of the four non-employee
directors was granted options to acquire 15,000 shares of the Company's common
stock at the Offering price. On January 1 of each year, each non-employee
director will receive an additional grant for 3,500 shares at the fair market
value on the date of grant. Options issued under the Director Plan become
exercisable on the first anniversary of the date of grant and terminate upon the
earlier of ten years from date of grant or one year from date of termination as
a director. Through the Directors Retainer Fee Plan, non-employee directors of
the Company may also elect to receive all or a portion of their director fees in
shares of the Company's common stock. The Stock Plan is administered by the
Stock Plan Committee of the Board of Directors which is composed of outside
directors who are not eligible to participate in this plan. The Stock Plan
authorizes the issuance of non-qualified stock options, incentive stock options,
stock appreciation rights, restricted stock and other stock-based awards.
Options granted during the years ended December 31, 1996 and 1997, were granted
with exercise prices equal to or greater than the fair market value of the stock
on the date of grant. Options granted under the stock plan during 1996 and 1997
vest over a three-year period and have a maximum term of ten years. A maximum of
800,000 shares of common stock have been reserved for issuance in connection
with these plans. Information with respect to options granted under these stock
option plans is as follows:
Options Outstanding:
Number Exercise Price Weighted-Average
of Shares Per Share Exercise Price
Balance at December 31, 1995 - - -
Granted 523,000 $ 8.15 - $11.75 $11.16
Cancelled (24,000) $11.75 $11.75
Balance at December 31, 1996 499,000 $ 8.15 - $11.75 $11.14
Granted 227,500 $11.69 - $18.69 $12.66
Exercised (8,665 $11.75 $11.75
Cancelled (52,334) $11.75 - $12.00 $11.80
Balance at December 31, 1997 665,501 $ 8.15 - $18.69 $11.59
<PAGE>
As of December 31, 1996 no options to purchase shares of the Company's common
stock were exercisable. As of December 31, 1997 there were 187,000 exercisable
options at a weighted-average exercise price of $11.20.
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 requires that companies either recognize
compensation expense for grants of stock, stock options, and other equity
instruments based on fair value, or provide pro forma disclosure of net income
and earnings per share in the notes to the financial statements. The Company has
adopted the disclosure provisions of SFAS No. 123, and has applied Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for its stock
option plans. Had compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates as calculated
in accordance with SFAS No. 123, the Company's unaudited pro forma net income
and pro forma net income per share for the years ended December 31, 1996 and
1997, would have been reduced to the amounts indicated below:
1996
1996 Pro Forma 1997 1997
Net Income Net Income
Pro Forma Per Share Per Share
Net Income Diluted Net Income
As
Reported $2,712,000 $ 0.42 $6,803,000 $ 0.84
Pro
forma $2,372,000 $ 0.37 $5,733,000 $ 0.70
The weighted average fair value of options granted was $4.72 and $5.63 during
1996 and 1997, respectively. The fair value for each stock option is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: an expected life of five years, expected
volatility of 40%, no dividend yield, and a risk-free interest rate of 6.5% and
6.2% for 1996 and 1997, respectively.
The following table sets forth the computation of basic and diluted net income
per share for the year ended December 31, 1997:
Numerator:
Numerator for basic and diluted net income per share $6,803,000
Denominator:
Denominator for basic net income per share -
weighted average shares 8,037,026
Effect of dilutive securities - employee stock options 101,767
Denominator for diluted net income per share--adjusted weighted-
average shares and assumed conversions 8,138,793
Basic net income per common share $0.85
Diluted net income per common share $0.84
The denominator for basic net income per share includes 25,000, 19,093 and
34,574 shares for the years ended December 31, 1995, 1996 and 1997,
respectively, resulting from stock options issued within one year of the
Company's public offering. In addition to the dilutive securities listed above,
stock options for an additional 23,000 shares, that are anti-dilutive at
December 31, 1997, could potentially dilute earnings per share in future
periods.
N. CONTINGENCIES
The Company is involved in legal actions and claims in the ordinary course of
its business. It is the opinion of management, based on the advice of legal
counsel, that such litigation and claims will be resolved without material
effect on the Company's consolidated financial position, results of operations
or liquidity.
Beginning in 1994, the Company self-insures for health benefits provided to a
majority of its employees. The Company maintains stop-loss insurance such that
the Company's liability for losses is limited. The Company recognizes an expense
for estimated health benefit claims incurred but not reported at the end of each
year.
<PAGE>
Beginning in 1995, the Company self-insures for most workers' compensation
claims. The Company maintains stop-loss insurance such that the Company's
liability for losses is limited. The Company accrues for estimated workers'
compensation claims incurred but not reported at the end of each year.
O. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of each class of
financial instruments, for those instruments for which it is practicable to
estimate that value, and the estimated fair values of the financial instruments
are as follows:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short effective
maturity of these instruments.
Note Receivable
The carrying value of the note receivable approximates its fair value at
December 31, 1997 based on the yield of the note and the present value of
expected cash flows.
Long-term Debt
The fair value of the Company's long-term debt is estimated based on the
current rates offered to the Company for similar debt. The carrying value of the
Company's long-term debt approximates its fair value as of December 31, 1996 and
1997.
P. GAIN ON SALE OF FACILITIES, NET
As discussed in Note B, in December 1995, KYP sold seven facilities to
Meditrust (the "Sale") for $47,000,000. The Sale was effective December 31,
1995, and a net gain of $4,869,000 was recorded.
A portion of the proceeds of the Sale was used by KYP to repay the outstanding
balance of its Medium-Term Notes ($9,409,000), a related prepayment penalty
($1,154,000) and transaction costs ($884,000). The original principal amount of
the Medium-Term Notes was $6,000,000 and interest on this obligation accrued at
10.55% per annum through June 30, 1993. Commencing December 31, 1993, KYP began
making semiannual interest payments on the original principal and the accrued
interest. The principal and all deferred interest were scheduled to be repaid in
June 1998. As a result of the early retirement of this debt, the Company
recorded a loss of $1,502,000, which was netted against the gain on the sale of
the KYP facilities. The terms of the KYP partnership agreement specified that
one of the Predecessor Entities which served as KYP's general partner would not
share in the gain associated with the sale of the facilities; as such, the
entire amount of the net gain was allocated to the Unitholders, and was included
in the minority interest reflected in the Statement of Operations for the year
ended December 31, 1995.
The determination of the net gain included the recognition of an estimated
liability of approximately $3,000,000 to Medicare and certain states' Medicaid
programs. This amount is included with other estimated settlements due to/from
third-party payors as a component of accounts receivable. Under existing
regulations, KYP is required to repay these programs for certain depreciation
expense recorded by the KYP facilities and for which they received reimbursement
prior to the sale. Any payments assessed by these programs to settle these
obligations in excess of the funds withheld from the proceeds of the sale of the
facilities will be the responsibility of the Company without any recourse to the
Unitholders. However, if the ultimate settlement of these obligations results in
a net amount due to KYP, this amount would be distributed to the Unitholders.
The Sale provided for the dissolution of KYP and the distribution of the net
proceeds of the Sale to the Unitholders, which occurred in March 1996. The
Company's balance sheet as of December 31, 1995 included the cash to be
distributed to the Unitholders as well as the related distribution payable of
$33,493,000.
Q. RELATED PARTY TRANSACTIONS
An affiliate of the Company provides office space, legal, tax, data processing
and other administrative services to the Company in return for a monthly fee.
Total service charges under this arrangement were $700,000, $700,000 and
$708,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
R. RECENT ACQUISITIONS (Unaudited)
The following unaudited pro forma financial information gives effect to the
acquisition of the Ohio Facilities, the Connecticut facilities, the Dayton
facilities, the Massachusetts facilities and a therapy services company, as if
they had occurred on January 1,
<PAGE>
1996. The pro forma financial results are not necessarily indicative of the
actual results of operations which might have occurred or of the results of
operations which may occur in the future.
For the Years Ended December 31,
1996 1997
Total net revenues $ 262,043,000 $ 285,061,000
Income before income taxes and extraordinary loss 5,132,000 11,971,000
Income before extraordinary loss 4,215,000 7,304,000
Net income 2,897,000 7,304,000
Net income per common share using
6,396,142 and 8,138,793 common and
common equivalent shares, respectively $ 0.45 $ 0.90
S. SUMMARY QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The Company's unaudited quarterly financial information follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Total net revenues $ 47,384,000 $ 50,292,000 $ 57,964,000 $ 66,137,000
Income from operations 3,822,000 4,069,000 4,455,000 4,846,000
Income before income taxes 2,461,000 2,613,000 2,773,000 3,303,000
Income taxes 959,000 1,020,000 1,081,000 1,287,000
Net income 1,502,000 1,593,000 1,692,000 2,016,000
Net income per share
Basic $ 0.19 $ 0.20 $ 0.21 $ 0.25
Diluted $ 0.19 $ 0.20 $ 0.21 $ 0.24
Year Ended December 31, 1996
First Second Third Fourth
Quarter Quarter Quarter Quarter
Total net revenues $ 34,931,000 $ 36,872,000 $ 45,903,000 $ 47,706,000
Income from operations 1,307,000 846,000 (1) 3,655,000 3,918,000
Income (loss) before
income taxes and
extraordinary loss 205,000 (229,000) 2,312,000 2,541,000
Income taxes (benefit) -- (400,000) 902,000 307,000
Income before
extraordinary loss 205,000 171,000 1,410,000 2,234,000
Extraordinary loss -- (1,318,000) (2) -- --
Net income (loss) 205,000 (1,147,000) 1,410,000 2,234,000
Net income per share-
basic and diluted $ 0.18 $ 0.28
Pro forma income taxes
(benefit) 80,000 (489,000)
Pro forma income before
extraordinary loss 125,000 260,000
Pro forma net income (loss) 125,000 (1,058,000)
Pro forma income before
extraordinary loss
per share - basic and diluted $ 0.03 $ 0.05
Pro forma net income (loss)
per share - basic and diluted $ 0.03 $ (0.21)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total net revenues $ 23,777,000 $ 26,737,000 $ 28,515,000 $ 30,396,000
Income from operations 1,290,000 1,671,000 2,123,000 2,895,000
Net income (loss) (240,000) 253,000 297,000 924,000
Pro forma income taxes
(benefit) (94,000) 99,000 116,000 360,000
Pro forma net income (loss) (146,000) 154,000 181,000 564,000
Pro forma net income (loss)
per share - basic and diluted $ (0.03) $ 0.03 $ 0.04 $ 0.13
</TABLE>
(1) Includes $1,716,000 of special compensation and other expenses incurred
primarily as a result of the Offering (see Note M)
(2) A portion of the proceeds of the Offering was used to repay long-term debt
in June 1996. The resulting loss on early retirement of debt is presented as an
extraordinary loss net of related tax benefit (see Note I)
T. PENDING ACQUISITIONS
During 1997, the Company entered into separate agreements to acquire two
long-term care facilities in Ohio and two long-term care facilities in Rhode
Island. The aggregate purchase price of these two acquisitions is approximately
$33,700,000, and the Company expects to finance them through an expansion of
funds committed to its existing Leasing Facility (see Note H). The Company is
currently awaiting regulatory approval for each of these acquisitions and
expects each transaction to be completed during the second quarter of 1998.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held on May 13, 1998, to be filed
with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held on May 13, 1998, to be filed
with the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held on May 13, 1998, to be filed
with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held on May 13, 1998, to be filed
with the Securities and Exchange Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
See Index to Consolidated Financial Statements in Item 8 of this annual report.
2. Financial Statement Schedules:
None.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are incorporated by
reference herein or are filed as part of this annual report.
Exhibit
Number Description of Document
------------------------------
2.1* Reorganization Agreement, dated as of May 15, 1996,
by and among Harborside Healthcare Corporation, The
Berkshire Companies Limited Partnership, Krupp
Enterprises Limited Partnership, The Douglas Krupp
1994 Family Trust, The George Krupp 1994 Family
Trust, Laurence Gerber, Stephen L. Guillard and
Damian Dell'Anno.
<PAGE>
3.1** Amended and Restated Certificate of incorporation of the Company.
3.2** Amended and Restated By-laws of the Company.
4.1* Form of Specimen Common Stock certificate.
4.2 Letter from the Company to the Commission agreeing to file
certain debt instruments.
10.1(a)* Facility lease Agreement, dated as of December 31, 1995 between
Meditrust Tri-States, Inc. and HHCI Limited Partnership (New
Haven Facility).
10.1(b)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust Tri-States, Inc. and HHCI Limited Partnership
(Indianapolis Facility).
10.1(c)* Facility Lease Agreement, dated as of December 31, 1995 between
Meditrust of Ohio, Inc. and HHCI Limited Partnership (Troy
Facility).
10.1(d)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust of Florida, Inc. and HHCI Limited Partnership (Sarasota
Facility).
10.1(e)* Facility Lease Agreement, dated as of December 31, 1995 between
Meditrust of Florida, Inc. and HHCI Limited Partnership
(Pinebrook Facility).
10.1(f)* Facility Lease Agreement, dated as of December 31, 1995 between
Meditrust of Florida, Inc. and HHCI Limited Partnership (Naples
Facility).
10.1(g)* Facility Lease Agreement, dated as of December 31, 1995 between
Meditrust of New Jersey, Inc. and HHCI Limited Partnership (Woods
Edge Facility).
10.1(h)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust Tri-States, Inc. and HHCI Limited
Partnership (New Haven Facility).
10.1(i)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust Tri-States, Inc. and HHCI Limited
Partnership (Indianapolis Facility).
10.1(j)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of Ohio, Inc. and HHCI Limited
Partnership (Troy Facility).
10.1(k)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by ad between Meditrust of Florida, Inc. and HHCI Limited
Partnership (Sarasota Facility).
10.1(l)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of Florida, Inc. and HHCI Limited
Partnership (Pinebrook Facility).
10.1(m)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of Florida, Inc. and HHCI Limited
Partnership (Naples Facility).
10.1(n)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Jersey, Inc. and HHCI
Limited Partnership (Woods Edge Facility).
10.2(a)* Loan Agreement among Meditrust Mortgage Investments, Inc. and Bay
Tree Nursing Center Corporation, Belmont Nursing Center
Corporation, Countryside Care Center Corporation, Oakhurst Manor
Nursing Center Corporation, Orchard Ridge Nursing Center
Corporation, Sunset Point Nursing Center Corporation, West Bay
Nursing Center Corporation and Harborside Healthcare Limited
Partnership, dated October 13, 1994.
10.2(b)* Guaranty, dated October 14, 1994, to Meditrust Mortgage
Investments, Inc. from Harborside Healthcare Limited Partnership.
10.2(c)* Environmental Indemnity Agreement, dated October 13, 1994, by and
among Bay Tree Nursing Center Corporation, Belmont Nursing Center
Corporation, Countryside Care Center Corporation, Oakhurst Manor
Nursing Center Corporation, Orchard Ridge Nursing Center
Corporation, Sunset Point Nursing Center Corporation, West Bay
Nursing Center Corporation and Harborside Healthcare Limited
Partnership and Meditrust Mortgage Investments, Inc.
10.2(d)* Consolidated and Renewal Promissory Note, dated October 13, 1994,
from Bay Tree Nursing Center Corporation, Belmont Nursing Center
Corporation, Countryside Care Center Corporation, Oakhurst Manor
Nursing Center Corporation, Orchard Ridge Nursing Center
Corporation, Sunset Point Nursing Center Corporation, West Bay
Nursing Center Corporation to Meditrust Mortgage Investments,
Inc.
<PAGE>
10.2(e)* Negative Pledge Agreement, dated October 13, 1994, by and among
Douglas Krupp, George Krupp, Bay Tree Nursing Center Corporation,
Belmont Nursing Center Corporation, Countryside Care Center
Corporation, Oakhurst Manor Nursing Center Corporation, Orchard
Ridge Nursing Center Corporation, Sunset Point Nursing Center
Corporation, West Bay Nursing Center Corporation and Meditrust
Mortgage Investments, Inc.
10.2(f)* Affiliated Party Subordination Agreement, dated October 13, 1994,
by and among Bay Tree Nursing Center Corporation, Belmont Nursing
Center Corporation, Countryside Care Center Corporation, Oakhurst
Manor Nursing Center Corporation, Orchard Ridge Nursing Center
Corporation, Sunset Point Nursing Center Corporation, West Bay
Nursing Center Corporation, Harborside Healthcare Limited
Partnership, Harborside Rehabilitation Limited Partnership and
Meditrust Mortgage Investments, Inc.
10.2(g)* First Amendment to Loan Agreement, dated May 17, 1996 by and
among Meditrust Mortgage Investments, Inc. and Bay Tree Nursing
Center Corporation, Belmont Nursing Center Corporation,
Countryside Care Center Corporation, Oakhurst Manor Nursing
Center Corporation, Orchard Ridge Nursing Center Corporation,
Sunset Point Nursing Center Corporation, West Bay Nursing Center
Corporation and Harborside Healthcare Limited Partnership.
10.2(h)* Credit Agreement, dated as of April 14, 1997, among Harborside
Healthcare Corporation and the other Borrowers specified therein,
the Lenders party thereto and the Chase Manhattan Bank, as
Administrative Agent.
10.2(i)*** First Amendment to Revolving Credit Agreement among Harborside
Healthcare Corporation and other Borrowers specified therein, the
Lenders party thereto and Chase Manhattan Bank, Administrative
Agent, dated as of August 1, 1997
10.2(j)*** Second Amendment to Revolving Credit Agreement among Harborside
Healthcare Corporation and other Borrowers specified therein, the
Lenders party thereto and Chase Manhattan Bank, Administrative
Agent, dated as of August 28, 1997
10.3(a)* Facility lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire Inc. and Harborside New Hampshire
Limited Partnership (Westwood Facility).
10.3(b)* Facility Lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire, Inc. and Harborside New Hampshire
Limited Partnership (Pheasant Wood Facility).
10.3(c)* Facility Lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire, Inc. and Harborside New Hampshire
Limited Partnership (Crestwood Facility).
10.3(d)* Facility Lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire, Inc. and Harborside New Hampshire
Limited Partnership (Milford Facility).
10.3(e)* Facility Lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire, Inc. and Harborside New Hampshire
Limited Partnership (Applewood Facility).
10.3(f)* Facility Lease Agreement, dated as of December 31, 1996 between
Meditrust of Bedford, Inc. and Harborside New Hampshire Limited
Partnership (Northwood Facility).
10.3(g)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and
Harborside New Hampshire Limited Partnership (Westwood Facility).
10.3(h)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and
Harborside New Hampshire Limited Partnership (Pheasant Wood
Facility).
<PAGE>
10.3(i)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and
Harborside New Hampshire Limited Partnership (Crestwood
Facility).
10.3(j)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and
Harborside New Hampshire Limited Partnership (Milford Facility).
10.3(k)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and
Harborside New Hampshire Limited Partnership (Applewood
Facility).
10.3(l)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of Bedford, Inc. and Harborside
New Hampshire Limited Partnership (Northwood Facility).
10.4(a)* Facility Lease Agreement, dated as of March 31, 1995 between
Meditrust of Ohio, Inc. and Harborside of Toledo Limited
Partnership (Swanton Facility).
10.4(b)* First Amendment of Facility Lease Agreement, dated as of December
31, 1995, by and between Harborside Toledo Limited Partnership
and Meditrust of Ohio, Inc. (Swanton Facility).
10.4(c)* Second Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of Ohio , Inc. and Harborside
Toledo Limited Partnership (Swanton Facility).
10.5* Amended and Restated Agreement of Limited Partnership of Bowie
Center Limited Partnership, dated April 7, 1993.
10.6* Agreement of Lease, dated March 16, 1993, between Bryan Nursing
Home, Inc. and Harborside of Ohio Limited Partnership (Defiance
and Northwestern Ohio Facilities).
10.7* First Amendment to Agreement of Lease, dated June 1, 1993, by and
between Bryan Nursing Home, Inc. and Harborside Ohio Limited
Partnership.
10.8* Option to Purchase Agreement, dated March 16, 1993, by and
between Bryan Nursing Home, Inc. And Harborside Ohio Limited
Partnership.
10.9(a)* Lease, dated September 30, 1994, between Rockledge T. Limited
Partnership and Harborside of Florida Limited Partnership
(Brevard Facility).
10.9(b)* Lease Guaranty, dated September 30, 1994, to Rockledge T. Limited
Partnership from Harborside Healthcare Limited Partnership.
10.9(c)* Indemnity Agreement, dated September 30, 1994, between Rockledge
T. Limited Partnership, Harborside of Florida Limited
Partnership, Harborside Healthcare Limited Partnership and
Southtrust Bank of Alabama.
10.9(d)* Assignment and Security Agreement, dated September 30, 1994,
between Rockledge T. Limited Partnership, Harborside of Florida
Limited Partnership and Southtrust Bank of Alabama.
10.9(e)* Subordination Agreement (Lease), dated September 30, 1994, by and
among Rockledge T. Limited Partnership, Harborside of Florida
Limited Partnership, Harborside Healthcare Limited Partnership
and Southtrust Bank of Alabama.
10.9(f)* Subordination Agreement (Management), dated September 30, 1994,
by and among Rockledge T. Limited Partnership, Harborside of
Florida Limited Partnership, Harborside Healthcare Limited
Partnership and Southtrust Bank of Alabama.
10.10(a)* Form of Employment Agreement between the Company and Stephen L.
Guillard.
10.10(b)* Form of Employment Agreement between the Company and Damian
Dell'Anno.
10.10(c)* Form of Employment Agreement between the Company and Bruce
Beardsley.
10.10(d)* Form of Employment Agreement between the Company and William
Stephan.
10.11* Form of 1996 Stock Option Plan for Non-Employee Directors.
10.12(a)* Form of 1996 Long-Term Stock Incentive Plan.
<PAGE>
10.12(b)* Form of Nonqualified Stock Option Agreement.
10.13* Retirement Savings Plan of the Company.
10.14* Supplemental Executive Retirement Plan of the Company.
10.15* Form of Administrative Services Agreement between the Company and
Berkshire.
10.16* Agreement to Lease, dated as of May 3, 1996 among Westbay Manor
Company, Westbay Manor II Development Company, Royal View Manor
Development Company, Beachwood Care Center Limited Partnership,
Royalview Manor Company, Harborside Health I Corporation and
Harborside Healthcare Limited Partnership.
10.17* Form of Directors Retainer Fee Plan.
10.18* Form of Guaranty by Harborside Healthcare Corporation in favor of
Westbay Manor Company, Westbay Manor II Development Company,
Royalview Manor Development Company and Beachwood Care Center
Limited Partnership.
21.1 Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule.
* Incorporated by reference to the Company's Registration Statement
on Form S-1 (Registration No. 333-3096).
** Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996 (File No.
01-14358).
*** Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997 (File No.
01-14358).
(b) The Company did not file any reports on Form 8-K during the last quarter of
of the Company's fiscal year ended December 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to signed on
its behalf by the undersigned, thereunto duly authorized, on the 31st day of
March, 1998.
HARBORSIDE HEALTHCARE
CORPORATION
By: /s/ Stephen L. Guillard
---------------------------
Chairman of the Board
President and Chief Executive
Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated
Director
- -------------------
Robert T. Barnum
/S/ David F. Benson Director
- -------------------
Director
- -------------------
Robert M. Bretholtz
/S/ Sally W. Crawford Director
- ---------------------
/S/ Stephen L. Guillard President, Chief Executive Officer and
- ----------------------- Director (Principal Executive Officer)
/S/ Douglas Krupp Director
- -----------------
/S/ William H. Stephan Senior Vice President and Chief
- ---------------------- Financial Officer (Principal Financial and
Accounting Officer)
Exhibit 4.2
Harborside Healthcare Corporation
470 Atlantic Avenue
Boston, MA 02210
March 30, 1998
Securities and Exchange Commission
450 Fifth Avenue, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
In accordance with Item 601(b)(4)(iii) of Regulation S-K, Harborside
Healthcare Corporation (the "Company") has not filed herewith any instrument
with respect to long term debt not being registered where the total number of
securities authorized thereunder does not exceed ten percent (10%) of the total
assets of the Company and its subsidiaries on a consolidated basis. The Company
hereby agrees to furnish a copy of any such agreement to the Securities and
Exchange Commission upon request.
Very truly yours,
HARBORSIDE HEALTHCARE CORPORATION
By: /S/ William H. Stephan
--------------------------
Chief Financial Officer
Exhibit 21
Subsidiaries of Harborside Healthcare Corporation as of December 31, 1997
<TABLE>
<CAPTION>
Jurisdiction of
Incorporation or
Name Organization Doing Business As
---- ------------ -----------------
<S> <C> <C>
1. Bay Tree Nursing Center Corporation Massachusetts Harborside Healthcare-Palm Harbor
2. Belmont Nursing Center Corporation Massachusetts Harborside Healthcare-Toledo
3. Bowie Center Limited Partnership Maryland Larkin Chase Nursing and Restoration
Center
4. Countryside Care Center Corporation Massachusetts Harborside Healthcare-Terre Haute
5. Harborside of Cleveland Limited Partnership Massachusetts Harborside Healthcare- Beachwood
Rehabilitation and Nursing Center
Harborside Healthcare- Broadview
Heights Rehabilitation and Nursing
Center
Harborside Healthcare- Westlake I
Rehabilitation and Nursing Center
Harborside Healthcare- Westlake II
Rehabilitation and Nursing Center
6. Harborside of Florida Limited Partnership Florida Harborside Healthcare- Brevard
7. Harborside of Ohio Limited Partnership Massachusetts Harborside Healthcare- Northwest Ohio
Harborside Healthcare- Defiance
8. Harborside Funding Limited Partnership Massachusetts
9. Harborside Health I Corporation Delaware Harborside Nursing Homes, Inc.
10. Harborside Healthcare Advisors Massachusetts
Limited Partnership
11. Harborside Healthcare Limited Massachusetts Allicor
Partnership Harborside Healthcare Management
Limited Partnership
12. Harborside Healthcare Network Florida
Limited Partnership
13. Harborside Homecare Limited Massachusetts Behavioral Health Care
Partnership
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction of
Incorporation or
Name Organization Doing Business As
---- ------------ -----------------
<S> <C> <C>
14. Harborside New Hampshire Massachusetts Harborside Nursing Facilities Limited
Limited Partnership Partnership
Harborside Healthcare- Applewood
Rehabilitation and Nursing Center
Harborside Healthcare- Crestwood
Rehabilitation and Nursing Center
Harborside Healthcare- Milford
Rehabilitation and Nursing Center
Harborside Healthcare- Northwood
Rehabilitation and Nursing Center
Harborside Healthcare- Pheasantwood
Rehabilitation and Nursing Center
Harborside Healthcare- Westwood
Rehabiliation and Nursing Center
15. Harborside Rehabiliation Limited Massachusetts Theracor Rehabilitation Services
Partnership
16. Harborside Toledo Corporation Massachusetts
17. Harborside Toledo Limited Partnership Massachusetts Harborside Healthcare- Swanton
18. HHCI Limited Partnership Massachusetts Harborside Healthcare- Naples
Harborside Healthcare- Sarasota
Harborside Healthcare- Pinebrook
Harborside Healthcare- New Haven
Harborside Healthcare- Woods Edge
Harborside Healthcare- Indianapolis
Harborside Healthcare- Troy
19. KHI Corporation Delaware
20. Maryland Harborside Corporation Massachusetts
21. Oakhurst Manor Nursing Center Massachusetts Harborside Healthcare- Ocala
Corporation
22. Orchard Ridge Nursing Center Massachusetts Harborside Healthcare- Gulf Coast
Corporation
23. Riverside Retirement Limited Partnership Massachusetts Harborside Healthcare- Decatur
24. Sunset Point Nursing Center Corporation Massachusetts Harborside Healthcare- Clearwater
25. West Bay Nursing Center Corporation Massachusetts Harborside Healthcare- Tampa Bay
26. Harborside Healthcare Baltimore Limited
Partnership Massachusetts Harborside Healthcare - Harford
Gardens
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction of
Incorporation or
Name Organization Doing Business As
---- ------------ -----------------
<S> <C> <C>
27. Harborside Massachusetts
Limited Partnership Massachusetts Harborside Healthcare - North Shore
Harborside Healthcare - Amesbury
Harborside Healthcare - Cedar Glen
Harborside Healthcare - Danvers
28. Harborside of Dayton
Limited Partnership Massachusetts Harborside Healthcare - Laurelwood
Harborside Healthcare - New Lebanon
Harborside Healthcare - Dayton
29. Harborside Connecticut
Limited Partnership Massachusetts Harborside Healthcare - Arden House
Harborside Healthcare - Governor's
Harborside Healthcare - Willows
Harborside Healthcare - Madison House
Harborside Healthcare - Reservoir
</TABLE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement on
Form S-8 (Registration No. 333- 10571) of our report dated February 13, 1998, on
our audits of the consolidated financial statements of Harborside Healthcare
Corporation and subsidiaries (the "Company") as of December 31, 1997 and 1996,
and for the three years in the period ended December 31, 1997, which report is
included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 30, 1998
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,747
<SECURITIES> 0
<RECEIVABLES> 32,416
<ALLOWANCES> 0
<INVENTORY> 30,527<F1>
<CURRENT-ASSETS> 49,957
<PP&E> 96,872
<DEPRECIATION> 0
<TOTAL-ASSETS> 168,562
<CURRENT-LIABILITIES> 27,403
<BONDS> 89,736<F2>
0
0
<COMMON> 80
<OTHER-SE> 51,703<F3>
<TOTAL-LIABILITY-AND-EQUITY> 168,562
<SALES> 0
<TOTAL-REVENUES> 221,777
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 204,585
<LOSS-PROVISION> 189<F4>
<INTEREST-EXPENSE> 5,853
<INCOME-PRETAX> 11,150
<INCOME-TAX> (4,347)
<INCOME-CONTINUING> 6,803
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,803
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.84
<FN>
<F1>Includes the following assets: prepaid expenses and other of $6,644,
deferred income taxes--current of $2,150, deferred income taxes--long-term of
$71, restricted cash of $5,545, note recievable of $7,487, investment in limited
partnership of $67, and intangible assets, net of $8,563.
<F2>Includes the following long-term liabilities: deferred income of $3,559,
capital lease obligation of $52,361, and long-term debt of $33,456.
<F3>Includes the following equity accounts: additional paid-in capital of
$48,440 and retained earnings of $3,263.
<F4>Includes loss on investment in limited partnership of $189.
</FN>
</TABLE>
