UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 01-14358
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Harborside Healthcare Corporation
- --------------------------------------------------------------------------------
Delaware 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)
(617) 556-1515
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of shares of common stock, par value $0.01 per share outstanding as of
August 7,1998: 8,011,164
1
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Table of Contents
Page
----
Part I. Financial Information
Condensed Consolidated Balance Sheets
December 31, 1997 and June 30, 1998 3
Condensed Consolidated Statements of Operations
For the Three Months and the Six Months Ended
June 30, 1997 and 1998 4
Condensed Consolidated Statement of Changes
in Stockholders' Equity for the Six Months
Ended June 30, 1998 5
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Part II Other Information 14
Signatures 15
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,747 $ 3,028
Accounts receivable, net of allowances for doubtful
accounts of $1,871 and $2,455, respectively 32,416 41,484
Prepaid expenses and other 6,711 8,466
Deferred income taxes 2,150 2,150
------------ ------------
Total current assets 50,024 55,128
Restricted cash 5,545 7,116
Property and equipment, net 96,872 102,048
Intangible assets, net 8,563 9,673
Note receivable 7,487 7,487
Deferred income taxes 71 71
------------ ------------
Total assets $168,562 $181,523
============ ============
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 186 $ 202
Current portion of capital lease obligation 3,924 4,204
Accounts payable 7,275 7,963
Employee compensation and benefits 10,741 13,696
Other accrued liabilities 4,417 5,786
Accrued interest 251 199
Current portion of deferred income 609 803
------------ ------------
Total current liabilities 27,403 32,853
Long-term portion of deferred income 3,559 5,045
Long-term debt 33,456 36,346
Long-term portion of capital lease obligation 52,361 51,594
------------ ------------
Total liabilities 116,779 125,838
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 30,000,000 shares
authorized, 8,008,665 and 8,011,164 shares
issued and outstanding, respectively 80 80
Additional paid-in capital 48,440 48,469
Retained earnings 3,263 7,136
------------ ------------
Total stockholders' equity 51,783 55,685
------------ ------------
Total liabilities and stockholders' equity $168,562 $181,523
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------- ------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total net revenues $ 50,292 $ 76,186 $ 97,676 $148,640
-------- -------- -------- --------
Expenses:
Facility operating 40,065 59,649 77,517 117,030
General and administrative 2,334 4,110 4,723 7,475
Service charges paid to affiliate 177 315 354 628
Depreciation and amortization 960 1,178 1,882 2,263
Facility rent 2,687 6,065 5,309 11,621
-------- -------- -------- --------
Total expenses 46,223 71,317 89,785 139,017
-------- -------- -------- --------
Income from operations 4,069 4,869 7,891 9,623
Interest expense, net 1,364 1,552 2,756 3,202
Other expense 92 41 61 72
-------- -------- -------- --------
Income before income taxes 2,613 3,276 5,074 6,349
Income taxes 1,020 1,278 1,979 2,476
-------- -------- -------- --------
Net income $ 1,593 $ 1,998 $ 3,095 $ 3,873
======== ======== ======== ========
Net income per share-basic $ 0.20 $ 0.25 $ 0.39 $ 0.48
======== ======== ======== ========
Net income per share-diluted $ 0.20 $ 0.24 $ 0.39 $ 0.47
======== ======== ======== ========
Weighted average number of
common shares
used in per share computations
Basic 8,028,000 8,062,000 8,026,000 8,061,000
Diluted 8,057,000 8,351,000 8,043,000 8,328,000
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Stockholders' equity, December 31, 1997 $ 80 $ 48,440 $ 3,263 $ 51,783
Exercise of stock options - 29 - 29
Net income for the six months ended
June 30, 1998 - - 3,873 3,873
-------- -------- -------- --------
Stockholders' equity, June 30, 1998 $ 80 $ 48,469 $ 7,136 $ 55,685
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
For the six months ended June 30,
---------------------------------
1997 1998
---- ----
<S> <C> <C>
Operating activities:
Net income $ 3,095 $ 3,873
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation of property and equipment 1,712 1,895
Amortization of intangible assets 170 368
Amortization of deferred income (184) (255)
Amortization of loan costs and fees 44 108
Accretion of interest on capital lease obligation 1,419 1,532
Other 2 -
------- -------
6,258 7,521
Changes in operating assets and liabilities:
(Increase) in accounts receivable (4,577) (9,068)
(Increase) in prepaid expenses and other (2,455) (1,755)
Increase in accounts payable 317 688
Increase in employee compensation and benefits 1,578 2,955
Increase (decrease) in accrued interest 65 (52)
Increase in other accrued liabilities 1,116 1,369
(Decrease) in income taxes payable (705) -
------- -------
Net cash provided by operating activities 1,597 1,658
------- -------
Investing activities:
Additions to property and equipment (812) (7,071)
Additions to intangibles (1,357) (1,586)
Transfers to restricted cash, net (76) (1,571)
Repayment of demand note 1,369 -
------- -------
Net cash used by investing activities (876) (10,228)
------- -------
Financing activities:
Issuance of long-term debt 2,175 3,000
Payment of long-term debt (89) (94)
Principal payments of capital lease obligation (1,835) (2,019)
Receipt of lease inducement - 1,935
Exercise of stock options - 29
------- -------
Net cash provided by financing activities 251 2,851
------- -------
Net increase (decrease) in cash and cash equivalents 972 (5,719)
Cash and cash equivalents, beginning of period 9,722 8,747
------- -------
Cash and cash equivalents, end of period $10,694 $ 3,028
======= =======
Supplemental Disclosure:
Interest paid $ 1,734 $ 2,128
======= =======
Income taxes paid $ 2,684 $ 2,923
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. General
The accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report or Form 10-K for the year ended December
31, 1997. In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the Company's financial position as of
June 30, 1998, the results of its operations for the three-month and six-month
periods ended June 30, 1997 and 1998 and its cash flows for the six-month
periods ended June 30, 1997 and 1998. The results of operations for the
three-month and six-month periods ended June 30, 1998 are not necessarily
indicative of the results which may be expected for the full year. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" included elsewhere in this report.
B. Basis of Presentation
The Company was incorporated as a Delaware corporation on March 19, 1996 and was
formed as a holding company, in anticipation of an initial public offering (the
"Offering"), to combine under the control of a single corporation the operations
of various business entities (the "Predecessor Entities") which were all under
the majority control of several related stockholders. Immediately prior to the
Offering, the Company executed an agreement (the "Reorganization Agreement")
which resulted in the transfer of ownership of the Predecessor Entities to the
Company prior to completion of the Offering in exchange for 4,400,000 shares of
the Company's common stock. The Company's financial statements for periods prior
to the Offering have been prepared by combining the historical financial
statements of the Predecessor Entities, similar to a pooling of interests
presentation. On June 14, 1996, the Company completed the issuance of 3,600,000
shares of common stock through the Offering resulting in net proceeds to the
Company (after deducting underwriters' commissions and other offering expenses)
of $37,160,000. The consolidated financial statements include the accounts of
Harborside Healthcare Corporation and its wholly-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
C. Significant Accounting Policies
Reclassifications have been made to conform prior years' data to the current
year presentation.
D. Earnings Per Share
The following table sets forth the computation of basic and diluted net income
per share for the period ended June 30, 1998:
Numerator:
Numerator for basic and diluted net income per share $3,873,000
==========
Denominator:
Denominator for basic net income per share - weighted average
shares 8,061,000
Effect of dilutive securities - employee stock options 267,000
----------
Denominator for diluted net income per share--adjusted weighted-
average shares and assumed conversions 8,328,000
==========
Basic net income per common share $0.48
Diluted net income per common share $0.47
The denominator for basic net income per share includes 26,000 and 50,000 shares
for the periods ended June 30, 1997 and 1998, respectively, resulting from stock
options issued within one year of the Company's public offering.
7
<PAGE>
E. Acquisitions
During the second quarter of 1998, the Company completed the acquisitions of two
long-term care facilities (248 licensed beds) in Toledo, Ohio and two long-term
care facilities (267 licensed beds) in Warwick, Rhode Island. The aggregate
purchase price of these two acquisitions was approximately $33,700,000, and the
Company financed them through an expansion of funds committed to its existing
synthetic leasing facility (the "Leasing Facility"). The Ohio acquisition was
completed on April 1 and the Rhode Island acquisition on May 8. In connection
with these acquisitions, the Company increased funds committed by a bank group
through its Leasing Facility to $59,250,000. In May 1998, the Company also
increased funds available from the bank group through its revolving credit
facility to $40,000,000.
F. Subsequent Events
On April 15, 1998, the Company entered into a Merger Agreement with HH
Acquisition Corp. ("MergerCo"), an entity organized for the sole purpose of
effecting a merger on behalf of Investcorp S.A., certain of its affiliates and
certain other international investors (collectively, the "New Investors"). On
August 11, 1998, MergerCo merged with and into the Company, with the Company as
the surviving corporation. As a result of the merger, the New Investors acquired
approximately 91% of the post-merger common stock of the Company. Certain
pre-merger stockholders of the Company, including certain of the Company's
existing members of senior management, retained approximately 660,000 shares (or
approximately 9%) of the Company's post-merger common stock. Each other share of
the Company's pre-merger common stock was converted into $25 in cash,
representing aggregate cash payments of approximately $184 million. Holders of
outstanding stock options of the Company converted the majority of their options
into cash at $25 per underlying share less the applicable option exercise price
and withholding taxes, representing aggregate cash payments of approximately $8
million.
In connection with the transaction and prior to the merger, the New Investors
made cash common equity contributions of $165 million to MergerCo, and MergerCo
obtained gross proceeds of $99.5 million through the issuance of 11% senior
subordinated discount notes due 2008 and $40 million through the issuance of
13.5% exchangeable preferred stock mandatorily redeemable 2010. In connection
with the merger, the Company also entered into a new $250 million senior secured
credit facility with a group of banks.
8
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements including those concerning
Management's expectations regarding future financial performance and future
events. These forward-looking statements involve significant risk and
uncertainties, including those described herein and included under "Special Note
Regarding Forward-Looking Statements" below. Actual results may differ
materially from those anticipated by such forward-looking statements.
OVERVIEW
Harborside Healthcare provides high quality long-term care, subacute care and
other specialty medical services in four principal regions: the Southeast, the
Midwest, New England and the Mid-Atlantic. As of June 30, 1998, the Company
operated 49 facilities with a total of 5,983 licensed beds. The Company provides
traditional skilled nursing care, a wide range of subacute care programs (such
as orthopedic, CVA/stroke, cardiac, pulmonary and wound care), as well as
distinct programs for the provision of care to Alzheimer's and hospice patients.
In addition, the Company provides rehabilitation therapy at Company- operated
and non-affiliated facilities. As of June 30, 1998, the Company provided
rehabilitation therapy services to patients at 53 non-affiliated long-term care
facilities. The Company seeks to position itself as the long-term care provider
of choice to managed care and other private referral sources in its target
markets by achieving a strong regional presence and by providing a full range of
high quality, cost effective nursing and specialty medical services.
The Company was created in March 1996, in anticipation of an initial public
offering (the "Offering"), in order to combine under its control the operations
of various long-term care facilities and ancillary businesses (the "Predecessor
Entities") which had operated since 1988. The Company completed the Offering on
June 14, 1996 and issued 3,600,000 shares of common stock at $11.75 per share.
The owners of the Predecessor Entities contributed their interests in such
Predecessor Entities to the Company and received 4,400,000 shares of the
Company's common stock.
RECENT ACQUISTIONS
During 1997 and 1998, the Company acquired 16 skilled nursing facilities with a
total of 1,989 beds (including six assisted living beds), an assisted living
facility with 115 beds and a rehabilitation services company. In particular, the
acquisitions in 1997 consisted of five skilled nursing facilities in Connecticut
with a total of 684 beds, four skilled nursing facilities in Massachusetts with
a total of 401 beds, two skilled nursing facilities in Ohio with a total of 226
beds (including six assisted living beds), an assisted living facility in Ohio
with 115 beds, one skilled nursing facility in Maryland with 163 beds and a
rehabilitation services company. In addition, in 1997 the Company entered into
contracts to manage two skilled nursing facilities in Massachusetts with a total
of 178 beds. In 1998, the Company acquired two skilled nursing facilities in
Rhode Island with a total of 267 beds and two skilled nursing facilities in Ohio
with a total of 248 beds. As a result of these recent acquisitions, the
Company's results of operations for the six month and three month periods ended
June 30, 1998 do not fully reflect the results of operations of certain acquired
facilities.
The following table sets forth the number of facilities and the number of
licensed beds operated by the Company:
As of June 30,
-------------------------
1997 1998
---- ----
Facilities operated (1) 31 49
Licensed beds (1) 3,864 5,983
(1) In 1998, includes two managed facilities with 178 licensed beds.
The following table sets forth certain operating data for the periods indicated:
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
----------------------------------- ---------------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Patient days:
Private and other 89,477 128,858 176,161 251,531
Medicare 33,062 52,386 66,968 102,238
Medicaid 189,113 296,837 370,365 567,484
------- ------- ------- -------
Total 311,652 478,081 613,494 921,253
======= ======= ======= =======
Average Occupancy rate (1) 91.5% 92.2% 91.9% 92.6%
Total net revenues:
Private and other 33.1% 31.3% 33.5% 31.8%
Medicare 28.4% 25.8% 28.7% 26.2%
Medicaid 38.5% 42.9% 37.8% 42.0%
------- ------- ------- -------
Total 100.0% 100.0% 100.0% 100.0%
======= ======= ======= =======
</TABLE>
(1) "Average occupancy rate" is computed by dividing the number of billed bed
days by the total number of available licensed bed days during each of the
periods indicated.
9
<PAGE>
RESULTS OF OPERATIONS
The Company's total net revenues include net patient service revenues and
rehabilitation therapy service revenues from contracts with non-affiliated
long-term care facilities. Private net patient service revenues are recorded at
established per diem billing rates. Net patient service revenues to be
reimbursed under contracts with third-party payers, primarily the Medicare and
Medicaid programs, are recorded at amounts estimated to be realized under these
contractual arrangements.
The Company's facility operating expenses consist primarily of payroll and
employee benefits related to nursing, housekeeping and dietary services provided
to patients, as well as maintenance and administration of the facilities. Other
significant facility operating expenses include the cost of rehabilitation
therapy services, medical and pharmacy supplies, food, utilities, insurance and
taxes. The Company's facility operating expenses also include the general and
administrative costs associated with the operation of the Company's
rehabilitation therapy business. The Company's general and administrative
expenses include all costs associated with its regional and corporate
operations.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
TOTAL NET REVENUES. Total net revenues increased by $25,894,000 or 51.5%, from
$50,292,000 in the second quarter of 1997 to $76,186,000 in the second quarter
of 1998. This increase resulted primarily from the acquisition of four
Massachusetts facilities on August 1, 1997, three Dayton, Ohio facilities on
September 1, 1997, five Connecticut facilities on December 1, 1997, two North
Toledo, Ohio facilities on April 1, 1998 and two Rhode Island facilities on May
8, 1998. In addition, revenue increased as the result of the increased net
patient service revenues per patient day at the Company's "same store"
facilities. Of such increase, $4,597,000 or 17.8% of the increase resulted from
the operation of the Massachusetts facilities, $3,794,000 or 14.7% of the
increase resulted from the operation of the Dayton, Ohio facilities, $11,696,000
or 45.2% of the increase resulted from the operation of the Connecticut
facilities, $2,779,000 or 10.7% of the increase resulted from the operation of
the North Toledo facilities and $1,745,000 or 6.7% of the increase resulted from
the operation of the Rhode Island facilities. The remaining $1,283,000 or 4.9%
of such increase, is largely attributable to higher average net patient service
revenues per patient day at the Company's "same store" facilities and primarily
due to increased levels of care provided to patients with medically complex
conditions. Average net patient service revenues per patient day at "same store"
facilities increased from $149.75 during the second quarter of 1997 to $151.12
during the second quarter of 1998, . Occupancy at "same store" facilities
increased from 91.6% during the second quarter of 1997 to 91.8% during the
second quarter of 1998. The average occupancy rate at all of the Company's
facilities increased from 91.5% during the second quarter of 1997 to 92.2%
during the second quarter of 1998. The Company's quality mix of private,
Medicare and insurance revenues was 61.5% for the three months ended June 30,
1997 as compared to 57.1% in the same period of 1998. The decrease in the
quality mix percentage was primarily due to the effects of acquired facilities.
FACILITY OPERATING EXPENSES. Facility operating expenses increased by
$19,584,000, or 48.9%, from $40,065,000 in the second quarter of 1997 to
$59,649,000 in the second quarter of 1998. The operation of the Massachusetts
facilities accounted for $3,964,000 or 20.2% of this increase , the operation of
the Dayton, Ohio facilities accounted for $2,865,000 or 14.6% of this increase,
the operation of the Connecticut facilities accounted for $9,138,000 or 46.7%,
the operation of the North Toledo facilities accounted for $1,871,000 or 9.6% of
this increase, and the operation of the Rhode Island facilities accounted for
$1,002,000 or 5.1% of this increase. The remainder of the increase in facility
operating expenses, $744,000 or 3.8%, is due to increases in the costs of labor,
medical supplies and rehabilitation therapy services purchased from third
parties at "same store" facilities.
GENERAL AND ADMINISTRATIVE. SERVICE CHARGES PAID TO AFFILIATE. General and
administrative expenses increased by $1,776,000, or 76.1% from $2,334,000 in the
second quarter of 1997 to $4,110,000 in the second quarter of 1998. This
increase resulted from the acquisition of new facilities resulting in the
expansion of regional and corporate support, and additional travel, consulting
and systems development expenses associated with the Company's growth. The
Company reimburses an affiliate for rent and other expenses related to its
corporate headquarters as well as for certain data processing and administrative
services provided to the Company. During the second quarter of 1997, such
reimbursements totaled $177,000 compared to $315,000 during the second quarter
of 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$960,000 in the second quarter of 1997 to $1,178,000 in the second quarter of
1998 primarily as a result of building improvements and investment in new
computers and software.
FACILITY RENT. Facility rent expense for the second quarter increased by
$3,378,000 from $2,687,000 in 1997 to $6,065,000 in 1998. The increase in rent
expense is the result of the acquisition of new facilities in 1997 and 1998.
INTEREST EXPENSE, NET. Interest expense, net, increased from $1,364,000 in the
second quarter of 1997 to $1,552,000 in the second quarter of 1998. This net
increase is primarily due to additional interest expense resulting from the
acquisition of new facilities in 1997 and 1998.
10
<PAGE>
INCOME TAXES. Income tax expense increased from $1,020,000 in the second
quarter of 1997 to $1,278,000 in the second quarter of 1998.
NET INCOME. Net income was $1,593,000 in the second quarter of 1997 as
compared to income of $1,998,000 in the second quarter of 1998.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
TOTAL NET REVENUES. Total net revenues increased by $50,964,000 or 52.2%, from
$97,676,000 in the first half of 1997 to $148,640,000 in the first half of
1998. This increase resulted primarily from the acquisition of four
Massachusetts facilities on August 1, 1997, three Dayton, Ohio facilities on
September 1, 1997, five Connecticut facilities on December 1, 1997, two North
Toledo, Ohio facilities on April 1, 1998 and two Rhode Island facilities on May
8, 1998. In addition, revenue increased as the result of the generation of
additional revenue from rehabilitation therapy services provided to additional
non-affiliated long-term care facilities and increased net patient service
revenues per patient day at the Company's "same store" facilities. Of such
increase, $9,445,000 or 18.5% of the increase resulted from the operation of the
Massachusetts facilities, $7,563,000 or 14.8% of the increase resulted from the
operation of the Dayton, Ohio facilities, $23,050,000 or 45.2% of the increase
resulted from the operation of the Connecticut facilities, $2,779,000 or 5.5% of
the increase resulted from the operation of the North Toledo facilities and
$1,745,000 or 3.4% of the increase resulted from the operation of the Rhode
Island facilities. Revenues generated by providing rehabilitation therapy
services at non-affiliated long-term care facilities increased by $1,592,000 or
21.9% from $7,267,000 in the first half of 1997 to $8,859,000 in the first half
of 1998. The remaining $4,790,000 or 9.5% of such increase, is largely
attributable to higher average net patient service revenues per patient day at
the Company's "same store" facilities and primarily due to increased levels of
care provided to patients with medically complex conditions. Average net patient
service revenues per patient day at "same store" facilities increased from
$147.46 during the first half of 1997 to $151.84 during the first half of 1998.
The average occupancy rate at all of the Company's facilities increased from
91.9% during the first half of 1997 to 92.6% during the first half of 1998. The
Company's quality mix of private, Medicare and insurance revenues was 62.2% for
the six months ended June 30, 1997 as compared to 58.0% in the same period of
1998.
FACILITY OPERATING EXPENSES. Facility operating expenses increased by
$39,513,000, or 51.0%, from $77,517,000 for the first half of 1997 to
$117,030,000 for the first half of 1998. The operation of the Massachusetts
facilities accounted for $7,812,000 or 19.8% of this increase, the operation of
the Dayton, Ohio facilities accounted for $5,927,000 or 15.0%. of this increase,
the operation of the Connecticut facilities accounted for $18,509,000 or 46.8%
of this increase, the operation of the North Toledo facilities accounted for
$1,871,000 or 4.7%, and the operation of the Rhode Island facilities accounted
for $1,002,000 or 2.5% of this increase. Operating expenses associated with
additional non-affiliate therapy contracts increased $899,000, or 2.5%. The
remainder of the increase in facility operating expenses, $3,493,000 or 8.8%, 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 $2,752,000, or 58.3%, from $4,723,000 for
the first half of 1997 to $7,475,000 for the first half of 1998. This increase
resulted from the acquisition of new facilities resulting in the expansion of
regional and corporate support, and additional travel, consulting and systems
development expenses associated with the Company's growth. The Company
reimburses an affiliate for rent and other expenses related to its corporate
headquarters as well as for certain data processing and administrative services
provided to the Company. During the first half of 1997, such reimbursements
totaled $354,000 compared to $628,000 in 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$1,882,000 for the first half of 1997 to $2,263,000 for the first half of 1998
primarily as a result of building improvements and investment in new computers
and software.
FACILITY RENT. Facility rent expense for the first half increased by
$6,312,000 from $5,309,000 in 1997 to $11,621,000 in 1998. The increase in rent
expense is due to the acquisition of new facilities in 1997 and 1998.
INTEREST EXPENSE, NET. Interest expense, net, increased from $2,756,000 for
the first half of 1997 to $3,202,000 for the first half of 1998. This net
increase is primarily due to additional interest expense resulting from the
acquisition of new facilities in 1997 and 1998.
INCOME TAX. Income tax expense increase from $1,979,000 in the first half of
1997 to $2,476,000 in the first half of 1998.
NET INCOME. Net income was $3,095,000 for the first half of 1997 as compared
to $3,873,000 for the first half of 1998.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and acquisitions growth
through a combination of mortgage financing and operating leases. Leased
facilities are leased from either the owner of the facilities, from a real
estate investment trust which has purchased the facilities from the owner, or
through a synthetic leasing facility created in September 1997. In addition, in
1996 the Company financed the acquisition of four Ohio facilities from the owner
by means of a lease which is accounted for as a capital lease for financial
reporting purposes. The Company's existing facility leases generally require it
to make monthly lease payments, establish escrow funds to serve as debt service
reserve accounts, and pay all property operating costs. The Company generally
negotiates leases which provide for extensions beyond the initial lease term and
an option to purchase the leased facility. In some cases, the option to purchase
the leased facility is exercisable at a price based on the fair market value of
the facility at the time the option is exercised. In other cases, the lease for
the facility sets forth a fixed option purchase price which the Company believes
is equal to the fair market value of the facility at the inception of such
lease.
During the second quarter of 1998, the Company increased the funds committed by
a bank group through its synthetic leasing facility to $59,250,000. The Company
used this increased commitment to fund the acquisition of two long-term care
facilities (248 licensed beds) in Toledo, Ohio and two long-term care facilities
(267 licensed beds) in Warwick, Rhode Island. The aggregate purchase price of
these two acquisitions was approximately $33,700,000. In May 1998, the Company
also increased funds available from the bank group through its revolving credit
facility to $40,000,000.
At June 30, 1998, the Company had two mortgage loans outstanding totaling
$17,948,000 and $18,600,000 in advances from its long-term revolving credit
facility. One mortgage loan had an outstanding principal balance of $16,380,000
of which $15,140,000 is due at maturity in 2004. This loan bears interest at an
annual rate of 10.65% plus additional interest equal to 0.3% of the difference
between the annual operating revenues of the four mortgaged facilities and
actual revenues during a twelve-month base period. The Company's other mortgage
loan, which encumbers a single facility, had an outstanding balance of
$1,568,000 at June 30, 1998, of which $1,338,000 is due in 2010.
The Company's operating activities during the first half of 1997 and 1998
generated net cash of $1,597,000 and $1,658,000 respectively.
Net cash used by investing activities was $876,000 during the first half of 1997
as compared to $10,228,000 used in 1998. The primary use of cash for investing
purposes during these periods was related to additions to property and equipment
($812,000 in 1997 compared to $7,071,000 in 1998), additions to intangible
assets ($1,357,000 in 1997 compared to $1,586,000 in 1998), transfers to
restricted cash ($76,000 in 1997 compared to $1,571,000 in 1998). Most of the
additions to property and equipment are related to the Massachusetts facilities
and a sixty bed addition to the Ocala, Florida facility scheduled to open in
September 1998.
Net cash provided by financing activities was $251,000 in 1997 as compared to
$2,851,000 in 1998. The primary source of cash provided by financing activities
was related to the borrowing of $3,000,000 under the revolving credit facility
to finance the Ocala building expansion and the receipt of lease inducements.
SEASONALITY
The Company's earnings generally fluctuate from quarter to quarter. This
seasonality is related to a combination of factors which include the timing and
amount of Medicaid rate increases, seasonal census cycles, and the number of
days in a given fiscal quarter.
INFLATION
The healthcare industry is labor intensive. Wages and other labor related costs
are especially sensitive to inflation. Certain of the Company's other expense
items, such as supplies and real estate costs are also sensitive to inflationary
pressures. Shortages in the labor market or general inflationary pressure could
have a significant effect on the Company. In addition, suppliers pass along
rising costs to the Company in the form of higher prices. When faced with
increases in operating costs, the Company has sought to increase its charges for
services and its requests for reimbursement from government programs. The
Company's private pay customers and third party reimbursement sources may be
less able to absorb increased prices for the Company's services. The Company's
operations could be adversely affected if it is unable to recover future cost
increases or experiences significant delays in increasing rates of reimbursement
of its labor or other costs from Medicare and Medicaid revenue sources.
12
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q, including information set forth under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations", constitute "Forward-Looking Statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The
Company desires to take advantage of certain "safe harbor" provisions of the
Reform Act and is including this special note to enable the Company to do so.
Forward-looking statements included in this Form 10-Q, or hereafter included in
other publicly available documents filed with the Securities and Exchange
Commission, reports to the Company's stockholders and other publicly available
statements issued or released by the Company involve known and unknown risks,
uncertainties, and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ materially from
the future results, performance (financial or operating) or achievements
expressed or implied by such forward-looking statements. The Company believes
the following important factors could cause such a material difference to occur:
1. The Company's ability to grow through the acquisition and development
of long-term care facilities or the acquisition of ancillary
businesses.
2. The Company's ability to identify suitable acquisition candidates, to
consummate or complete construction projects, or to profitably operate
or successfully integrate enterprises into the Company's other
operations.
3. The occurrence of changes in the mix of payment sources utilized by the
Company's patients to pay for the Company's services.
4. The adoption of cost containment measures by private pay sources such
as commercial insurers and managed care organizations, as well as
efforts by governmental reimbursement sources to impose cost
containment measures.
5. Changes in the United States healthcare system, including changes in
reimbursement levels under Medicaid and Medicare, and other changes in
applicable government regulations that might affect the profitability
of the Company.
6. The Company's continued ability to operate in a heavily regulated
environment and to satisfy regulatory authorities, thereby avoiding a
number of potentially adverse consequences, such as the imposition of
fines, temporary suspension of admission of patients, restrictions on
the ability to acquire new facilities, suspension or de-certification
from Medicaid or Medicare programs, and in extreme cases, revocation of
a facility's license or the closure of a facility, including as a
result of unauthorized activities by employees.
7. The Company's ability to secure the capital and the related cost of
such capital necessary to fund its future growth through acquisition
and development, as well as internal growth.
8. Changes in certificate of need laws that might increase competition in
the Company's industry, including, particularly, in the states in which
the Company currently operates or anticipates operating in the future.
9. The Company's ability to staff its facilities appropriately with
qualified healthcare personnel, including in times of shortages of such
personnel and to maintain a satisfactory relationship with labor
unions.
10. The level of competition in the Company's industry, including without
limitation, increased competition from acute care hospitals, providers
of assisted and independent living and providers of home healthcare and
changes in the regulatory system in the state in which the Company
operates that facilitate such competition.
11. The continued availability of insurance for the inherent risks of
liability in the healthcare industry.
12. Price increases in pharmaceuticals, durable medical equipment and other
items.
13. The Company's reputation for delivering high-quality care and its
ability to attract and retain patients, including patients with
relatively high acuity levels.
14. Changes in general economic conditions, including changes that pressure
governmental reimbursement sources to reduce the amount and scope of
healthcare coverage.
The foregoing review of significant factors should not be construed as
exhaustive or as an admission regarding the adequacy of disclosures previously
made by the Company.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On April 15, 1998, the Company entered into a Merger Agreement with HH
Acquisition Corp. ("MergerCo"), an entity organized for the sole
purpose of effecting a merger on behalf of Investcorp S.A., certain of
its affiliates and certain other international investors (collectively,
the "New Investors"). On August 11, 1998, MergerCo merged with and into
the Company, with the Company as the surviving corporation. As a result
of the merger, the New Investors acquired approximately 91% of the
post-merger common stock of the Company. Certain pre-merger
stockholders of the Company, including certain of the Company's
existing members of senior management, retained approximately 660,000
shares (or approximately 9%) of the Company's post-merger common stock.
Each other share of the Company's pre-merger common stock was converted
into $25 in cash, representing aggregate cash payments of approximately
$184 million. Holders of outstanding stock options of the Company
converted the majority of their options into cash at $25 per underlying
share less the applicable option exercise price and withholding taxes,
representing aggregate cash payments of approximately $8 million.
In connection with the transaction and prior to the merger, the New
Investors made cash common equity contributions of $165 million to
MergerCo, and MergerCo obtained gross proceeds of $99.5 million through
the issuance of 11% senior subordinated discount notes due 2008 and $40
million through the issuance of 13.5% exchangeable preferred stock
mandatorily redeemable 2010. In connection with the merger, the Company
also entered into a new $250 million senior secured credit facility
with a group of banks.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on 8-K
None.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Harborside Healthcare Corporation
By: /s/ Stephen L. Guillard
---------------------------
Stephen L. Guillard
Chairman, President, and Chief Executive Officer
By: /s/ William H. Stephan
--------------------------
William H. Stephan
Senior Vice President and Chief Financial Officer
DATE: August 14, 1998
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the balance
sheet and statement of operations and is qualified in its entirety to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,028
<SECURITIES> 0
<RECEIVABLES> 43,939
<ALLOWANCES> (2,455)
<INVENTORY> 34,963 <F1>
<CURRENT-ASSETS> 55,128
<PP&E> 120,511
<DEPRECIATION> (18,463)
<TOTAL-ASSETS> 181,523
<CURRENT-LIABILITIES> 32,853
<BONDS> 92,985 <F2>
0
0
<COMMON> 80
<OTHER-SE> 55,605 <F3>
<TOTAL-LIABILITY-AND-EQUITY> 181,523
<SALES> 0
<TOTAL-REVENUES> 148,640
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 139,089
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,202
<INCOME-PRETAX> 6,349
<INCOME-TAX> 2,476
<INCOME-CONTINUING> 3,873
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,873
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.47
<FN>
<F1> Includes the following assets: prepaid expenses and other of $8,466,
deferred income taxes--current of $2,150, deferred income taxes--long-term of
$71, restricted cash of $7,116, intangible assets, net of $9,673, and note
receivable $7,487.
<F2> Includes the following long-term liabilities: deferred income of $5,045,
capital lease obligation of $51,594, and long-term debt of $36,346.
<F3> Includes the following equity accounts: additional paid-in capital of
$48,469 and retained earnings of $7,136.
</FN>
</TABLE>
