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RULE NO. 424(b)(3)
REGISTRATION NO. 333-51633
HARBORSIDE HEALTHCARE CORPORATION
470 ATLANTIC AVENUE
BOSTON, MASSACHUSETTS 02210
July 17, 1998
Dear Stockholder:
You are cordially invited to a Special Meeting (the "Special Meeting") of
the stockholders of Harborside Healthcare Corporation ("Harborside" or the
"Company"), which will be held at the offices of Gibson, Dunn & Crutcher LLP,
200 Park Avenue, 48th Floor, New York, New York 10166 on August 11, 1998, at
8:00 a.m. local time.
At the Special Meeting, the stockholders of Harborside will be asked to
consider and vote on, among other things, a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of April 15, 1998 (the "Merger
Agreement"), between Harborside and HH Acquisition Corp. ("MergerCo"), a
Delaware corporation organized on behalf of Investcorp S.A., certain of its
affiliates and other international investors. The Merger Agreement provides,
among other things, for the merger of MergerCo with and into Harborside (the
"Merger") pursuant to which each share of Harborside's Common Stock, $.01 par
value per share ("Harborside Common Stock"), will be converted, at the
election of the holder thereof, into either (a) the right to receive $25.00 in
cash or (b) the right to retain one share of Harborside Common Stock which,
upon consummation of the Merger, will be denominated as Harborside Class A
Common Stock and will have rights, powers, privileges and restrictions which
differ in some respects from the existing Harborside Common Stock, except that
(i) as described in greater detail in the next paragraph, all stockholders who
elect to retain Harborside Common Stock will experience proration of such
shares, resulting in their retaining only a portion of the shares of
Harborside Common Stock they elect to retain and receiving $25.00 per share in
cash for each of their other shares of Harborside Common Stock, (ii) an
aggregate of 225,651 shares of Harborside Common Stock held by the Senior
Management Stockholders (as defined in the accompanying Proxy
Statement/Prospectus) will not be subject to the election described above and
instead will be converted into the right to retain the same number of shares
of Harborside Common Stock (the "Management Rollover Shares") which, upon
consummation of the Merger, will be denominated as Harborside Class A Common
Stock, (iii) each other share of Harborside Common Stock held by the Senior
Management Stockholders, constituting an aggregate of 106,663 shares of
Harborside Common Stock, and each share of Harborside Common Stock held by
certain other specified officers of the Company, constituting an aggregate of
3,846 shares of Harborside Common Stock, will not be subject to the election
described above and instead will be converted into the right to receive $25.00
in cash, (iv) shares of Harborside Common Stock held by Harborside, its
subsidiaries, MergerCo or any of its affiliates will be canceled and retired,
and (v) shares of Harborside Common Stock with respect to which appraisal
rights have been perfected will be treated as described in the accompanying
Proxy Statement/Prospectus.
Pursuant to the terms of the Merger Agreement, the number of shares of
Harborside Common Stock (other than Management Rollover Shares) to be retained
by existing Harborside stockholders is a calculated number (the "Non-Cash
Election Number"), which will not be less than 361,500 nor more than 500,600,
and will represent 6% of the total number of shares of all classes of the
Company's common stock to be issued and outstanding immediately after giving
effect to the Merger. Because The Berkshire Companies Limited Partnership, a
Massachusetts limited partnership affiliated with the Company, and certain of
its affiliates (collectively, the "Berkshire Stockholders") have committed to
elect to retain a number of shares of Harborside Common Stock equal to the
Non-Cash Election Number, all other stockholders who do not elect to retain
Harborside Common Stock will be assured that they will receive $25.00 in cash
for each share held by such stockholders, and all stockholders who elect to
retain Harborside Common Stock will experience proration of such shares,
resulting in their retaining only a portion of the shares of Harborside Common
Stock they elect to retain and receiving $25.00 per share in cash for each of
their other shares of Harborside Common Stock. Assuming no stockholders of the
Company other than the Berkshire Stockholders elect to retain Harborside
Common Stock, the shares of Harborside Common Stock to be retained by the
Berkshire Stockholders will constitute 6% of the outstanding common stock and
voting power of the Company following the Merger. In addition, the Management
Rollover Shares to be retained by the Senior Management Stockholders will
constitute approximately
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3% of the outstanding common stock and voting power of the Company following
the Merger. Regardless of the number of stockholders that elect to retain
Harborside Common Stock, the shares of Harborside Common Stock to be retained
by existing Harborside stockholders (consisting of the shares retained by the
Senior Management Stockholders, the Berkshire Stockholders and any other
Harborside stockholders) will represent approximately 9% of the outstanding
common stock and approximately 9% of the voting power of the Company following
the Merger. Certain affiliates of Investcorp S.A. and other international
investors will own the remaining approximately 91% of the outstanding common
stock having approximately 91% of the voting power of the Company following
the Merger.
At the time of the Merger, MergerCo expects to have received common equity
contributions of approximately $160 million from affiliates of Investcorp and
certain international investors. In addition, at the effective time of the
Merger, the Company currently intends to issue to institutional investors an
aggregate of approximately $140 million in gross proceeds of subordinated debt
and exchangeable preferred stock, and enter into a senior secured credit
facility for approximately $250 million. The proceeds of these equity and debt
issuances and funds available under the new senior secured credit facility are
expected to be used to finance the $25.00 per share cash consideration to be
paid to stockholders who elect to receive cash for their shares in connection
with the Merger, to refinance certain existing indebtedness of the Company, to
pay the fees and expenses associated with the Merger and such related
financings, to finance the working capital needs of the Company, to finance
acquisitions and for general corporate purposes. As a result of these
anticipated financings, the Company is expected to have substantial
consolidated indebtedness upon consummation of the Merger. As of March 31,
1998, after giving pro forma effect to the Merger and the anticipated
financings related thereto, the ratio of total indebtedness to total assets of
the Company would have been 0.72 compared to 0.52 on an historical basis at
March 31, 1998. The actual amount of the debt, preferred stock and common
equity financings will be determined shortly before the closing of the Merger
and may differ from the currently anticipated levels. The Merger Agreement,
however, provides that the common equity contributions from affiliates of
Investcorp and its co-investors will not be less than $135 million.
If the Merger is approved, the Company intends to seek to have the
Harborside Common Stock delisted from the New York Stock Exchange.
Detailed information concerning the Merger is set forth in the accompanying
Proxy Statement/Prospectus, which you are urged to read carefully. A copy of
the Merger Agreement is attached as Annex I to the Proxy Statement/Prospectus.
Approval and adoption of the Merger Agreement requires the affirmative vote
of a majority of the outstanding shares of Harborside Common Stock held by
stockholders of record on July 16, 1998 (the "Record Date"). The Berkshire
Stockholders and Messrs. Stephen L. Guillard (President and Chief Executive
Officer of the Company) and Damian N. Dell'Anno (Executive Vice President and
Chief Operating Officer of the Company) (collectively, the "Subject
Stockholders") owned of record and are entitled to vote an aggregate of
4,332,306 shares of Harborside Common Stock on the Record Date, constituting
approximately 54% of the outstanding shares of Harborside Common Stock
entitled to vote at the Special Meeting. Pursuant to a stockholder agreement,
dated as of April 15, 1998, among MergerCo and the Subject Stockholders (the
"Stockholder Agreement"), the Subject Stockholders have agreed, among other
things, to vote their shares in favor of the Merger and the adoption of the
Merger Agreement. Thus, the requisite vote of the holders of shares of
Harborside Common Stock to approve and adopt the Merger Agreement and the
Merger is assured.
Holders of Harborside Common Stock will be entitled to dissenters' rights
under Delaware law in connection with the Merger as described in the
accompanying Proxy Statement/Prospectus.
At a meeting held on April 15, 1998, Harborside's Board of Directors, and
the independent members of Harborside's Board of Directors, each unanimously
determined, among other things, that the Merger Agreement and the transactions
contemplated thereby, including the Merger, are in the best interests of the
stockholders of Harborside. In reaching its determination, Harborside's Board
of Directors considered, among other things, the opinion of Schroder & Co.
Inc. ("Schroders") as to the fairness, from a financial point of view, of the
$25.00 per share cash consideration to be received by the holders of
Harborside Common Stock in the Merger. Schroders' opinion is included as Annex
III to the accompanying Proxy Statement/Prospectus. Schroders has advised the
Company that it believes the Company's stockholders cannot rely on such
opinion to support any claims against Schroders arising under applicable state
law.
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Stockholders should be aware that the Company did not request Schroders, or
any other third party, to value the shares of Harborside Common Stock to be
retained by stockholders who elect not to receive the $25.00 per share cash
consideration for their shares, and that such retained shares may have a value
that differs from $25.00 per share. In addition, as described in the
accompanying Proxy Statement/Prospectus under "RISK FACTORS--Valuation of Non-
Cash Election Shares," stockholders who elect to retain shares may be subject
to risks associated with owning a minority position in a leveraged company and
risks associated with the anticipated lack of liquidity of the Harborside
Common Stock.
The Board of Directors, and the independent members of the Board of
Directors, each unanimously recommends that the holders of Harborside Common
Stock vote FOR the approval and adoption of the Merger Agreement and the
transactions contemplated thereby, including the Merger.
IT IS VERY IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING,
WHETHER OR NOT YOU PLAN TO ATTEND PERSONALLY. THEREFORE, YOU SHOULD COMPLETE
AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT AS SOON AS POSSIBLE IN THE
ENCLOSED POSTAGE-PAID ENVELOPE. THIS WILL ENSURE THAT YOUR SHARES ARE
REPRESENTED AT THE SPECIAL MEETING.
STOCKHOLDERS WHO ELECT TO RECEIVE CASH FOR ALL OF THEIR SHARES OF HARBORSIDE
COMMON STOCK SHOULD NOT FORWARD STOCK CERTIFICATES TO THE EXCHANGE AGENT UNTIL
THEY HAVE RECEIVED A LETTER OF TRANSMITTAL AS DESCRIBED IN THE ACCOMPANYING
PROXY STATEMENT/PROSPECTUS. STOCKHOLDERS ELECTING TO RETAIN HARBORSIDE COMMON
STOCK SHOULD RETURN THE ENCLOSED FORM OF NON-CASH ELECTION TOGETHER WITH DULY
ENDORSED HARBORSIDE COMMON STOCK CERTIFICATES AS INSTRUCTED IN THE
ACCOMPANYING PROXY STATEMENT/PROSPECTUS.
Yours very truly,
/s/ Stephen L. Guillard
Stephen L. Guillard
President and Chief Executive
Officer
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HARBORSIDE HEALTHCARE CORPORATION
470 ATLANTIC AVENUE
BOSTON, MASSACHUSETTS 02210
(617) 556-1515
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 11, 1998
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To the Stockholders of
HARBORSIDE HEALTHCARE CORPORATION
NOTICE IS HEREBY GIVEN that a Special Meeting of the stockholders (including
any adjournments or postponements thereof, the "Special Meeting") of
Harborside Healthcare Corporation, a Delaware corporation ("Harborside"), will
be held at the offices of Gibson, Dunn & Crutcher LLP, 200 Park Avenue, 48th
Floor, New York, New York 10166, on August 11, 1998, at 8:00 a.m., local time,
for the following purpose, which is more fully described in the accompanying
Proxy Statement/Prospectus:
To consider and vote upon a proposal to approve and adopt the Agreement and
Plan of Merger, dated as of April 15, 1998 (the "Merger Agreement"), between
Harborside and HH Acquisition Corp. ("MergerCo"), a Delaware corporation
organized on behalf of Investcorp S.A., certain of its affiliates and other
international investors. The Merger Agreement provides, among other things,
for the merger of MergerCo with and into Harborside (the "Merger") pursuant to
which each share of Harborside's Common Stock, $.01 par value per share
("Harborside Common Stock"), will be converted, at the election of the holder
thereof, into either (a) the right to receive $25.00 in cash or (b) the right
to retain one share of Harborside Common Stock which, upon consummation of the
Merger, will be denominated as Harborside Class A Common Stock and will have
rights, powers, privileges and restrictions which differ in some respects from
the existing Harborside Common Stock, except that (i) as described in greater
detail in the next paragraph, all stockholders who elect to retain Harborside
Common Stock will experience proration of such shares, resulting in their
retaining only a portion of the shares of Harborside Common Stock they elect
to retain and receiving $25.00 per share in cash for each of their other
shares of Harborside Common Stock, (ii) an aggregate of 225,651 shares of
Harborside Common Stock held by the Senior Management Stockholders (as defined
in the accompanying Proxy Statement/Prospectus) will not be subject to the
election described above and instead will be converted into the right to
retain the same number of shares of Harborside Common Stock (the "Management
Rollover Shares") which, upon consummation of the Merger, will be denominated
as Harborside Class A Common Stock, (iii) each other share of Harborside
Common Stock held by the Senior Management Stockholders, constituting an
aggregate of 106,663 shares of Harborside Common Stock, and each share of
Harborside Common Stock held by certain other specified officers of the
Company, constituting an aggregate of 3,846 shares of Harborside Common Stock,
will not be subject to the election described above and instead will be
converted into the right to receive $25.00 in cash, (iv) shares of Harborside
Common Stock held by Harborside, its subsidiaries, MergerCo or any of its
affiliates will be canceled and retired, and (v) shares of Harborside Common
Stock with respect to which appraisal rights have been perfected will be
treated as described in the accompanying Proxy Statement/Prospectus.
Pursuant to the terms of the Merger Agreement, the number of shares of
Harborside Common Stock (other than Management Rollover Shares) to be retained
by existing Harborside stockholders is a calculated number (the "Non-Cash
Election Number"), which will not be less than 361,500 nor more than 500,600,
and will represent 6% of the total number of shares of all classes of the
Company's common stock to be issued and outstanding immediately after giving
effect to the Merger. Because The Berkshire Companies Limited Partnership, a
Massachusetts limited partnership affiliated with the Company, and certain of
its affiliates (collectively, the "Berkshire Stockholders") have committed to
elect to retain a number of shares of Harborside Common Stock equal to the
Non-Cash Election Number, all other stockholders who do not elect to retain
Harborside Common Stock will be assured that they will receive $25.00 in cash
for each share held by such stockholders, and all stockholders who elect to
retain Harborside Common Stock will experience proration of such shares,
resulting in their retaining only a portion of the shares of Harborside Common
Stock they elect to retain and receiving $25.00 per share in cash for each of
their other shares of Harborside Common Stock. Assuming no stockholders of the
Company other than the Berkshire Stockholders elect to retain Harborside
Common Stock, the shares of Harborside Common Stock to be retained by the
Berkshire Stockholders will constitute 6% of the outstanding common stock and
voting power of the Company following the Merger. In addition, the Management
Rollover Shares to be retained by the Senior Management Stockholders will
constitute approximately 3% of the outstanding common stock and voting power
of the Company following the Merger. Regardless of the
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number of stockholders that elect to retain Harborside Common Stock, the
shares of Harborside Common Stock to be retained by existing Harborside
stockholders (consisting of the shares retained by the Senior Management
Stockholders, the Berkshire Stockholders and any other Harborside stockholder)
will constitute approximately 9% of the outstanding common stock and voting
power of the Company following the Merger. Certain affiliates of Investcorp
S.A. and other international investors will own the remaining approximately
91% of the outstanding common stock having approximately 91% of the voting
power of the Company following the Merger. A copy of the Merger Agreement is
attached as Annex I to the accompanying Proxy Statement/Prospectus.
If the Merger is approved, the Company intends to seek to have the
Harborside Common Stock delisted from the New York Stock Exchange.
Stockholders also will be asked to consider and vote on a proposal to amend
the Company's Certificate of Incorporation, among other things, to change the
capital structure of the Company to comport with the terms of the Merger
Agreement (the "Amendment Proposal"). The Merger will not be effected unless
the Amendment Proposal is approved, and the Amendment Proposal will not be
effected unless the Merger is approved.
Approval and adoption of the Merger Agreement and approval of the Amendment
Proposal requires the affirmative vote of a majority of the outstanding shares
of Harborside Common Stock held by stockholders of record on July 16, 1998
(the "Record Date"). The Berkshire Stockholders and Messrs. Stephen L.
Guillard (President and Chief Executive Officer of the Company) and Damian N.
Dell'Anno (Executive Vice President and Chief Operating Officer of the
Company) (collectively, the "Subject Stockholders") owned of record and are
entitled to vote an aggregate of 4,332,306 shares of Harborside Common Stock
on the Record Date, constituting approximately 54% of the outstanding shares
of Harborside Common Stock entitled to vote at the Special Meeting. Pursuant
to a stockholder agreement, dated as of April 15, 1998, among MergerCo and the
Subject Stockholders (the "Stockholder Agreement"), the Subject Stockholders
have agreed, among other things, to vote their shares in favor of the Merger
and the adoption and approval of the Merger Agreement and the transactions
contemplated thereby (which include the Amendment Proposal). Thus, the
requisite vote of the holders of shares of Harborside Common Stock to approve
and adopt the Merger Agreement and the Merger and to approve the Amendment
Proposal is assured.
Only holders of record of shares of Harborside Common Stock at the close of
business on the Record Date are entitled to notice of, and to vote at, the
Special Meeting. A complete list of stockholders entitled to vote at the
Special Meeting will be available for examination, for proper purposes, during
ordinary business hours at Harborside's corporate offices, 470 Atlantic
Avenue, Boston, Massachusetts 02210, during the ten days prior to the Special
Meeting.
In connection with the proposed Merger, appraisal rights will be available
to those stockholders of Harborside who meet and comply with the requirements
of Section 262 of the Delaware General Corporation Law (the "DGCL"), a copy of
which is included as Annex IV to the accompanying Proxy Statement/Prospectus.
Reference is made to the section entitled "STOCKHOLDERS' APPRAISAL RIGHTS" in
the accompanying Proxy Statement/Prospectus for a discussion of the procedures
to be followed in asserting appraisal rights under Section 262 of the DGCL in
connection with the proposed Merger.
YOUR VOTE IS VERY IMPORTANT REGARDLESS OF HOW MANY SHARES OF HARBORSIDE
COMMON STOCK YOU OWN. REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE SPECIAL
MEETING, YOU ARE REQUESTED TO SIGN, DATE AND RETURN THE ENCLOSED PROXY WITHOUT
DELAY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. YOU MAY REVOKE YOUR PROXY AT ANY
TIME PRIOR TO ITS EXERCISE BY (1) ATTENDING AND VOTING IN PERSON AT THE
SPECIAL MEETING, (2) GIVING NOTICE OF REVOCATION OF THE PROXY AT THE SPECIAL
MEETING OR (3) DELIVERING TO SCOTT D. SPELFOGEL, SECRETARY OF HARBORSIDE, (A)
A WRITTEN NOTICE OF REVOCATION OR (B) A DULY EXECUTED PROXY RELATING TO THE
SAME SHARES AND MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING, BEARING A
DATE LATER THAN THE PROXY PREVIOUSLY EXECUTED.
BY ORDER OF THE BOARD OF DIRECTORS
Scott D. Spelfogel
Secretary
July 17, 1998
PLEASE SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE.
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STOCKHOLDERS ELECTING TO RETAIN HARBORSIDE COMMON STOCK SHOULD RETURN THE
ENCLOSED FORM OF NON-CASH ELECTION TOGETHER WITH DULY ENDORSED HARBORSIDE
STOCK CERTIFICATES AS INSTRUCTED IN THE PROXY STATEMENT/PROSPECTUS. SEE "THE
MERGER--NON-CASH ELECTION" FOR INSTRUCTIONS FOR STOCKHOLDERS ELECTING TO
RETAIN SHARES. OTHERWISE, STOCK CERTIFICATES SHOULD BE RETAINED UNTIL LETTERS
OF TRANSMITTAL ARE RECEIVED AFTER THE EFFECTIVE TIME OF THE MERGER. SEE "THE
MERGER--CONVERSION/RETENTION OF SHARES; PROCEDURES FOR EXCHANGE OF
CERTIFICATES."
IF YOU HAVE ANY QUESTIONS OR REQUIRE ADDITIONAL MATERIAL, PLEASE CONTACT
HARBORSIDE INVESTOR RELATIONS AT (888) 742-7267.
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HARBORSIDE HEALTHCARE CORPORATION
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PROXY STATEMENT/PROSPECTUS
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SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 11, 1998
This Proxy Statement/Prospectus (the "Proxy Statement/Prospectus") is being
furnished to stockholders of Harborside Healthcare Corporation, a Delaware
corporation (together with its subsidiaries, except where the context
otherwise requires, "Harborside" or the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company (the "Board
of Directors" or the "Board") for use at a Special Meeting of stockholders of
the Company, which will be held at the offices of Gibson, Dunn & Crutcher LLP,
200 Park Avenue, 48th Floor, New York, New York 10166 on August 11, 1998 at
8:00 a.m., local time, and at any adjournments or postponements thereof (the
"Special Meeting"). This Proxy Statement/Prospectus relates to the proposed
merger (the "Merger") of HH Acquisition Corp. ("MergerCo"), a Delaware
corporation organized on behalf of Investcorp S.A. ("Investcorp"), certain of
its affiliates and other international investors, with and into the Company
pursuant to the Agreement and Plan of Merger, dated as of April 15, 1998 (the
"Merger Agreement"), between MergerCo and the Company, and the transactions
contemplated thereby.
Pursuant to the Merger, each share of Harborside's common stock, par value
$.01 per share ("Harborside Common Stock"), issued and outstanding immediately
prior to the effective time of the Merger (the "Effective Time") will be
converted, at the election of the holder thereof, into either (a) the right to
receive $25.00 in cash or (b) the right to retain one share (a "Non-Cash
Election Share") of Harborside Common Stock which, upon consummation of the
Merger, will be denominated as Harborside Class A Common Stock and will have
rights, powers, privileges and restrictions which differ in some respects from
the existing Harborside Common Stock, except that (i) as described in greater
detail in the next paragraph, all stockholders who elect to retain Harborside
Common Stock will experience proration of such shares, resulting in their
retaining only a portion of the shares of Harborside Common Stock they elect
to retain and receiving $25.00 per share in cash for each of their other
shares of Harborside Common Stock, (ii) an aggregate of 225,651 shares of
Harborside Common Stock held by the Senior Management Stockholders (as defined
in "SUMMARY--The Merger--Interests of Certain Persons in the Merger") will not
be subject to the election described above and instead will be converted into
the right to retain the same number of shares of Harborside Common Stock (the
"Management Rollover Shares") which, upon consummation of the Merger, will be
denominated as Harborside Class A Common Stock, (iii) each other share of
Harborside Common Stock held by the Senior Management Stockholders,
constituting an aggregate of 106,663 shares of Harborside Common Stock, and
each share of Harborside Common Stock held by certain other specified officers
of the Company, constituting an aggregate of 3,846 shares of Harborside Common
Stock, will not be subject to the election described above and instead will be
converted into the right to receive $25.00 in cash, (iv) shares of Harborside
Common Stock held by Harborside, its subsidiaries, MergerCo or any of its
affiliates will be canceled and retired, and (v) shares of Harborside Common
Stock with respect to which appraisal rights have been perfected will be
treated as described herein.
Pursuant to the terms of the Merger Agreement, the number of shares of
Harborside Common Stock (other than Management Rollover Shares) to be retained
by existing Harborside stockholders is a calculated number (the "Non-Cash
Election Number"), which will not be less than 361,500 nor more than 500,600,
and will represent 6% of the total number of shares of all classes of the
Company's common stock to be issued and outstanding immediately after giving
effect to the Merger. See "THE MERGER--Merger Consideration." The actual Non-
Cash Election Number will depend on how many shares of the other classes of
the Company's common stock will be outstanding following the Merger, which
will depend on the aggregate amount of cash that MergerCo will need to raise
from certain affiliates of Investcorp and other international investors
through their purchase, at a price of $25.00 per share, of common stock of
MergerCo, which will then be converted on a one-for-one basis into common
stock of the Company pursuant to the Merger. The aggregate amount of cash
i
<PAGE>
that MergerCo will need to raise through its sale of common stock, and hence
the number of shares that it will issue, will depend on the aggregate amount
of proceeds raised in offerings of preferred stock and subordinated debt to
institutional investors currently planned by MergerCo to provide part of the
financing for the Merger. The amount of proceeds of these offerings will
depend on market conditions at the time of the offerings. See "THE MERGER--
Merger Financings." It is expected that the Non-Cash Election Number will be
determined shortly before the Special Meeting.
Because The Berkshire Companies Limited Partnership, a Massachusetts limited
partnership affiliated with the Company, and certain of its affiliates
(collectively, the "Berkshire Stockholders") have committed to elect to retain
a number of shares of Harborside Common Stock equal to the Non-Cash Election
Number, all other stockholders who do not elect to retain Harborside Common
Stock will be assured that they will receive $25.00 in cash for each share
held by such stockholders, and all stockholders who elect to retain Harborside
Common Stock will experience proration of such shares, resulting in their
retaining only a portion of the shares of Harborside Common Stock they elect
to retain and receiving $25.00 per share in cash for each of their other
shares of Harborside Common Stock. The shares of Harborside Common Stock to be
retained by existing Harborside stockholders (including the Management
Rollover Shares) will constitute approximately 9% of the outstanding common
stock and approximately 9% of the voting power of the Company following the
Merger. Certain affiliates of Investcorp and other international investors
will own the remaining approximately 91% of the outstanding common stock
having approximately 91% of the voting power of the Company following the
Merger. See "THE MERGER--Merger Consideration." Holders of Harborside Common
Stock will be entitled to dissenters' rights under the Delaware General
Corporation Law (the "DGCL") in connection with the Merger as described
herein.
A copy of the Merger Agreement is attached as Annex I to this Proxy
Statement/Prospectus. The summaries of the portions of the Merger Agreement
set forth in this Proxy Statement/Prospectus do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, the text
of the Merger Agreement.
In addition, the Merger Agreement provides that each option to purchase
shares of Harborside Common Stock (each such option, a "Company Stock Option"
and, collectively, the "Company Stock Options") issued and outstanding
immediately prior to the Effective Time (whether or not then vested or
exercisable) will be converted, at the election of the holder thereof and
subject to the terms and conditions described in the Merger Agreement, into
(i) the right to retain a fully vested and immediately exercisable option for
all or any portion (the "Elected Portion") of the number of shares of
Harborside Common Stock subject to such Company Stock Option immediately prior
to the Effective Time at an exercise price per share equal to the exercise
price of such Company Stock Option immediately prior to the Effective Time
and/or (ii) the right to receive an amount in cash equal to (a) the excess, if
any, of $25.00 over the per share exercise price of such Company Stock Option,
multiplied by (b) the number of shares of Harborside Common Stock which are
subject to such Company Stock Option immediately prior to the Effective Time
but which are not part of the Elected Portion thereof (if any), reduced by (c)
any applicable withholding taxes.
Assuming the number of shares of Harborside Common Stock outstanding as of
the Effective Time is 8,011,164, the aggregate cash consideration to be paid
by MergerCo for the Harborside Common Stock and Company Stock Options in
connection with the Merger will be approximately $192.1 million.
This Proxy Statement/Prospectus also constitutes a prospectus of the Company
with respect to the shares of Harborside Common Stock to be retained by
stockholders in the Merger.
Approval and adoption of the Merger Agreement and the transactions
contemplated thereby requires the affirmative vote of a majority of the
outstanding shares of Harborside Common Stock held by stockholders of record
on July 16, 1998 (the "Record Date"). The Berkshire Stockholders and Messrs.
Stephen L. Guillard (President and Chief Executive Officer of the Company) and
Damian N. Dell'Anno (Executive Vice President and Chief Operating Officer of
the Company) (collectively, the "Subject Stockholders") owned of record and
are entitled to vote an aggregate of 4,332,306 shares of Harborside Common
Stock on the Record Date, constituting approximately 54% of the outstanding
shares of Harborside Common Stock entitled to vote at the
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Special Meeting. Pursuant to a stockholder agreement, dated as of April 15,
1998, among MergerCo and the Subject Stockholders (the "Stockholder
Agreement"), the Subject Stockholders have agreed, among other things, to vote
their shares in favor of the Merger and the adoption of the Merger Agreement
and the transactions contemplated thereby. Thus, the requisite vote of the
holders of shares of Harborside Common Stock to approve and adopt the Merger
Agreement and the Merger is assured. A copy of the Stockholder Agreement is
attached as Annex II to this Proxy Statement/Prospectus. The summaries of the
portions of the Stockholder Agreement set forth in this Proxy
Statement/Prospectus do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, the text of the Stockholder
Agreement.
The Board of Directors, and the independent members of the Board, after
careful consideration, each unanimously approved the Merger Agreement and the
Merger, and determined that the Merger is in the best interests of Harborside
and its stockholders, and recommends that you vote FOR approval and adoption
of the Merger Agreement and the transactions contemplated thereby, including
the Merger. In reaching their determination, the members of the Board
considered, among other things, the opinion of Schroder & Co. Inc.
("Schroders") as to the fairness, from a financial point of view, of the
$25.00 per share cash consideration to be received by the holders of
Harborside Common Stock in the Merger. Schroders' opinion is included as
Annex III to this Proxy Statement/Prospectus. You are urged to read the
opinion in its entirety for further information with respect to the
assumptions made, matters considered and limits of the reviews undertaken by
Schroders in rendering its opinion. Schroders has advised the Company that it
believes the Company's stockholders cannot rely on such opinion to support any
claims against Schroders arising under applicable state law.
Stockholders who elect to retain Non-Cash Election Shares (which will be
denominated as Harborside Class A Common Stock upon consummation of the
Merger) should be aware that such Non-Cash Election Shares may have a value
that differs from the $25.00 per share cash consideration to be received by
holders of Harborside Common Stock who elect to receive cash for their shares
in the Merger. No third party appraisal was requested or obtained by the
Company with respect to the value of the Non-Cash Election Shares. In
addition, Schroders was not asked to give its opinion with respect to the
fairness of the Non-Cash Election Shares. Stockholders who elect to retain
Non-Cash Election Shares also should be aware of certain risks to which they
may be subject as a result of such election, including risks associated with
owning a minority position in a leveraged company and risks associated with
the anticipated lack of liquidity of the Harborside Class A Common Stock. See
"RISK FACTORS--Valuation of Non-Cash Election Shares."
Harborside Common Stock is listed for trading on The New York Stock Exchange
("NYSE") under the symbol "HBR." On July 15, 1998, the closing price of
Harborside Common Stock as reported on the NYSE was $24.38 per share. On April
15, 1998, the last trading day before the public announcement of the execution
of the Merger Agreement, the closing price of Harborside Common Stock as
reported on the NYSE was $21.50 per share.
If the Merger is approved, the Company intends to seek to have the
Harborside Common Stock delisted from the NYSE. See "RISK FACTORS--Delisting
of Common Stock from NYSE."
This Proxy Statement/Prospectus, the accompanying form of proxy (the
"Proxy") and the other enclosed documents are first being mailed to
stockholders of the Company on or about July 20, 1998.
SEE "RISK FACTORS" BEGINNING ON PAGE 19 FOR A DISCUSSION OF CERTAIN
IMPORTANT RISKS RELATING TO THE RETENTION OF HARBORSIDE COMMON STOCK THAT
SHOULD BE CONSIDERED BY HOLDERS OF HARBORSIDE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is July 17, 1998.
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NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN AS CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS,
IN CONNECTION WITH THE MERGER, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED BY HARBORSIDE
OR MERGERCO. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES TO WHICH IT RELATES
IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
iv
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
AVAILABLE INFORMATION..................................................... 1
FORWARD LOOKING STATEMENTS................................................ 2
SUMMARY................................................................... 4
RISK FACTORS.............................................................. 19
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA........................ 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 34
PRICES OF HARBORSIDE COMMON STOCK AND DIVIDEND POLICY..................... 43
THE COMPANY............................................................... 44
THE SPECIAL MEETING....................................................... 60
Matters to Be Considered................................................ 60
Required Votes.......................................................... 60
Voting and Revocation of Proxies........................................ 61
Record Date; Stock Entitled to Vote; Quorum............................. 61
Stockholders' Appraisal Rights.......................................... 62
Solicitation of Proxies................................................. 62
THE MERGER................................................................ 63
Background of the Merger................................................ 63
Recommendation of the Board of Directors; Reasons for the Merger........ 66
Opinion of Schroders.................................................... 70
Merger Consideration.................................................... 75
Non-Cash Election....................................................... 77
Non-Cash Election Procedure............................................. 79
Effective Time of the Merger............................................ 79
Conversion/Retention of Shares; Procedures for Exchange of Certificates. 79
Fractional Shares....................................................... 80
Conduct of Business Pending the Merger.................................. 80
Conditions to the Consummation of the Merger............................ 80
Material Federal Income Tax Consequences................................ 80
Accounting Treatment.................................................... 84
Treatment of Existing Company Stock Options............................. 84
Directors Retainer Fee Plan............................................. 85
Interests of Certain Persons in the Merger.............................. 85
Agreements with Certain Stockholders.................................... 89
Executive Officers and Directors of MergerCo............................ 89
Delisting of Harborside Common Stock from NYSE.......................... 89
Termination of SEC Reporting............................................ 90
Resale of Retained Harborside Common Stock Following the Merger......... 90
Merger Financings....................................................... 90
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.................... 92
DESCRIPTION OF HARBORSIDE CAPITAL STOCK................................... 105
Harborside's Existing Capital Stock..................................... 105
Harborside's Capital Stock Following The Merger......................... 105
Changes to Terms of Harborside Common Stock............................. 108
MATERIAL PROVISIONS OF THE MERGER AGREEMENT............................... 110
The Merger.............................................................. 110
Representations and Warranties.......................................... 110
Certain Pre-Closing Covenants........................................... 111
</TABLE>
v
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<TABLE>
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PAGE
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<S> <C>
No Solicitation of Transactions......................................... 112
Board of Directors and Officers of the Company Following the Merger..... 112
Treatment of Existing Company Stock Options............................. 113
Access to Information................................................... 113
Cooperation and Reasonable Efforts...................................... 113
Delisting from NYSE..................................................... 113
Public Announcements.................................................... 113
Indemnification and Insurance........................................... 113
Master Rights Agreement................................................. 114
Minimum Equity Requirement.............................................. 114
Conditions to the Consummation of the Merger............................ 114
Termination............................................................. 114
Amendment and Waiver.................................................... 115
Expenses and Certain Required Payments.................................. 116
CERTAIN RELATED AGREEMENTS................................................ 117
Stockholder Agreement................................................... 117
Non-Compete Agreements.................................................. 117
MANAGEMENT................................................................ 118
Directors and Executive Officers of the Company......................... 118
EXECUTIVE COMPENSATION.................................................... 120
Compensation of Directors............................................... 121
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements........................................................... 122
Supplemental Executive Retirement Plan.................................. 123
1996 Long-Term Stock Incentive Plan..................................... 123
Certain Relationships and Related Transactions.......................... 123
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 126
REGULATORY APPROVALS...................................................... 129
Federal and State Healthcare Regulatory Authorities..................... 129
Other Regulatory Approvals.............................................. 131
HH ACQUISITION CORP....................................................... 132
STOCKHOLDERS' APPRAISAL RIGHTS............................................ 133
THE AMENDMENT PROPOSAL.................................................... 135
EXPERTS................................................................... 135
LEGAL OPINIONS............................................................ 136
OTHER INFORMATION......................................................... 136
STOCKHOLDER PROPOSALS..................................................... 137
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
<TABLE>
<C> <S>
SCHEDULE I Certain Officers
ANNEX I Agreement and Plan of Merger
ANNEX II Stockholder Agreement
ANNEX III Opinion of Schroder & Co. Inc.
ANNEX IV Excerpts from the DGCL relating to Dissenters' Rights
ANNEX V Form of Restated Certificate of Incorporation
</TABLE>
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<PAGE>
AVAILABLE INFORMATION
Harborside is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company with the Commission can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the web site (http://www.sec.gov) maintained by the
Commission, or at its regional offices located at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. Such reports, proxy statements and other
information are also available for inspection at the offices of the NYSE, 20
Broad Street, New York, New York 10005. As described herein, the Harborside
Common Stock will be deregistered under the Exchange Act following the Merger
if the number of record holders permits such deregistration. If that
deregistration occurs, Harborside does not plan to provide any reports or
information to its public stockholders other than pursuant to the right to
inspect the books and records of Harborside as required by Delaware law.
However, Harborside currently plans to register certain debt securities and
exchangeable preferred stock under the Securities Act of 1933, as amended (the
"Securities Act"). Following the issuance of such securities, Harborside will
be subject to the reporting requirements of the Exchange Act and such reports
will be publicly available to holders of Harborside Common Stock. However, it
is not currently anticipated that such reports will be sent to Harborside
stockholders. Under certain circumstances or upon the repayment or redemption
of such securities, the Company may no longer be subject to the reporting
requirements of the Exchange Act unless it has registered other securities
under the Securities Act or the Exchange Act.
This Proxy Statement/Prospectus also constitutes a prospectus of the Company
filed as part of a Registration Statement on Form S-4 (the "Registration
Statement") under the Securities Act. This Proxy Statement/Prospectus omits
certain information contained in the Registration Statement and the exhibits
thereto. Reference is made to the Registration Statement and related exhibits
for further information with respect to the Company and the retention of
Harborside Common Stock. Statements contained herein concerning the contents
of documents referred to herein are not necessarily complete and are qualified
by reference to the copy of such document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission.
1
<PAGE>
FORWARD LOOKING STATEMENTS
This Proxy Statement/Prospectus includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. All statements, other than statements of historical facts,
included in this Proxy Statement/Prospectus that address activities, events or
developments that the Company expects or anticipates will or may occur in the
future, including such things as future capital expenditures (including the
amount and nature thereof), business strategy and measures to implement
strategy, competitive strengths, goals, expansion and growth of the Company's
business and operations, plans, references to future success and other such
matters are forward-looking statements. These statements are based on certain
assumptions and analyses made by the Company in light of its experience and
its perception of historical trends, current conditions and expected future
developments as well as other factors it believes are appropriate in the
circumstances. However, whether actual results and developments will conform
with the Company's expectations and predictions is subject to a number of
risks and uncertainties, including the risk factors discussed under the
caption "RISK FACTORS" in this Proxy Statement/Prospectus and other factors,
many of which are beyond the control of the Company. The following includes
some, but not all, of the factors or uncertainties that could cause the
Company to fail to conform with expectations and predictions:
--The Company's ability to grow through the acquisition and development of
long-term care facilities or the acquisition of ancillary businesses.
--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.
--The occurrence of changes in the mix of payment sources utilized by the
Company's patients to pay for the Company's services.
--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.
--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.
--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.
--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.
--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.
--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.
--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 states in which the Company
operates that facilitate such competition.
--The continued availability of insurance for the inherent risks of
liability in the healthcare industry.
--Price increases in pharmaceuticals, durable medical equipment and other
items.
2
<PAGE>
--The Company's reputation for delivering high-quality care and its ability
to attract and retain patients, including patients with relatively high
acuity levels.
--Changes in general economic conditions, including changes that pressure
governmental reimbursement sources to reduce the amount and scope of
healthcare coverage.
Consequently, all of the forward-looking statements made in this Proxy
Statement/Prospectus are qualified by these cautionary statements and there
can be no assurance that the actual results or developments anticipated by the
Company will be realized or, even if substantially realized, that they will
have the expected consequences to or effects on the Company or its business or
operations. The foregoing review of significant factors should not be
construed as exhaustive.
3
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement/Prospectus. Reference is made to the more detailed information
contained in this Proxy Statement/Prospectus and the Annexes and Schedule
hereto. Stockholders of the Company are urged to read this Proxy
Statement/Prospectus and the Annexes hereto in their entirety. References in
this Proxy Statement/Prospectus to "Harborside" or the "Company" refer to
Harborside Healthcare Corporation, its subsidiaries and their predecessors, or
any of them, depending on the context.
FOR A DISCUSSION OF CERTAIN IMPORTANT RISKS RELATED TO THE RETENTION OF
HARBORSIDE COMMON STOCK, SEE "RISK FACTORS."
THE SPECIAL MEETING
TIME AND PLACE; RECORD DATE
The Special Meeting of the stockholders of Harborside will be held on August
11, 1998 at the offices of Gibson, Dunn & Crutcher LLP, 200 Park Avenue, 48th
Floor, New York, New York 10166 at 8:00 a.m. local time. Stockholders of record
at the close of business on the Record Date (July 16, 1998) will be entitled to
notice of, and to vote at, the Special Meeting. The date of the mailing of this
Proxy Statement/Prospectus to stockholders of the Company will be on or about
July 20, 1998. At the close of business on the Record Date, there were
8,011,164 shares of Harborside Common Stock outstanding and entitled to vote,
which were owned by approximately 1,500 stockholders of record.
MATTERS TO BE CONSIDERED
The purpose of the Special Meeting is to vote upon (i) a proposal to approve
and adopt the Merger Agreement and the Merger, pursuant to which MergerCo will
merge with and into the Company, the separate existence of MergerCo will
terminate and the stockholders of the Company will receive the consideration
described below under "--The Merger--Effect of the Merger" and (ii) a proposal
to amend the Company's Certificate of Incorporation, among other things, to
change the capital structure of the Company to comport with the terms of the
Merger Agreement (the "Amendment Proposal"). The Merger will not be effected
unless the Amendment Proposal is approved, and the Amendment Proposal will not
be effected unless the Merger is approved.
REQUIRED VOTES
The approval of the Merger Agreement and the Merger, and the Amendment
Proposal, will require the affirmative vote of the holders of a majority of the
shares of Harborside Common Stock entitled to vote at the Special Meeting. The
Subject Stockholders, who as of the Record Date owned and are entitled to vote
an aggregate of approximately 54% of the Harborside Common Stock outstanding,
have agreed, subject to certain conditions, to vote all shares of Harborside
Common Stock held by them in favor of the Merger Agreement and the transactions
contemplated thereby (which include the Amendment Proposal) and the Merger. See
"THE SPECIAL MEETING--Required Votes" and "THE MERGER--Interests of Certain
Persons in the Merger." Thus, the requisite vote of the holders of shares of
Harborside Common Stock to approve and adopt the Merger Agreement and the
Merger and to approve the Amendment Proposal is assured.
VOTING OF PROXIES
All shares of Harborside Common Stock represented by a properly executed
Proxy received in time for the Special Meeting will be voted in the manner
specified in the Proxy. Proxies that do not contain any instruction to vote for
or against or to abstain from voting on a particular matter will be voted in
accordance with the recommendations of the Board. See "THE SPECIAL MEETING--
Voting and Revocation of Proxies."
It is not expected that any matter other than those referred to herein will
be brought before the stockholders at the Special Meeting. If, however, other
matters are properly presented, the persons named as proxies will vote in
accordance with their best judgment with respect to such matters, unless
authority to do so is withheld in the Proxy.
4
<PAGE>
ADJOURNMENTS; REVOCABILITY OF PROXIES
If the Special Meeting is adjourned, for whatever reason, the approval of the
Merger Agreement, the Merger and the Amendment Proposal shall be considered and
voted upon by stockholders at the subsequent, reconvened meeting, if any.
You may revoke your Proxy at any time prior to its exercise (i) by attending
the Special Meeting and voting in person (although attendance at the Special
Meeting will not in and of itself constitute revocation of a Proxy), (ii) by
giving notice of revocation of your Proxy at the Special Meeting or (iii) by
delivering (a) a written notice of revocation of your Proxy or (b) a duly
executed Proxy relating to the matters to be considered at the Special Meeting,
bearing a date later than the Proxy previously executed, to Scott D. Spelfogel,
Secretary, Harborside Healthcare Corporation, 470 Atlantic Avenue, Boston,
Massachusetts 02210. Unless revoked in one of the manners set forth above,
Proxies in the form enclosed will be voted at the Special Meeting as described
above.
SOLICITATION OF PROXIES
The cost of soliciting Proxies will be borne by the Company. The Company may
solicit Proxies and the Company's directors, officers and employees may also
solicit Proxies by telephone, telegram or personal interview. Such directors,
officers and employees will not be additionally compensated for any such
solicitation but may be reimbursed for reasonable out-of-pocket expenses in
connection therewith. Arrangements will be made to furnish copies of Proxy
materials to fiduciaries, custodians and brokerage houses for forwarding to
beneficial owners of Harborside Common Stock. Such persons will be paid
reasonable out-of-pocket expenses.
If you have any questions or require additional material, please call
Harborside Investor Relations at (888) 742-7267.
HOLDERS OF HARBORSIDE COMMON STOCK SHOULD NOT SEND STOCK CERTIFICATES WITH
THEIR PROXY CARDS. SEE "THE MERGER--NON-CASH ELECTION PROCEDURE" FOR
INSTRUCTIONS FOR STOCKHOLDERS ELECTING TO RETAIN SHARES OF HARBORSIDE COMMON
STOCK.
SECURITY OWNERSHIP OF MANAGEMENT
As of the Record Date, directors and executive officers of the Company and
their affiliates held an aggregate of 3,765,160 shares of Harborside Common
Stock (approximately 47% of the outstanding shares). See "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." The directors and executive officers
of the Company have indicated that they intend, and the Subject Stockholders
are obligated, pursuant to the terms of the Stockholder Agreement, to vote
their shares of Harborside Common Stock in favor of the Merger Agreement, the
Merger and the Amendment Proposal.
THE MERGER
EFFECT OF THE MERGER
At the Effective Time, MergerCo will be merged with and into Harborside and
Harborside will continue as the surviving corporation in the Merger.
Pursuant to the Merger, each share of Harborside Common Stock issued and
outstanding immediately prior to the Effective Time will be converted, at the
election of the holder thereof, into either (a) the right to receive $25.00 in
cash or (b) the right to retain one Non-Cash Election Share, except that (i) as
described in greater detail below, all stockholders who elect to retain
Harborside Common Stock will experience proration of such shares, resulting in
their retaining only a portion of the shares of Harborside Common Stock they
elect to retain and receiving $25.00 per share in cash for each of their other
shares of Harborside Common Stock, (ii) an aggregate of 225,651 shares of
Harborside Common Stock held by the Senior Management Stockholders
5
<PAGE>
(Stephen L. Guillard, Damian Dell'Anno and William H. Stephan) will not be
subject to the election described above and instead will be converted into the
right to retain the same number of shares of Harborside Common Stock which,
upon consummation of the Merger, will be denominated as Harborside Class A
Common Stock, (iii) each other share of Harborside Common Stock held by the
Senior Management Stockholders, constituting an aggregate of 106,663 shares of
Harborside Common Stock, and each share of Harborside Common Stock held by
certain other specified officers of the Company, constituting an aggregate of
3,846 shares of Harborside Common Stock, will not be subject to the election
described above and instead will be converted into the right to receive $25.00
in cash, which, in the case of the Senior Management Stockholders, will equal
$2,096,825 in the case of Mr. Guillard, $470,875 in the case of Mr. Dell'Anno
and $98,875 in the case of Mr. Stephan and, in the case of such other specified
officers of the Company, will equal $96,150 in the aggregate, (iv) shares of
Harborside Common Stock held by Harborside, its subsidiaries, MergerCo or any
of its affiliates will be canceled and retired, and (v) shares of Harborside
Common Stock with respect to which appraisal rights have been perfected will be
treated as described herein. Assuming the number of shares of Harborside Common
Stock outstanding as of the Effective Time is 8,011,164, the aggregate cash
consideration to be paid by MergerCo for the Harborside Common Stock and
Company Stock Options in connection with the Merger will be approximately
$192.1 million.
Stockholders that elect to retain shares of Harborside Common Stock will be
subject to numerous risks, including the risk that the per share value of such
shares may be less than the $25.00 cash amount that stockholders may elect to
receive for their shares of Harborside Common Stock in connection with the
Merger, risks associated with owning a minority position in a leveraged company
and risks associated with the anticipated lack of liquidity of the Harborside
Common Stock. It is expected that the Harborside Common Stock will be delisted
from trading on the NYSE and deregistered under the Exchange Act, resulting in
a significant decrease in the information available to stockholders and a
material adverse effect on the trading market for the Harborside Common Stock.
See "RISK FACTORS" for a description of these and additional factors that
holders of Harborside Common Stock should carefully consider in connection with
their evaluation of their potential election to retain Harborside Common Stock
in the Merger. Stockholders that elect to receive $25.00 in cash for their
Harborside Common Stock will lose the opportunity to participate in future
increases, if any, in the value of the Harborside Common Stock, including in
connection with any possible public offering of Harborside capital stock or a
sale of all or a portion of Harborside in the future. See "RISK FACTORS--
Control of Harborside."
Pursuant to the terms of the Merger Agreement, the number of shares of
Harborside Common Stock (other than Management Rollover Shares) to be retained
by existing Harborside stockholders is a calculated number which will not be
less than 361,500 nor more than 500,600, and will represent 6% of the total
number of shares of all classes of the Company's common stock to be issued and
outstanding immediately after giving effect to the Merger. See "THE MERGER--
Merger Consideration." The determination of the Non-Cash Election Number is
dependent on the actual common equity capitalization of MergerCo, which will
not be determined until the terms of the Merger-related financings are
finalized. See "THE MERGER--Merger Financings." It is expected that the Non-
Cash Election Number will be determined shortly before the Special Meeting.
Because the Berkshire Stockholders have committed to elect to retain a number
of shares of Harborside Common Stock equal to the Non-Cash Election Number, all
other stockholders who do not elect to retain Harborside Common Stock will be
assured that they will receive $25.00 in cash for each share held by such
stockholders, and all stockholders who elect to retain Harborside Common Stock
will experience proration of such shares, resulting in their retaining only a
portion of the shares of Harborside Common Stock they elect to retain and
receiving $25.00 per share in cash for each of their other shares of Harborside
Common Stock. The shares of Harborside Common Stock to be retained by existing
Harborside stockholders (consisting of the shares retained by the Senior
Management Stockholders, the Berkshire Stockholders and any other Harborside
stockholder) will constitute approximately 9% of the outstanding common stock
and approximately 9% of the voting power of the Company following the Merger.
See "THE MERGER--Merger Consideration" for examples illustrating the potential
effects of proration.
6
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The aggregate cash consideration that the Berkshire Stockholders will receive
for their 4,004,347 shares (representing approximately 50% of the shares of
Harborside Common Stock outstanding as of the Record Date) in connection with
the Merger will depend on the actual Non-Cash Election Number and the number of
shares as to which other Harborside stockholders make a Non-Cash Election.
Assuming that no Harborside stockholder other than the Berkshire Stockholders
elects to receive Non-Cash Election Shares in connection with the Merger, the
aggregate cash consideration that the Berkshire Stockholders will receive for
their shares in connection with the Merger will range from $87,593,675
(assuming the Non-Cash Election Number equals 500,600) to $91,071,175 (assuming
the Non-Cash Election Number equals 361,500). If other Harborside stockholders
elect to retain shares in connection with the Merger, the amount of shares to
be retained by the Berkshire Stockholders will be subject to proration, and any
shares not retained by the Berkshire Stockholders as a result of such proration
will be converted into the right to receive $25.00 in cash.
The aggregate cash consideration of approximately $192.1 million to be paid
for the Harborside Common Stock and Company Stock Options in the Merger is
expected to be funded by a portion of the funds received from the following
sources: (i) approximately $3.9 million of borrowings under a new $250 million
senior secured credit facility expected to be entered into by the Company at
the Effective Time; (ii) approximately $140 million of proceeds from the
offering by MergerCo to institutional investors of senior subordinated debt and
exchangeable preferred stock; and (iii) approximately $160 million of proceeds
from the issuance by MergerCo to certain affiliates of Investcorp and other
international investors of common stock. See "THE MERGER--Merger Financings."
Prior to the effectiveness of the Merger, MergerCo will have five authorized
classes of common stock: Common Stock, Class A Stock, Class B Stock, Class C
Stock and Class D Stock. Immediately prior to the Effective Time, no shares of
Common Stock or Class A Stock of MergerCo will be issued or outstanding, and
all of the issued and outstanding shares of the remaining classes of stock of
MergerCo will at such time be owned by affiliates of Investcorp and certain
other international investors. Pursuant to the terms of the Merger Agreement
and simultaneously with the consummation of the Merger, a certificate of
incorporation substantially in the form of Annex V to this Proxy
Statement/Prospectus will become the certificate of incorporation of the
Company. As of the Effective Time, (i) each share of Harborside Common Stock to
be retained by existing Harborside stockholders (including the Management
Rollover Shares) will be designated as a share of Harborside Class A Common
Stock and (ii) the shares of MergerCo's Class B Stock, Class C Stock and Class
D Stock will be converted into shares of Harborside Class B Common Stock,
Harborside Class C Common Stock and Harborside Class D Common Stock,
respectively. Upon the effectiveness of the Merger, the number of shares of
Harborside Class A Common Stock outstanding will be equal to the Non-Cash
Election Number plus the number of Management Rollover Shares, and the number
of shares of Harborside Class B Common Stock, Class C Common Stock and Class D
Common Stock outstanding will be equal to the number of shares of Class B
Stock, Class C Stock and Class D Stock of MergerCo, respectively, as were
outstanding immediately prior to the Effective Time. The shares of Harborside
Class A Common Stock to be outstanding after the Merger will have one vote per
share, as they currently do, will represent approximately 9% of the outstanding
common stock of the Company and will have approximately 9% of the voting power.
The shares of Harborside Class B Common Stock, Harborside Class C Common Stock
and Harborside Class D Common Stock will collectively represent approximately
91% of the outstanding common stock of the Company after the Merger. Shares of
Harborside Class D Common Stock will have approximately 91% of the voting power
after the Merger and shares of Harborside Class B Common Stock and Harborside
Class C Common Stock will not have voting rights. See "DESCRIPTION OF
HARBORSIDE CAPITAL STOCK--Harborside Capital Stock Following the Merger." With
respect to certain risks related to retaining Harborside Common Stock, see
"RISK FACTORS" below.
Although affiliates of Investcorp and certain other international investors
will own approximately 91% of the outstanding common stock of Harborside as of
the Effective Time, there is no current intention to engage in any post-Merger
transaction which would eliminate the approximately 9% of the outstanding
common stock of Harborside to be held by existing stockholders of Harborside.
While it is, therefore, unlikely that such a transaction would occur in the
foreseeable future, no assurance can be given that such a transaction will not
occur. See "RISK FACTORS--Control of Harborside."
7
<PAGE>
RECOMMENDATION OF THE BOARD OF DIRECTORS
At its April 15, 1998 meeting, the Board of Directors, with all six members
in attendance, and the four independent members of the Board of Directors, each
unanimously (i) determined that the Merger is in the best interests of the
Company's stockholders and (ii) recommended that the Company's stockholders
approve and adopt the Merger Agreement and the transactions contemplated
thereby, including the Merger and the Amendment Proposal. The Board of
Directors was not required to, and did not, appoint a Special Committee to
consider the terms of the Merger on behalf of the Company. Four out of the six
members of the Board are independent (in that none of such persons is an
employee or, other than by reason of being a director, an affiliate of the
Company), and were in a position to consider the terms of the Merger without
having interests that differed in any material respect from the interests of
the Harborside stockholders. With respect to the interests of Douglas Krupp, a
director who also is an affiliate of the Berkshire Stockholders, and of Stephen
L. Guillard, a director who is also a Senior Management Stockholder, such
interests were fully disclosed to and considered by the Board. See "THE
MERGER--Background of the Merger," "--Recommendation of the Board of Directors;
Reasons for the Merger" and "--Interests of Certain Persons in the Merger."
OPINION OF SCHRODERS
On April 15, 1998, Schroders, Harborside's financial advisor, delivered to
the Board its written opinion dated April 15, 1998 (the "Schroders Opinion") to
the effect that, as of such date and based upon and subject to certain matters
stated in such opinion, the $25.00 per share consideration to be received by
the holders of Harborside Common Stock in the Merger is fair, from a financial
point of view, to such holders. The Schroders Opinion is directed to the Board
and relates only to the fairness of the $25.00 per share cash consideration to
be received in the Merger from a financial point of view, does not address the
value of the Harborside Common Stock to be retained by existing Harborside
stockholders (including the Management Rollover Shares), does not address any
other aspect of the Merger or related transactions and does not constitute a
recommendation to any stockholder as to how such stockholder should vote at the
Special Meeting. In connection with delivering the Schroders Opinion,
Harborside paid Schroders a fee of $250,000 and has agreed to pay, contingent
upon consummation of the Merger, an additional fee of approximately $2,250,000,
representing 0.75% of the aggregate consideration involved in the Merger,
determined after including the amount of all indebtedness assumed or retired in
connection with the Merger and after deducting the amount of the fairness
opinion fee previously paid. The full text of the Schroders Opinion, which sets
forth the assumptions made, matters considered, and limitations on the review
undertaken in rendering its opinion, is attached as Annex III to this Proxy
Statement/Prospectus and should be read carefully in its entirety. See "THE
MERGER--Opinion of Schroders."
NON-CASH ELECTION
Holders of shares of Harborside Common Stock other than Senior Management
Stockholders and certain other officers of the Company listed on Schedule I to
this Proxy Statement/Prospectus (the Senior Management Stockholders and such
other executive officers being referred to herein collectively as the
"Restricted Management Stockholders") will be entitled to make an unconditional
election (a "Non-Cash Election"), on or prior to the Election Date (as defined
below), to retain Non-Cash Election Shares. If, however, the number of shares
of Harborside Common Stock with respect to which an election to retain
Harborside Common Stock has been made in accordance with the Merger Agreement
(each, an "Electing Share") exceeds the Non-Cash Election Number, then (1) the
number of Electing Shares covered by each Non-Cash Election will be determined
by multiplying the total number of Electing Shares requested to be covered by
such Non-Cash Election by a proration factor determined by dividing the Non-
Cash Election Number by the total number of Electing Shares and (2) such number
of Electing Shares will be so retained. All Electing Shares, other than those
permitted to be retained as described in the immediately preceding sentence,
will be converted into cash as if such shares were not Electing Shares. The
number of Electing Shares permitted to be retained as Non-Cash Election Shares
or required to be converted into cash will be determined on a consistent basis
among stockholders who made the election to retain Non-Cash Election Shares,
pro rata on the basis of the number of shares as to which they made such
election.
8
<PAGE>
If Non-Cash Elections respecting more than the Non-Cash Election Number of
shares of Harborside Common Stock are made, any stockholder who elects to
retain shares of Harborside Common Stock will experience proration. Because the
Berkshire Stockholders have committed to elect to retain a number of shares of
Harborside Common Stock equal to the Non-Cash Election Number, all other
stockholders who do not elect to retain Harborside Common Stock will be assured
that they will receive $25.00 in cash for each share held by such stockholder,
and all stockholders who elect to retain Harborside Common Stock will
experience proration of such shares, resulting in their retaining only a
portion of the shares of Harborside Common Stock they elect to retain and
receiving $25.00 per share in cash for each of their other shares of Harborside
Common Stock. See "THE MERGER--Non-Cash Election."
Upon consummation of the Merger, the Non-Cash Election Shares will be
designated as shares of Harborside Class A Common Stock and will have the
rights, powers, privileges and restrictions specified in the Restated
Certificate of Incorporation of Harborside and described in this Proxy
Statement/Prospectus. See Annex V attached hereto and "DESCRIPTION OF
HARBORSIDE CAPITAL STOCK--Harborside Capital Stock Following the Merger." These
rights, powers, privileges and restrictions will differ in certain respects
from those of the Harborside Common Stock prior to the Merger. These
differences primarily relate to the rights, powers, privileges and restrictions
of the Harborside Class A Common Stock relative to the other classes of capital
stock of Harborside that will be authorized in connection with the Merger,
including rights, powers, privileges and restrictions in connection with any
merger of Harborside with another entity (other than the Merger) or any resale
of shares of Harborside Class D Common Stock.
The Harborside Class A Common Stock will differ from the Harborside Common
Stock in the following respects. The rights of the holders of Harborside Class
A Common Stock to receive dividends and distributions will be subject to the
rights of the holders of the Harborside preferred stock to be authorized in
connection with the Merger and will be co-equal to the rights of the holders of
the other classes of common stock to be authorized in connection with the
Merger. In the event of any stock dividend, subdivision, combination or
reclassification of any other class of common stock, a corresponding change
will be made to the Harborside Class A Common Stock so that it is not adversely
affected. In the event of an initial public offering or sale of Harborside, the
outstanding shares of Harborside Class A Common Stock (as well as the
outstanding shares of Class B Common Stock, Class C Common Stock and Class D
Common Stock of Harborside) will automatically be converted into shares
designated as "Common Stock" of Harborside (without any separate class
designation). In the event of the merger of Harborside with another entity
(other than the Merger), the holders of Harborside Class A Common Stock will be
entitled to receive the same per share consideration as is received by the
holders of the other classes of common stock unless the holders of the
Harborside Class A Common Stock agree otherwise. The holders of Harborside
Class A Common Stock will have the right to "tag-along" in connection with any
resale of Harborside Class D Common Stock by selling to the proposed purchaser
up to the same percentage of their shares of Harborside Class A Common Stock as
the percentage of the total number of shares of Harborside Class D Common Stock
being sold in the transaction. The Harborside Class A Common Stock will be
subject to mandatory redemption by Harborside if and to the extent that the
holders thereof elect not to "tag-along" in connection with any such resale of
Harborside Class D Common Stock. For a discussion of how the mandatory
redemption provisions affect holders of Harborside Class A Common Stock, see
"RISK FACTORS--Terms of Harborside Common Stock--Mandatory Redemption."
NON-CASH ELECTION PROCEDURE
Stockholders of Harborside Common Stock electing to retain Non-Cash Election
Shares must properly complete and sign the Non-Cash Election Form (the "Form of
Election") which is being sent to stockholders of record concurrently with this
Proxy Statement/Prospectus. Such Form of Election, together with all
certificates representing shares of Harborside Common Stock duly endorsed in
blank or otherwise in form acceptable for
9
<PAGE>
transfer on the books of the Company (or by appropriate guarantee of delivery,
as set forth in such Form of Election), must be received by The Bank of New
York (the "Exchange Agent") at one of the addresses listed on the Form of
Election by 5:00 p.m., Eastern time, on the second business day preceding the
date of the Special Meeting (the "Election Date") and must not be withdrawn.
See "THE MERGER--Non-Cash Election Procedure."
FRACTIONAL SHARES
Fractional shares of Harborside Common Stock will not be issued or retained
in the Merger. Holders of Harborside Common Stock otherwise entitled to a
fractional share of Harborside Common Stock following the Merger as a result of
the Non-Cash Election proration procedure will be paid cash in lieu of such
fractional share in an amount equal to such fraction multiplied by $25.00.
CONDITIONS TO THE MERGER
The obligations of Harborside and MergerCo to consummate the Merger are
subject to various conditions, including, without limitation, obtaining
requisite Harborside stockholder approval, obtaining certain regulatory
approvals and third-party consents required in connection with and as a result
of the Merger, the absence of any injunction or other legal restraint or
prohibition preventing the consummation of the Merger and the absence of the
occurrence of an event that has had or is reasonably likely to have a material
adverse effect with respect to the Company. See "MATERIAL PROVISIONS OF THE
MERGER AGREEMENT--Conditions to the Consummation of the Merger."
The Company currently does not intend or expect that there will be any need
to amend or waive in any material respect any provision of the Merger
Agreement. In the event the Company waives any condition relating to the United
States federal income tax consequences of the Merger to Harborside
stockholders, or materially changes the terms of the Merger, the Company will
amend and supplement this Proxy Statement/Prospectus accordingly and resolicit
the stockholders of Harborside for their approval of the Merger Agreement and
the Amendment Proposal.
REGULATORY APPROVALS
Various state healthcare regulatory authorities require notice of and/or
approval of the Merger prior to its consummation. See "REGULATORY APPROVALS."
The Company has made all filings with, and as of July 17, 1998 has obtained all
approvals from, governmental authorities that are required to be made or
obtained on or before the Effective Time under applicable healthcare laws with
respect to the consummation of the Merger, except that the Company is awaiting
suitability approval from the Massachusetts Department of Public Health, which
it expects to receive shortly.
The Company has fulfilled the requirement of certificate of need ("CON")
notification in Florida, Massachusetts, Maryland, New Hampshire and Ohio. No
separate CON notifications are required in Connecticut, Indiana, New Jersey or
Rhode Island. The Company has filed notification letters with the licensing
authorities in Florida, Indiana, New Hampshire, Maryland and Ohio. The Company
has filed and received approval of a "Health Care Facility License Application"
as required in New Jersey. The Company has filed and received approval of a
"Change in Effective Control Application" as required in Rhode Island. The
Company has filed a "Notice of Intent to Acquire Form" as required in
Massachusetts. The Company intends to file the requisite facility licensure
applications within 48 hours after the Effective Time as required under
Massachusetts licensure regulations. The Company has filed and received
approval of a beneficial change of ownership as required in Connecticut. The
Company has fulfilled the notification requirements for Medicaid in
Connecticut, Florida, Indiana, Maryland and Ohio. The Company has filed
"Medicaid Provider Enrollment Applications" as required in Massachusetts. The
Company has filed a notification letter with Medicaid in New Hampshire. The
Company intends to file the requisite notices to the New Jersey and Rhode
Island Medicaid programs after the Effective Time as required under New Jersey
and Rhode Island Medicaid regulations.
10
<PAGE>
MERGER FINANCINGS
At the time of the Merger, MergerCo expects to have received common equity
contributions of approximately $160 million from an affiliate of Investcorp and
certain other international investors. In addition, at the Effective Time,
Harborside currently intends to issue an aggregate of approximately $140
million in gross proceeds of subordinated debt and exchangeable preferred
stock, and enter into a senior secured credit facility for approximately $250
million (which amount will be available for, among other things, synthetic
lease financings). The proceeds of these equity and debt issuances and funds
available under the new senior secured credit facility will be used to finance
the conversion into cash, in the Merger, of approximately 91% of the Harborside
Common Stock currently outstanding, to refinance certain existing indebtedness
of Harborside, to pay the fees and expenses associated with the Merger and such
related financings, to finance the working capital needs of Harborside, to
finance acquisitions and for general corporate purposes. See "RISK FACTORS--
Substantial Leverage; Liquidity."
The actual financing arrangements as well as the expected level of
outstanding borrowings and lease financings under the new senior secured credit
facility will not be determined until shortly before the Effective Time and may
be different from those outlined above based on market conditions and whether
the Company chooses to refinance certain existing indebtedness. Depending on
pricing and other market conditions at the time of the offering, MergerCo may
determine that in order to have the optimal financing for MergerCo under those
conditions, the actual gross proceeds of such offering should be higher or
lower than $140 million. To the extent that the gross proceeds of such offering
of debt and preferred stock differs from $140 million, the amount of the common
equity contributions and/or the amount of borrowings under the new senior
secured credit facility will be adjusted, or other financing arrangements will
be made, in order to result in the same total proceeds from such offering and
other sources in the aggregate (except that MergerCo has agreed in the Merger
Agreement that the common equity contributions from affiliates of Investcorp
and its co-investors will not be less than $135 million). Obtaining financing
for the Merger is not a condition to MergerCo's obligations under the Merger
Agreement.
In connection with the approximately $160 million of capital expected to be
provided by affiliates of Investcorp and other international investors, an
affiliate of Investcorp will be paid by the Company a fee of $6.5 million for
services rendered outside of the United States. In connection with the Merger,
the Company will pay Investcorp International, Inc. ("III"), an affiliate of
Investcorp, a loan finance advisory fee of $4.0 million and Invifin S.A., an
affiliate of Investcorp, will receive a fee of $1.5 million for providing a
standby commitment to fund the $100 million of senior subordinated debt
expected to be issued by the Company at the Effective Time. In connection with
the closing of the Merger, the Company will enter into an agreement for
management advisory and consulting services for a five-year term with III,
pursuant to which the Company has agreed to prepay III $6.0 million upon such
closing.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Paul, Weiss, Rifkind, Wharton & Garrison, special counsel to the Company, has
rendered a tax opinion as to the material United States federal income tax
consequences of the Merger. See "THE MERGER--Material Federal Income Tax
Consequences."
For United States federal income tax purposes, MergerCo will be viewed as a
transitory entity and therefore disregarded, and the Merger of MergerCo with
and into the Company will be treated as a sale of a portion of a tendering
stockholder's Harborside Common Stock to the stockholders of MergerCo and as a
redemption of a portion of the stockholder's Harborside Common Stock by the
Company. There is no published authority directly addressing how proceeds
should be allocated between the deemed sale and the redemption. In view of such
lack of authority, the Company intends to take the position that (i) the
percentage of a stockholder's Harborside Common Stock disposed of by the
stockholder pursuant to the Merger which will be treated as sold to the
stockholders of MergerCo will be a percentage of such stock equal to (a) the
amount contributed to MergerCo
11
<PAGE>
by the stockholders of MergerCo in exchange for MergerCo stock divided by (b)
the aggregate amount of cash paid to stockholders pursuant to the Merger and
(ii) the remainder of the stockholder's Harborside Common Stock disposed of in
the Merger will be treated as redeemed by the Company. The Internal Revenue
Service could, however, adopt a different approach in determining the portion,
if any, of a stockholder's Harborside Common Stock which is treated as redeemed
by the Company.
A stockholder who exchanges Harborside Common Stock for cash and retains no
Harborside Common Stock in the Merger will generally recognize either capital
gain or loss (assuming the Harborside Common Stock is held by such stockholder
as a capital asset) equal to the difference between the amount realized (i.e.,
the cash proceeds) by such stockholder in the Merger and the stockholder's
adjusted tax basis in such Harborside Common Stock. See "THE MERGER--Material
Federal Income Tax Consequences--Stockholders Receiving Cash and Retaining No
Stock."
The United States federal income tax consequences of the merger with respect
to a stockholder who exchanges Harborside Common Stock for cash and retains a
portion of such stockholder's Harborside Common Stock will depend upon, among
other things, (i) the extent to which a stockholder is deemed to have sold its
Harborside Common Stock to the stockholders of MergerCo or is deemed to have
had its Harborside Common Stock redeemed by the Company and (ii) whether the
redemption of a stockholder's Harborside Common Stock by the Company will
qualify as a sale or exchange under Section 302 of the Internal Revenue Code of
1986, as amended (the "Code").
A stockholder receiving cash and retaining Harborside Common Stock will
recognize capital gain or loss (assuming the Harborside Common Stock is held by
such stockholder as a capital asset) on the portion of such stockholder's
Harborside Common Stock that is treated as having been sold to the stockholders
of MergerCo equal to the difference between the amount realized by such
stockholder with respect to such portion and the stockholder's adjusted tax
basis in such portion of the stockholder's Harborside Common Stock.
Under Section 302 of the Code, the portion of a stockholder's Harborside
Common Stock that is treated as redeemed by the Company will be treated as a
sale or exchange of such portion, provided that (i) the Merger results in a
"substantially disproportionate" reduction of the stockholder's equity interest
in the Company or (ii) the receipt of cash by the stockholder in the Merger is
not "essentially equivalent to a dividend." With respect to a stockholder
receiving cash and retaining Harborside Common Stock, if the stockholder
satisfies either test described in the immediately preceding sentence, the
stockholder will recognize gain or loss (assuming the Harborside Common Stock
is held by such stockholder as a capital asset) on the portion of such
stockholder's Harborside Common Stock that is treated as redeemed by the
Company equal to the difference between the amount realized by the stockholder
with respect to such portion and the stockholder's adjusted tax basis in such
portion of the stockholder's Harborside Common Stock. If a stockholder
receiving cash and retaining Harborside Common Stock in the Merger does not
satisfy either test described in the first sentence of this paragraph, the
redemption by the Company of such stockholder's Harborside Common Stock for
cash will be treated as a distribution from the Company and will be taxed to
the stockholder as ordinary dividend income to the extent of the Company's
current and accumulated earnings and profits. Any portion of such a
distribution that is not taxed to the stockholder as a dividend will be treated
first as a tax-free return of capital to the stockholder, reducing the tax
basis of the stockholder's Harborside Common Stock (but not below zero), with
any amount in excess of the stockholder's tax basis taxable as capital gain
(assuming the Harborside Common Stock is held as a capital asset). See "THE
MERGER--Material Federal Income Tax Consequences--Stockholders Receiving Cash
and Retaining a Portion of Their Stock."
The Merger will have no tax consequences to a stockholder with respect to
Harborside Common Stock retained by the stockholder.
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<PAGE>
Payments in connection with the Merger may be subject to "backup withholding"
at a rate of 31% unless the stockholder submits to the Company a completed
substitute IRS Form W-9 or, in the case of a foreign stockholder, a properly
executed IRS Form W-8, as applicable. See "THE MERGER--Material Federal Income
Tax Consequences--Backup Federal Income Tax Withholding."
Payments to a non-U.S. stockholder that are allocable to the redemption of
such non-U.S. stockholder's Harborside Common Stock will be subject to United
States withholding tax at a rate of 30% unless the non-U.S. stockholder
provides to the Company a properly executed IRS Form 4224 or IRS Form 1001, as
applicable, or otherwise satisfies the Company that the payment is exempt from
withholding. See "THE MERGER--Material Federal Income Tax Consequences--
Withholding for Non-U.S. Stockholders."
BECAUSE THE TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING ON THE
PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER, IT IS RECOMMENDED THAT HOLDERS OF
HARBORSIDE COMMON STOCK CONSULT THEIR TAX ADVISORS CONCERNING THE FEDERAL (AND
ANY STATE, LOCAL AND FOREIGN) TAX CONSEQUENCES OF THE MERGER IN LIGHT OF THEIR
PARTICULAR CIRCUMSTANCES.
TREATMENT OF EXISTING COMPANY STOCK OPTIONS
Pursuant to the stock option plan governing the Company Stock Options, all
issued and outstanding Company Stock Options will automatically become vested
and exercisable at the Effective Time. The Merger Agreement provides that each
Company Stock Option issued and outstanding immediately prior to the Effective
Time will be converted, at the election of the holder thereof and subject to
the terms and conditions described in the Merger Agreement, into (i) the right
to retain a fully vested and immediately exercisable option for the Elected
Portion of the number of shares of Harborside Common Stock subject to such
Company Stock Option immediately prior to the Effective Time at an exercise
price per share equal to the exercise price of such Company Stock Option
immediately prior to the Effective Time and/or (ii) the right to receive an
amount in cash equal to (a) the excess, if any, of $25.00 over the per share
exercise price of such Company Stock Option, multiplied by (b) the number of
shares of Harborside Common Stock which are subject to such Company Stock
Option immediately prior to the Effective Time but which are not part of the
Elected Portion thereof (if any), reduced by (c) any applicable withholding
taxes.
DIRECTORS RETAINER FEE PLAN
The Company currently has in effect a Directors Retainer Fee Plan pursuant to
which independent directors (currently Messrs. Robert T. Barnum, David F.
Benson and Robert M. Bretholtz and Ms. Sally W. Crawford) may elect to (i)
receive certain fees relating to their service as directors in cash or in
shares of Harborside Common Stock or (ii) defer payment of such fees and credit
such fees to an account (a "Share Unit Account") consisting of units that are
equivalent in value to shares of Harborside Common Stock ("Share Units"). The
Merger Agreement provides that each Share Unit outstanding immediately prior to
the Effective Time will be canceled in exchange for the right of the holder
thereof to receive an amount in cash equal to the product of (i) the number of
Share Units in such holder's Share Unit Account outstanding immediately prior
to the Effective Time and (ii) $25.00. Based on the total number of Share Units
outstanding as of June 30, 1998, such cash amount would equal approximately
$62,110, in the case of Mr. Barnum, approximately $59,110, in the case of Mr.
Benson, and approximately $14,110, in the case of Ms. Crawford. As of June 30,
1998, Mr. Bretholtz had no outstanding Share Units in his Share Unit Account.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain directors and executive officers of the Company have interests,
described below, that may present them with conflicts of interest in connection
with the Merger. The Board of Directors (including the independent members of
the Board) is aware of the interests described below and considered them in
addition to the other
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<PAGE>
matters described under "THE MERGER--Recommendation of the Board of Directors;
Reasons for the Merger" when it approved the Merger Agreement and recommended
that stockholders vote in favor of the Merger. See "THE MERGER--Interests of
Certain Persons in the Merger."
Pursuant to the Merger Agreement, 177,688, 47,563 and 400 shares of
Harborside Common Stock held by Messrs. Stephen L. Guillard, Damian Dell'Anno
and William H. Stephan (collectively, the "Senior Management Stockholders"),
respectively, will not be subject to the election to receive cash or retain
stock available generally to other stockholders and instead will be converted
into the right to retain the same number of shares of Harborside Common Stock,
which will be denominated as shares of Company Class A Common Stock as of the
Effective Time (the same denomination as the shares of Harborside Common Stock
to be retained by other existing Harborside stockholders). Each other share of
Harborside Common Stock held by the Senior Management Stockholders and each
share of Harborside Common Stock held by certain other officers of the Company
listed on Schedule I to this Proxy Statement/Prospectus (together, the
"Management Cash-Out Shares") also will not be subject to such election and
instead will be converted into the right to receive $25.00 in cash from the
Company following the Merger, which, in the case of the Senior Management
Stockholders, will equal $2,096,825 in the case of Mr. Guillard, $470,875 in
the case of Mr. Dell'Anno, $98,875 in the case of Mr. Stephan and, in the case
of such other specified officers of the Company, will equal $96,150 in the
aggregate. Shares of Harborside Common Stock held by directors and other
employees of Harborside (other than the shares referred to in the preceding two
sentences) will be subject to the same election as will be available generally
to other stockholders.
All of the Company Stock Options issued to directors and other employees that
have not as of yet vested will vest as a result of the Merger transaction and
be treated as described in "--Treatment of Existing Company Stock Options"
above. The following table reflects the maximum cash amount that directors and
executive officers of the Company may elect to receive in respect of their
Company Stock Options upon consummation of the Merger.
<TABLE>
<CAPTION>
NET
OPTION
NAME PROCEEDS
---- ----------
<S> <C>
Robert T. Barnum.............................................. $ 264,585
Bruce J. Beardsley(1)......................................... 435,378
David F. Benson............................................... 264,585
Robert M. Bretholtz........................................... 264,585
Sally W. Crawford............................................. 264,585
Damian N. Dell'Anno(2)........................................ 916,643
Michael E. Gomez, R.P.T....................................... 448,906
Stephen L. Guillard........................................... 1,854,500
Kenneth Montgomery............................................ 249,500
Steven V. Raso(1)............................................. 278,800
William H. Stephan(1)......................................... 432,506
----------
Total....................................................... $5,674,573
</TABLE>
- --------
(1) Messrs. Beardsley, Raso and Stephan are expected to elect to retain certain
of their Company Stock Options which are exercisable into an aggregate of
39,162, 15,850 and 38,332 shares of Harborside Common Stock, respectively,
because the grant of new stock options to them under the Company's new
Stock Option Plan is contingent upon such election, as described below. The
amounts reflected under "Net Option Proceeds" assume that such options will
be retained.
(2) Pursuant to a letter agreement, dated April 15, 1998, with the Company, Mr.
Dell'Anno has agreed to retain certain of his Company Stock Options which
are exercisable into an aggregate of 10,560 shares of Harborside Common
Stock. The amounts reflected under "Net Option Proceeds" assume that such
options will be retained.
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The Company and each of Messrs. Guillard (President and Chief Executive
Officer of Harborside), Dell'Anno (Executive Vice President and Chief Operating
Officer of Harborside), Stephan (Senior Vice President and Chief Financial
Officer of Harborside), Bruce J. Beardsley (Senior Vice President,
Acquisitions, of Harborside) and Steven V. Raso (Senior Vice President,
Reimbursement, of Harborside) intend to enter into employment agreements
following the Effective Time (the "Employment Agreements"), providing each of
such officers with, among other benefits, (i) continuation in a similar
position with the Company after the Merger, (ii) a minimum base salary, subject
to adjustment, and (iii) an annual bonus, part of which will be based upon
achievement of specific performance targets and part of which will be
discretionary. Under the terms of the Employment Agreements, the salaries of
Messrs. Guillard, Dell'Anno, Stephan, Beardsley and Raso will be $345,000,
$225,000, $190,000, $200,000 and $135,000, respectively, and will be payable
retroactively from April 1, 1998. The salaries of Messrs. Guillard, Dell'Anno,
Stephan, Beardsley and Raso will be increased to $375,000, $240,000, $200,000,
$215,000 and $145,000, respectively, effective April 1, 1999.
Following the Effective Time, the Company intends to adopt the Harborside
Healthcare Corporation Stock Incentive Plan (the "Stock Option Plan"). The
number of shares that may be awarded under the Stock Option Plan will be
approximately 10% of the shares of common stock of the Company outstanding
immediately after the Effective Time, determined after giving effect to the
exercise of the options issued or issuable under the Stock Option Plan. Options
to purchase approximately 7.7% of such shares (determined on such basis) are
expected to be granted to current members of the Company's management upon
consummation of the Merger. Messrs. Guillard, Dell'Anno, Stephan, Beardsley and
Raso are expected to receive seven-year options to purchase 2.06%, 1.34%,
0.93%, 0.93% and 0.65% respectively, of the shares of common stock of the
Company outstanding immediately after the Effective Time, determined after
giving effect to the exercise of the options issued or issuable under the Stock
Option Plan, contingent, in the cases of Messrs. Dell'Anno, Stephan, Beardsley
and Raso, upon their electing in connection with the Merger to retain Company
Stock Options previously granted to them with respect to a specified number of
shares of Harborside Common Stock rather than electing to receive cash for
their options with respect to such shares. See "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" and "THE MERGER--Treatment of Existing
Company Stock Options."
At the Effective Time, the Company will enter into a master rights agreement
for the benefit of the Berkshire Stockholders and the investors in MergerCo,
which agreement will provide, among other things, for the following: (i)
certain rights to participate in future equity financings, which rights will be
granted to all existing holders of Harborside Common Stock who retain shares of
Harborside Common Stock in connection with the Merger; (ii) certain
registration rights; and (iii) certain rights to receive periodic information
concerning the Company. See "THE MERGER AGREEMENT--Master Rights Agreement."
Directors of the Company who have previously deferred certain director fees
pursuant to the Company's Directors Retainer Fee Plan will, as a result of the
Merger transaction, receive cash in exchange for such deferred compensation.
See "THE MERGER--Directors Retainer Fee Plan." As of June 30, 1998, the amount
payable in respect of such deferred compensation would equal approximately
$62,110, in the case of Robert T. Barnum, approximately $59,110, in the case of
David F. Benson, and approximately $14,110, in the case of Sally W. Crawford.
Pursuant to certain agreements dated as of January 15, 1998 between the
Company and each of Messrs. Guillard, Dell'Anno, Stephan, Beardsley and Raso
(the "Change in Control Agreements"), which were entered into prior to the
execution of the Merger Agreement, at the Effective Time each of such officers
will receive a payment equal to his annual salary, except for Mr. Guillard who
will receive a payment equal to 1.5 times his annual salary. The amounts of
such payments will be as follows: Mr. Guillard, $517,500; Mr. Dell'Anno,
$225,000; Mr. Stephan, $190,000; Mr. Beardsley, $200,000; and Mr. Raso,
$135,000. In addition, the Change in Control Agreements provide that all
outstanding loans made by the Company to such officers for the purchase of
stock will be forgiven as of the Effective Time. Messrs. Guillard and Dell'Anno
have such outstanding loans from the Company which, as of March 31, 1998, had a
remaining balance of $225,660 and $110,184, respectively. See "THE MERGER--
Interests of Certain Persons in the Merger."
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Douglas Krupp, a director of the Company, is an affiliate of three out of the
four entities that constitute the Berkshire Stockholders and, as a result of
his affiliate status, is deemed to beneficially own approximately 42% of the
Company's shares. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT." The aggregate cash consideration that such Berkshire Stockholder
affiliates will receive for their 3,382,305 shares (representing approximately
42% of the shares of Harborside Common Stock outstanding as of the Record Date)
in connection with the Merger will depend on the actual Non-Cash Election
Number and the number of shares as to which other Harborside stockholders make
a Non-Cash Election. Assuming that no Harborside stockholder other than the
Berkshire Stockholders elects to receive Non-Cash Election Shares in connection
with the Merger, the aggregate cash consideration that such Berkshire
Stockholder affiliates will receive for their shares in connection with the
Merger will range from $72,042,625 (assuming the Non-Cash Election Number
equals 500,600) to $75,520,125 (assuming the Non-Cash Election Number equals
361,500). If other Harborside stockholders elect to retain shares in connection
with the Merger, the amount of shares to be retained by such Berkshire
Stockholder affiliates will be subject to proration, and any shares not
retained by such Berkshire Stockholder affiliates as a result of such proration
will be converted into the right to receive $25.00 in cash.
The Company has entered into a Non-Compete Agreement, dated as of April 15,
1998, with each of Douglas Krupp, a director and beneficial stockholder of the
Company, and George Krupp, a beneficial stockholder of the Company, pursuant to
which each such individual has agreed for a one-year period commencing at the
Effective Time not to engage in certain business activities or to own certain
equity interests in any person or entity that engages in such business
activities. Pursuant to such agreements, the Company has agreed to pay $250,000
to each of such individuals at the Effective Time.
Pursuant to the Merger Agreement, the Company has agreed that for six years
after the Effective Time it will indemnify all current and former directors,
officers, employees and agents of the Company and its subsidiaries and will,
subject to certain limitations, maintain for six years a directors' and
officers' insurance and indemnification policy containing terms and conditions
which are not less advantageous than the policy in effect as of the date of the
Merger Agreement. See "MATERIAL PROVISIONS OF THE MERGER AGREEMENT--
Indemnification and Insurance."
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Effective
Time: (i) by mutual written consent of MergerCo and Harborside; (ii) by either
MergerCo or Harborside (a) if a court or other United States governmental
entity shall have issued an order or taken any other action permanently
enjoining, restraining or otherwise prohibiting the Merger, and such order or
other action shall have become final and nonappealable or (b) if the Merger
shall not have been consummated on or before January 10, 1999 (other than due
to the failure of the party seeking to terminate the Merger Agreement to
perform its obligations under the Merger Agreement); (iii) by Harborside, if
Harborside receives an Acquisition Proposal (as defined under "MATERIAL
PROVISIONS OF THE MERGER AGREEMENT--No Solicitation of Transactions") in
writing from any person or group as a result of which the Board determines in
good faith, after consultation with outside counsel, that it is obligated by
its fiduciary duty under applicable law to terminate the Merger Agreement; (iv)
by either MergerCo or Harborside, in the event of a breach by the other party
of any representation, warranty, covenant or other agreement contained in the
Merger Agreement which (x) remains uncured within 30 days after giving written
notice and (y) has a material adverse effect with respect to the breaching
party or the breaching party's ability to consummate the transactions
contemplated by the Merger Agreement; or (v) by MergerCo, if Harborside's Board
of Directors shall have (A) withdrawn, modified or amended in any respect
adverse to MergerCo its approval or recommendation of the Merger Agreement or
the Merger, (B) failed to include in this Proxy Statement/Prospectus such
recommendation, (C) recommended any Acquisition Proposal or Acquisition
Transaction (as defined under "MATERIAL PROVISIONS OF THE MERGER AGREEMENT--No
16
<PAGE>
Solicitation of Transactions") from or with a person other than MergerCo or any
of its subsidiaries or affiliates or (D) resolved to do any of the foregoing.
In the event of termination of the Merger Agreement under clause (iii) or (v)
of the preceding sentence, Harborside will be required to reimburse MergerCo
for its actual documented out-of-pocket expenses (not to exceed $4 million). In
addition, if within nine months of any such termination Harborside consummates
an Acquisition Transaction with a person unaffiliated with MergerCo, Harborside
will be required to pay MergerCo a fee of $6 million in addition to the
reimbursement of MergerCo's expenses described in the previous sentence. See
"MATERIAL PROVISIONS OF THE MERGER AGREEMENT--Termination" and "--Expenses and
Certain Required Payments."
AGREEMENTS WITH CERTAIN STOCKHOLDERS
Pursuant to the Stockholder Agreement, the Subject Stockholders, who, as of
the Record Date owned and are entitled to vote an aggregate of approximately
54% of the outstanding shares of Harborside Common Stock, have agreed, among
other things and subject to certain conditions, to vote in favor of the Merger
Agreement and the Merger, and to vote against any competing transactions by a
third party. The Stockholder Agreement also provides that the Berkshire
Stockholders will make Non-Cash Elections for a number of shares of Harborside
Common Stock equal to the Non-Cash Election Number. If the aggregate number of
Electing Shares (including those of the Berkshire Stockholders) exceeds the
Non-Cash Election Number, the Berkshire Stockholders will be subject to
proration with respect to the number of Non-Cash Election Shares they will
receive in the Merger in the same manner as all other electing stockholders.
The aggregate cash consideration that the Berkshire Stockholders will receive
for their 4,004,347 shares (representing approximately 50% of the shares of
Harborside Common Stock outstanding as of the Record Date) in connection with
the Merger will depend on the actual Non-Cash Election Number and the number of
shares as to which other Harborside stockholders make a Non-Cash Election.
Assuming that no Harborside stockholder other than the Berkshire Stockholders
elects to receive Non-Cash Election Shares in connection with the Merger, the
aggregate cash consideration that the Berkshire Stockholders will receive for
their shares in connection with the Merger will range from $87,593,675
(assuming the Non-Cash Election Number equals 500,600) to $91,071,175 (assuming
the Non-Cash Election Number equals 361,500). If other Harborside stockholders
elect to retain shares in connection with the Merger, the amount of shares to
be retained by the Berkshire Stockholders will be subject to proration, and any
shares not retained by the Berkshire Stockholders as a result of such proration
will be converted into the right to receive $25.00 in cash.
In addition, pursuant to the Stockholder Agreement, the Subject Stockholders
may not, directly or indirectly (through representatives or otherwise),
solicit, knowingly encourage, participate in or initiate discussions or
negotiations with, or provide any information to, any person or group (other
than MergerCo or any affiliate, associate or designee of MergerCo) concerning
any proposal for an acquisition of all or any substantial part of the business
and properties or capital stock of the Company and its subsidiaries taken as a
whole, directly or indirectly, whether by merger, consolidation, share
exchange, tender offer, purchase of assets or shares of capital stock or
otherwise; provided, that this prohibition does not restrict any Subject
Stockholder who is a member of the Board of Directors from taking actions in
such person's capacity as a director of the Company to the extent and in the
circumstances permitted by the Merger Agreement. See "MATERIAL PROVISIONS OF
THE MERGER AGREEMENT--No Solicitation of Transactions." Subject to certain
conditions and exceptions, the Subject Stockholders are also not permitted to
dispose of, or enter into any contract, option or other arrangement or
understanding with respect to or consent to the disposition of, any or all of
such Subject Stockholders' Harborside Common Stock or any interest therein. The
covenants and agreements in the Stockholder Agreement terminate on the first to
occur of (i) the Effective Time and (ii) the termination of the Merger
Agreement in accordance with its terms; provided that certain covenants will
survive the Effective Time of the Merger. In addition, the Subject Stockholders
have granted MergerCo an irrevocable option to purchase all shares of
Harborside Common Stock held by the Subject Stockholders at a price per share
equal to $25.00. The option is exercisable, in whole or in part, at any time
(x) after a person other than MergerCo or its affiliates takes certain
17
<PAGE>
specified actions indicating that it might be interested in acquiring the
Company or (y) if the Company withdraws or adversely modifies its
recommendation of the Merger. The option expires upon the earliest to occur of
(a) the Effective Time, (b) 120 days after the commencement of the option
exercise period and (c) the termination of the Merger Agreement pursuant to
specified termination provisions contained therein. For a summary of the
foregoing provisions and certain other provisions of the Stockholder Agreement,
see "CERTAIN RELATED AGREEMENTS--Stockholder Agreement."
STOCKHOLDERS' APPRAISAL RIGHTS
Under Section 262 of the DGCL, a stockholder of the Company may dissent from
the Merger and obtain payment for the fair value of such stockholder's shares
of Harborside Common Stock. In order to properly dissent, (i) the dissenting
stockholder must deliver to the Company, prior to the vote being taken on the
Merger at the Special Meeting, a written demand for appraisal of such
stockholder's shares of Harborside Common Stock if the Merger is effected and
(ii) the dissenting stockholder must not vote in favor of the Merger. See
"STOCKHOLDERS' APPRAISAL RIGHTS" and Annex IV.
PARTIES TO THE MERGER
HARBORSIDE
Harborside is a leading provider of high-quality long-term care and specialty
medical services in the Eastern United States. The Company has focused on
establishing strong local market positions with high-quality facilities in five
principal regions: the Midwest (Ohio and Indiana), New England (Massachusetts
and New Hampshire), the Northeast (Connecticut and Rhode Island), the Southeast
(Florida) and the Mid-Atlantic (New Jersey and Maryland). Harborside's
principal executive offices are located at 470 Atlantic Avenue, Boston,
Massachusetts 02210; telephone number (617) 556-1515.
HH ACQUISITION CORP.
HH Acquisition Corp., a Delaware corporation ("MergerCo"), was organized on
behalf of Investcorp, certain of its affiliates and other international
investors for the purpose of consummating the Merger and has not carried on any
activities to date other than those incident to its formation and the
transactions contemplated by the Merger Agreement. Immediately prior to the
Effective Time, 100% of the outstanding shares of capital stock of MergerCo
will be owned by certain affiliates of Investcorp and other international
investors. Upon consummation of the Merger, MergerCo will merge with and into
Harborside and the separate existence of MergerCo will terminate. The principal
offices of MergerCo are located at 200 Park Avenue, 48th floor, New York, New
York 10166, c/o Gibson, Dunn & Crutcher LLP; telephone number (212) 351-3914.
Investcorp and its affiliates act as principals and intermediaries in
international investment transactions. To date, Investcorp and its affiliates
have completed over 70 transactions with an aggregate value of approximately
$10 billion. Investcorp, its affiliates and their clients currently own
interests in 16 other corporate investments in North America and Europe. The
other international investors who will make common equity investments in
MergerCo are passive, offshore investment entities that regularly co-invest
with Investcorp in corporate investment opportunities sponsored by Investcorp.
See "HH ACQUISITION CORP."
No affiliates of Harborside are affiliated with Investcorp, MergerCo, any of
the entities that will own stock of MergerCo immediately prior to the Effective
Time or any of the entities that will own shares of Harborside Class B Common
Stock, Harborside Class C Common Stock or Harborside Class D Common Stock
immediately after the Effective Time, except that the Senior Management
Stockholders are expected to become directors of MergerCo immediately prior to
the Effective Time.
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RISK FACTORS
Holders of Harborside Common Stock should carefully consider the following
risk factors, as well as the other information set forth elsewhere in this
Proxy Statement/Prospectus, in connection with their evaluation of their
potential election to retain Harborside Common Stock in the Merger. This Proxy
Statement/Prospectus contains, in addition to historical information, certain
forward-looking statements that are subject to risks and other uncertainties.
The Company's actual results may differ materially from those anticipated in
these forward-looking statements. Factors that might cause such a difference
include those discussed below, as well as general economic and business
conditions, competition and other factors discussed elsewhere in the Proxy
Statement/Prospectus. All forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements set forth herein.
SUBSTANTIAL LEVERAGE; LIQUIDITY
Harborside is expected to issue subordinated debt and exchangeable preferred
stock and enter into a new senior secured credit facility (collectively, the
"Merger Financings") to finance the cash consideration to be paid to the
holders of Harborside Common Stock in the Merger, to refinance certain
existing indebtedness of the Company and to pay the fees and expenses incurred
in connection with the Merger and the Merger Financings. In addition, funds
under the new senior secured credit facility will be available to provide for
working capital requirements, the financing of acquisitions and general
corporate purposes. The Company expects that the definitive terms of the
Merger Financings will include significant operating and financial
restrictions, including limits on Harborside's ability to incur indebtedness,
grant liens, sell assets, engage in mergers or consolidations, make
investments and pay dividends, and a requirement to maintain certain financial
ratios, including cash interest and facility rent coverage and leverage
ratios. Upon consummation of the Merger, it is expected that Harborside will
have substantial consolidated indebtedness. As of March 31, 1998, after giving
pro forma effect to the Merger and the Merger Financings and the application
of the net proceeds therefrom, (i) Harborside would have had $121.9 million of
consolidated indebtedness (excluding capital lease obligations) and (ii)
stockholders' equity would have been reduced from $53.7 million to $1.9
million. This reduction in stockholders' equity will occur because the $25.00
per share paid to stockholders and all of the Merger expenses will be charged
to stockholders' equity, and because the approximately $40.0 million of
exchangeable preferred stock is not included in stockholders' equity for SEC
reporting purposes. In addition, Harborside expects to incur material
additional indebtedness in connection with its post-Merger strategy of
pursuing strategic acquisitions.
The Company's high degree of leverage may have important consequences for
Harborside, including the following: (a) Harborside's ability to obtain
additional financing for acquisitions, working capital, capital expenditures
or other purposes may be impaired or any such financing may not be on terms
favorable to Harborside; (b) interest expense may reduce the funds that would
otherwise be available to Harborside for its operations and future business
opportunities; (c) a substantial decrease in net operating cash flows or an
increase in expenses of Harborside could make it difficult for Harborside to
meet its debt service requirements or force it to modify its operations; (d)
substantial leverage may place Harborside at a competitive disadvantage and
may make it more vulnerable to a downturn in its business; (e) certain of such
indebtedness of the Company will be at variable rates of interest, which would
cause the Company to be vulnerable to increases in interest rates; (f) a
substantial portion of the assets of the Company will be pledged to secure its
debt, reducing its ability to obtain additional financing; and (g) the Company
may be hindered in its ability to adjust to rapidly changing market
conditions. See "THE MERGER--Merger Financings."
In addition, such leverage will have a negative effect on Harborside's net
income. For the fiscal year ended December 31, 1997 and three months ended
March 31, 1998, Harborside's net income, on a pro forma basis as adjusted to
give effect to the Merger and the Merger Financings, but excluding non-
recurring items directly attributable to the Merger, would have been $0.4 and
$0.1 million compared to the historical amount for such period of $6.8 and
$1.9 million, respectively. On a pro forma basis, Harborside's net loss
attributable to common
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<PAGE>
stockholders would have been $4.6 and $1.3 million for the year ended December
31, 1997 and the three months ended March 31, 1998, as compared to net income
available to common stockholders of $6.8 and $1.9 million for the same periods
on a historical basis. Pro forma net interest expense (which includes the
amortization of deferred financing charges) would have been $19.0 and $4.9
million for the year ended December 31, 1997 and the three months ended March
31, 1998, as compared to $5.9 and $1.7 million for the same periods on a
historical basis.
Immediately following the Effective Time, the Company is expected to enter
into a new senior secured credit facility for approximately $250 million. The
new credit facility agreement is expected to include certain covenants that,
among other things, restrict: (i) the making of investments (including
acquisitions), loans and advances and the paying of dividends and other
restricted payments; (ii) the incurrence of additional indebtedness; (iii) the
granting of liens, other than certain permitted liens; (iv) mergers,
consolidations and sales of all or a substantial part of the Company's
business or property; (v) the sale of assets; and (vi) the making of capital
expenditures. The Company will also be required to maintain certain financial
ratios, including cash interest and facility rent coverage and leverage
ratios. All of these restrictive covenants may restrict the Company's ability
to expand or to pursue its business strategies. The ability of the Company to
comply with these and other provisions of the new credit facility agreement
may be affected by changes in business conditions or results of operations,
adverse regulatory developments or other events beyond the Company's control.
The breach of any of these covenants could result in a default under the new
credit facility agreement, in which case such lenders could elect to declare
all amounts borrowed under the new credit facility, together with accrued
interest, to be due and payable, and the Company could be prohibited from
making payments with respect to other indebtedness until the default is cured
or all indebtedness under the new credit facility is paid or satisfied in
full. If the Company were unable to repay such borrowings, such lenders could
proceed against their collateral. If the indebtedness under the new credit
facility were to be accelerated, there can be no assurance that the assets of
the Company would be sufficient to repay in full such indebtedness and the
other indebtedness of the Company.
After the Merger is consummated, the Company's principal sources of
liquidity are expected to be cash flow from operations and borrowings under
its new senior secured credit facility. It is anticipated that these funds
will be used to finance acquisitions, finance working capital, meet debt
service and capital expenditure requirements, lease real estate and for
general corporate purposes. However, the Company could be required to attempt
to obtain other debt and/or equity financing to finance any significant
acquisitions or real estate/construction projects in the future. See "THE
MERGER--Merger Financings."
The Company's ability to satisfy its debt obligations will depend upon its
future operating performance, which will be affected by financial, business
and other factors, certain of which are beyond its control, as well as the
availability of revolving credit borrowings under the new senior secured
credit facility or a successor facility. The Company anticipates that its
operating cash flow, together with borrowings under the new senior secured
credit facility, will be sufficient to meet its operating expenses and capital
expenditures and to service its debt requirements as they become due. However,
there can be no assurance that the Company's cash flow, availability under the
new senior secured credit facility and other capital resources will be
sufficient for payment of principal of and interest on its indebtedness. If
the Company's cash flow, availability under the new senior secured credit
facility and other capital resources are insufficient to fund the Company's
debt service obligations, the Company may be forced to reduce or delay capital
expenditures, to sell assets, to restructure or refinance its indebtedness, or
to seek additional equity capital. There can be no assurance that any of such
measures could be implemented on satisfactory terms or, if implemented, would
be successful or would permit the Company to meet its debt service
obligations.
VALUATION OF NON-CASH ELECTION SHARES
The Non-Cash Election Shares (which will be denominated as Harborside Class
A Common Stock upon consummation of the Merger) may have a value that differs
from the $25.00 per share cash consideration to be
20
<PAGE>
received by holders of Harborside Common Stock electing to receive cash for
their shares in the Merger. No third party appraisal or other determination of
value was requested or obtained by the Company with respect to the value of
the Non-Cash Election Shares. In addition, Schroders was not asked to give its
opinion with respect to the fairness of the Non-Cash Election Shares.
Accordingly, Harborside stockholders who elect to retain Non-Cash Election
Shares instead of the $25.00 cash consideration for their shares in connection
with the Merger will be subject to the risk that the per share value of the
Non-Cash Election Shares may be less than the $25.00 cash amount that such
stockholders may elect to receive for their shares of Harborside Common Stock
in connection with the Merger. Such stockholders who elect to retain Non-Cash
Election Shares also should be aware of certain risks to which they may be
subject as a result of such election, including risks associated with owning a
minority position in a leveraged company and risks associated with the
anticipated lack of liquidity of the Harborside Common Stock, as described
elsewhere under "RISK FACTORS," to which they may be subject as a result of
such election.
DELISTING OF COMMON STOCK FROM NYSE
As a result of the Merger, it is likely that the Harborside Common Stock
will no longer meet the listing requirements of the NYSE and the NYSE may
unilaterally act to delist the Harborside Common Stock from the NYSE. Even if
the NYSE does not act unilaterally to delist the Harborside Common Stock, it
is MergerCo's intention that, after the Effective Time, the Harborside Common
Stock will not be listed on the NYSE or any other national securities
exchange. Harborside and MergerCo have each agreed, pursuant to the Merger
Agreement, to cooperate in taking, or causing to be taken, all actions
necessary to delist the Harborside Common Stock from the NYSE. The delisting
of the Harborside Common Stock is likely to have a material adverse effect on
the trading market for, and the value of, the Harborside Common Stock and
there can be no assurance that any trading market will exist for the
Harborside Common Stock after the Merger.
TERMINATION OF SEC REPORTING
As a result of the Merger, it is expected that the shares of Harborside
Common Stock will be held by fewer than 300 stockholders of record. In such a
case, the Company will deregister the Harborside Common Stock from the
reporting requirements of the Exchange Act. If the Harborside Common Stock is
so deregistered, the Company will not be required to comply with the proxy or
periodic reporting requirements of the Exchange Act and does not plan to
provide any reports or information to its public stockholders other than
pursuant to the right to inspect the books and records of Harborside as
required by Delaware law. As a result, the information available to
stockholders on the business and financial condition of the Company would be
reduced, which could have a material adverse effect on the value of the
Harborside Common Stock. Although Harborside currently plans to register
certain debt securities and exchangeable preferred stock under the Securities
Act, Harborside will remain subject to the reporting requirements of the
Exchange Act only for a limited period of time and will remain subject to the
applicable reporting requirements of the terms of such securities only until
such securities are repaid or redeemed. In addition, under the terms of such
securities, the Company will be required to deliver reports only to the
holders of such securities and not to the holders of Harborside Common Stock.
CONTROL OF HARBORSIDE
Upon completion of the Merger, approximately 91% of the outstanding shares
of voting common stock of Harborside will be held by a subsidiary of
Investcorp and ten entities which have entered into revocable management
services or similar agreements with an affiliate of Investcorp, pursuant to
which such affiliate has the authority to direct the voting of such shares for
as long as such agreements are in effect. Accordingly, for so long as such
agreements remain in effect, Investcorp and its affiliates will indirectly
control the power to elect all of Harborside's directors, to appoint new
management and to approve any action requiring the approval of the holders of
Harborside's capital stock voting as a single class, including adopting most
amendments to Harborside's certificate of incorporation and approving mergers
or sales of substantially all of Harborside's assets. The directors so elected
will have the authority to effect decisions affecting the capital structure of
Harborside, including but not limited to the issuance of additional capital
stock, the implementation of stock repurchase programs and the declaration of
dividends.
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In addition, the existence of a small group of controlling stockholders of
Harborside may have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from seeking to acquire, a
majority of the outstanding equity securities of Harborside. A third party
would be required to negotiate any such transaction with such stockholders and
the interests of such stockholders may be different from the interests of
other Harborside stockholders.
Although certain affiliates of Investcorp and certain other international
investors will own approximately 91% of the outstanding voting common stock of
Harborside as of the Effective Time, there is no current intention to engage
in any post-Merger transaction which would eliminate the approximately 9% of
the outstanding common stock of Harborside to be held by existing stockholders
of Harborside (including the Senior Management Stockholders). While it is,
therefore, unlikely that such a transaction would occur in the foreseeable
future, no assurance can be given that such a transaction will not occur.
TERMS OF HARBORSIDE COMMON STOCK--MANDATORY REDEMPTION
If a stockholder elects to retain shares of Harborside Common Stock, upon
consummation of the Merger such shares will be denominated as Harborside Class
A Common Stock and will have rights, powers, privileges and restrictions which
differ in some respects from the current rights, powers, privileges and
restrictions associated with the Harborside Common Stock. Among other things,
the Harborside Class A Common Stock will provide the holders thereof with
rights to "tag-along" in connection with any resale of Harborside Class D
Common Stock (which class will constitute, in the aggregate, approximately 91%
of the outstanding voting common stock of Harborside as of the Effective
Time), and will be subject to mandatory redemption if and to the extent that
the holder thereof does not elect to "tag-along" in connection with a sale of
Class D Common Stock. The effect of the mandatory redemption provision is that
holders of Harborside Class D Common Stock can cause holders of Harborside
Class A Common Stock to sell their Harborside Class A Common Stock at the time
(and upon the same terms) as holders of Harborside Class D Common Stock
propose to sell their Harborside Class D Common Stock, which may not be at a
time or at a price that such holders of Harborside Class A Common Stock desire
to sell their shares. See "DESCRIPTION OF HARBORSIDE CAPITAL STOCK--Harborside
Capital Stock Following the Merger" and Annex V attached hereto.
NO DIVIDENDS
No dividends on shares of Harborside Class A Common Stock following the
Merger are currently contemplated. In addition, the Company's current leasing
and financing arrangements restrict, and it is anticipated that the terms of
the agreements and instruments related to the Merger Financings will prohibit
or otherwise restrict, any future payment of dividends on shares of Harborside
Class A Common Stock. See "PRICES OF HARBORSIDE COMMON STOCK AND DIVIDEND
POLICY."
POTENTIAL DILUTION OF HARBORSIDE STOCKHOLDERS
Following the Merger, Harborside intends to grant options to purchase
additional shares of Harborside capital stock to members of Harborside's
management. The exercise of any stock option or any other issuance of capital
stock will dilute the holdings of persons holding shares of Harborside Common
Stock including persons who retain shares of Harborside Common Stock in
connection with the Merger. See "THE MERGER--Interests of Certain Persons in
the Merger."
NON-CASH ELECTION AND PRORATION INTO CASH
As described herein, a stockholder (other than a Restricted Management
Stockholder) may make a Non-Cash Election and thereby elect to retain shares
of Harborside Common Stock in the Merger, subject to the
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proration procedures described herein under "THE MERGER--Non-Cash Election."
Because the Berkshire Stockholders have already committed to elect to retain
the maximum number of shares of Harborside Common Stock permitted to be
retained under the Merger Agreement, all other stockholders who elect to
retain Harborside Common Stock are assured that they will experience proration
of such shares, resulting in their retaining only a portion of the shares of
Harborside Common Stock they elect to retain and receiving $25.00 per share in
cash for each of their other shares of Harborside Common Stock.
FEDERAL INCOME TAX TREATMENT
A stockholder who makes a Non-Cash Election with respect to all or part of
its shares, and who therefore receives cash and retains a portion of such
stockholder's Harborside Common Stock, may, depending on the particular
circumstances of the stockholder, be required to treat the receipt of a
portion of the cash received in the Merger as a distribution by the Company
that is taxable to the stockholder as ordinary dividend income to the extent
of the Company's current and accumulated earnings and profits (rather than as
the receipt of proceeds from the sale or exchange of the Harborside Common
Stock, which would generally receive capital gain treatment). Because such
dividend treatment is determined by the particular facts and circumstances of
the stockholder, it is uncertain whether or to what extent such dividend
treatment will be required with respect to any particular stockholder who
retains a portion of such stockholder's Harborside Common Stock. As a result,
no opinion of counsel to the Company is being given as to whether or to what
extent dividend treatment will be required. No such dividend treatment should
be applicable to stockholders who do not elect to retain shares and receive
cash for all of their shares in the Merger. See "THE MERGER--Material Federal
Income Tax Consequences--Stockholders Receiving Cash and Retaining a Portion
of Their Stock" for a more detailed discussion of the tax consequences of
receiving cash and retaining Harborside Common Stock.
ACHIEVING POST-MERGER BUSINESS STRATEGY
The post-Merger business strategy that has been developed is based on the
Company's operations and strategic planning process. See "THE COMPANY--Post-
Merger Business Strategy." After the Merger, the Company may decide to alter
or discontinue certain parts of the post-Merger business strategy described
herein or may adopt alternative or additional strategies. There can be no
assurance that such post-Merger business strategy, if implemented, will be
successful or will improve operating results. Further, other conditions may
occur, including, but not limited to, increased competition or adverse
regulatory developments, which may offset any improved operating results that
are attributable to such business strategy.
ACQUISITION STRATEGY
The Company intends to pursue acquisitions in the future as part of its
post-Merger business strategy. There can be no assurance that such
acquisitions will not adversely affect the Company's results of operations or
financial condition. In addition, there can be no assurance that the Company
will be able to locate suitable acquisition candidates in the future,
consummate acquisitions on favorable terms or successfully integrate newly
acquired businesses with the Company's operations.
FRAUDULENT CONVEYANCE CONSIDERATIONS
The incurrence of indebtedness by the Company, such as the senior
subordinated debt, and the subsequent transfer of a portion of the proceeds
thereof to the Company's stockholders to pay $25.00 in cash per share of
Harborside Common Stock may be subject to review under federal bankruptcy law
or relevant state fraudulent conveyance laws if a bankruptcy case or lawsuit
is commenced by or on behalf of unpaid creditors of the Company. Under these
laws, if, in a bankruptcy or reorganization case or a lawsuit by or on behalf
of unpaid creditors of the Company, a court were to find that, at the time of
the Merger and the related Merger Financings, (i) the Company incurred such
indebtedness and paid the $25.00 per share cash payment with the intent of
hindering, delaying or defrauding current or future creditors or (ii) (a) the
Company received less than reasonably equivalent value or fair consideration
in connection with the Merger and the related Merger Financings and (b)
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the Company (1) was insolvent or was rendered insolvent by reason of the
Merger or the related Merger Financings and transactions related thereto, (2)
was engaged, or was about to engage, in a business or transactions for which
its assets constituted unreasonably small capital, or (3) intended to incur,
or believed that it would incur, debts beyond its ability to pay as such debts
matured (as all of the foregoing terms are defined in or interpreted under the
relevant fraudulent transfer or conveyance statutes), then such court could
determine that the cash payment of $25.00 per share to the stockholders of the
Company violated applicable provisions of the United States Bankruptcy Code
and/or applicable state fraudulent conveyance laws, which determination would
permit the bankruptcy trustee or debtor in possession or unpaid creditors to
avoid the $25.00 per share cash payment and recover such $25.00 per share cash
payment from the Company's stockholders.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law of the jurisdiction that is being applied in any
such proceeding. Generally, however, the Company would be considered insolvent
if, at the time it incurred the indebtedness, either (i) the sum of its debts
(including contingent liabilities) is greater than its assets, at a fair
valuation, or (ii) the present fair sale value of its assets is less than the
amount required to pay the probable liability on its total existing debts and
liabilities (including contingent liabilities) as they become absolute and
matured. There can be no assurance as to what standards a court would use to
determine whether the Company was solvent at the relevant time. In rendering
their opinions in connection with the borrowings under the senior secured
credit facility and the issuance of the senior subordinated debt, none of the
counsel for the Company, MergerCo or the lenders will express any opinion as
to the applicability of federal or state fraudulent transfer and conveyance
laws.
The Company believes that at the time the obligations in connection with the
Merger and related Merger Financings are initially incurred, the Company will
be (a) neither insolvent nor rendered insolvent thereby, (b) in possession of
sufficient capital to run its businesses effectively and (c) incurring debts
within its ability to pay as the same mature or become due. In reaching the
foregoing conclusions, the Company has relied upon its analyses of internal
cash flow projections and estimated values of assets and liabilities of the
Company. As a condition to the Company's obligations under the Merger
Agreement, the Company will receive an opinion or certificate of a firm expert
in such matters confirming the solvency of the Company after giving effect to
the transactions contemplated by the Merger Agreement, including the related
Merger Financings. There can be no assurance, however, that a court passing on
such questions would reach the same conclusions.
REIMBURSEMENT BY THIRD-PARTY PAYORS
The Company received approximately 25.9%, 40.0% and 34.1% of its total net
revenues from Medicare patients, Medicaid patients, and private and other
patients, respectively, for the year ended December 31, 1997. The Company
typically receives higher payment rates for services provided to private pay
and Medicare patients than for equivalent services provided to patients
eligible for Medicaid. Any material decline in the number of private or
Medicare patients or increases in the number of Medicaid patients could
materially adversely affect the Company.
Both governmental and other third-party payors, such as commercial insurers,
managed care organizations, HMOs and PPOs, have employed cost containment
measures designed to limit payments made to healthcare providers such as the
Company. These measures include the adoption of initial and continuing
recipient eligibility criteria, the adoption of coverage criteria and the
establishment of payment ceilings. Furthermore, governmental reimbursement
programs are subject to statutory and regulatory changes, retroactive rate
adjustments, administrative rulings and government funding restrictions. There
can be no assurance that payments under state or federal governmental programs
will remain at levels comparable to present levels or will be sufficient to
cover the costs allocable to patients eligible for reimbursement pursuant to
such programs. In addition, there can be no assurance that the Company's
facilities or the services provided by the Company will continue to meet the
requirements for participation in such programs or that the states in which
the Company operates will continue to meet their Medicaid reimbursement
obligations on a timely basis, if at all. Any of the foregoing could
materially adversely affect the Company.
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The Balanced Budget Act (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. (See "THE
COMPANY--Government Regulation" for more information about the prospective
payment system for skilled nursing facilities.) The BBA also provides new
limits for the reimbursement of Part B therapy services and requires skilled
nursing facilities to institute "consolidated billing." Regulations regarding
the prospective payment system were published on May 12, 1998. As the
regulations were published recently, the Company has not been able to fully
assess and quantify the potential impact of the regulations on the Company's
consolidated financial position, results of operations or liquidity. Based on
a preliminary assessment, the Company believes that the new regulations will
result in a reduction of the Company's average Medicare per diem reimbursement
rate, which the Company expects to be able to substantially offset primarily
through reductions in facility operating costs. However, no assurance can be
given that the Company will be able to reduce such costs.
The Company is subject to periodic audits by the Medicare and Medicaid
programs, and the paying agencies for these programs have various rights and
remedies against the Company if they assert that the Company has overcharged
the programs or failed to comply with program requirements. Such paying
agencies could seek to require the Company to repay any overcharges or amounts
billed in violation of program requirements, or could make deductions from
future amounts due to the Company. Such agencies could also impose fines,
criminal penalties or program exclusions. Any such action could materially
adversely affect the Company. See "THE COMPANY--Sources of Revenues" and "--
Governmental Regulation."
GEOGRAPHIC CONCENTRATION
The Company's long-term care facilities are located in Ohio, Indiana,
Massachusetts, New Hampshire, New Jersey, Connecticut, Florida, Rhode Island
and Maryland. A substantial portion of the Company's total net revenues are
derived from its operations in Ohio, Florida and Connecticut. On a pro forma
basis, after giving effect to the Completed 1997 Acquisitions and the
Completed 1998 Acquisitions (as such terms are defined under "SELECTED
CONSOLIDATED FINANCIAL AND OPERATING DATA"), the Company derived 32.1%, 17.3%
and 15.4%, respectively, of its net patient service revenues from these three
states, for the year ended December 31, 1997. Any adverse changes in the
regulatory environment or to the reimbursement rates paid in the states in
which the Company operates, particularly in Ohio, Florida and Connecticut,
could have a material adverse effect on the Company. See "THE COMPANY--Sources
of Revenues."
GOVERNMENTAL REGULATION
The federal government and all the states in which the Company operates
regulate various aspects of the Company's business. In addition to the
regulation of Medicare and Medicaid reimbursement rates, 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 that regulate, among other matters, the number of licensed beds, the
provision of services, the distribution of pharmaceuticals, equipment,
staffing (including professional licensing), operating policies and
procedures, fire prevention measures, environmental matters and compliance
with building and safety codes. The failure to maintain or renew any required
regulatory approvals or licenses could materially adversely affect the
Company's ability to provide its services and receive reimbursement of its
expenses. There can be no assurance that federal, state or local governments
will not impose additional restrictions on the Company's activities which
could materially adversely affect the Company.
Long-term care facilities are subject to periodic inspection by governmental
authorities to assure compliance with the standards established for continued
licensing under state law and for certification under the Medicare or Medicaid
programs, including a review of billing practices and policies. Failure to
comply with these standards could result in the denial of reimbursement, the
imposition of fines, temporary suspension of admission of new patients,
suspension or decertification from the Medicare or Medicaid programs,
restrictions on the Company's ability to acquire new facilities or expand
existing facilities and, in extreme cases, the revocation of a facility's
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license or closure of a facility. There can be no assurance that the
facilities currently owned or leased by the Company will continue to meet the
requirements for state licensure or participation in the Medicare or Medicaid
programs nor can there be any assurance that the facilities acquired or
developed by the Company in the future will initially meet or continue to meet
these requirements.
Many states, including each state in which the Company currently operates
long-term care facilities except Indiana, control the supply of licensed long-
term care beds through certificate of need ("CON") programs, which require
approval for the construction of new long-term care facilities, the addition
of licensed beds and certain capital expenditures at such facilities.
Indiana's CON program expired on June 30, 1998. To the extent that a CON or
other similar approval is required for the acquisition or construction of new
facilities or the expansion of the number of licensed beds, services or
existing facilities, the Company could be adversely affected by the failure or
inability to obtain such approval, changes in the standards applicable for
such approval and possible delays and expenses associated with obtaining such
approval. Several of the states in which the Company operates have imposed
moratoriums on the issuance of CONs for new skilled nursing facility beds.
Connecticut has imposed a moratorium on the addition of any new skilled
nursing facility beds, including chronic and convalescent nursing facility
beds and rest home beds with nursing supervision, until the year 2002.
Massachusetts has imposed a moratorium on the addition of any new skilled
nursing facility beds until the year 2000, except that an existing facility
can add up to 12 beds without being subject to CON review. New Hampshire has
imposed a moratorium on the addition of any new beds to skilled nursing
facilities, intermediate care homes and rehabilitation homes until December
31, 1998. Legislation has been introduced in New Hampshire to extend this
moratorium until the year 2001, or in the alternative until the year 2003.
Ohio has imposed a moratorium until the year 1999 on the addition of any new
skilled nursing facility beds. Rhode Island has imposed a moratorium on the
issuance of any new initial licenses for skilled nursing facilities and on the
increase in the licensed bed capacity of any existing licensed skilled nursing
facility until July 1, 1999, except that an existing facility may increase its
licensed bed capacity to the greater of ten beds or 10% of the facility's
licensed bed capacity. The other states in which the Company conducts business
do not currently have a moratorium on new skilled nursing facility beds in
effect, but New Jersey only accepts applications for a CON when the state CON
agency issues a call for additional long-term care beds. There is presently no
such call for additional beds. These actions will restrict the Company's
ability, and that of its competitors, to expand its existing facilities or
construct new facilities in these states. In addition, in most states the
reduction of the number of licensed beds or the closure of a facility requires
the approval of the appropriate state regulatory agency and, if the Company
were to seek to reduce the number of licensed beds at a facility or to close a
facility, the Company could be adversely affected by a failure to obtain or a
delay in obtaining such approval.
The Company is also subject to federal and state laws that govern financial
and other arrangements between healthcare providers. Federal laws, as well as
the laws of certain states, prohibit direct or indirect payments or fee
splitting arrangements between healthcare providers that are designed to
induce or encourage the referral of patients to, or the recommendation of, a
particular provider for medical products and services. These laws include the
federal "anti-kickback law" which prohibits, among other things, the offer,
payment, solicitation or receipt of any form of remuneration in return for the
referral of Medicare and Medicaid patients. A wide array of relationships and
arrangements among healthcare providers, 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. A violation of the federal anti-kickback law could result in the
loss of eligibility to participate in the Medicare or Medicaid programs, or in
civil or criminal penalties for individuals or entities. Violation of state
anti-kickback laws could lead to loss of licensure, significant fines and
other penalties for individuals or entities.
Federal and state authorities are devoting increased attention and resources
to anti-fraud initiatives against healthcare providers. The BBA and the
Healthcare Insurance Portability and Accountability Act of 1996 expanded the
penalties for healthcare fraud, including broader provisions for the exclusion
of healthcare providers from the Medicare and Medicaid programs. Further,
under Operation Restore Trust, a major anti-fraud initiative of the Office of
the Inspector General (the "OIG") of the U.S. Department of Health and Human
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Services, the OIG has focused on detecting fraudulent billing practices
committed by home health agencies, durable medical equipment suppliers,
hospice programs and skilled nursing facilities in certain states
participating in a demonstration project. The initial outcomes of Operation
Restore Trust have led the OIG to expand the demonstration project to
additional states. Currently, the Company has operations in three of the
states participating in this project: Massachusetts, New Jersey and Ohio.
While the Company believes that the Company's billing practices are consistent
with the requirements of the Medicare and Medicaid programs, those criteria
are subject to interpretation. There can be no assurance that such anti-fraud
initiatives will not adversely affect the Company.
The federal government has recommended that healthcare providers establish
and implement an effective compliance program as one means of preventing or
detecting violations of applicable healthcare laws. The federal government
also has indicated that the maintenance of an effective compliance program may
be a factor considered by the government in evaluating what sanctions to
impose when violations of healthcare laws have been detected. Maintenance of
an effective compliance program may serve to reduce any fines or penalties
levied by the government for violation of law. The Company believes it has
developed and implemented such a compliance program. The Company, as an
ongoing matter, will continue to develop and refine its program. See "THE
COMPANY--Sources of Revenues" and "--Governmental Regulation."
RISK OF ADVERSE EFFECT OF HEALTHCARE REFORM
The Company is subject to extensive governmental healthcare regulation. In
addition, there are generally numerous legislative and executive initiatives
at the federal and state levels for comprehensive reforms affecting the
payment for and availability of healthcare services. Changes in laws, new
interpretations of existing laws or changes in reimbursement methodologies
could have a significant effect on certain or all of the Company's services
which are eligible for reimbursement, the costs of providing such services and
the amounts of reimbursement provided for the delivery of eligible services.
It is not clear at this time which legislative proposals, if any, will be
adopted or, if adopted, what effect such proposals would have on the Company's
business. There can be no assurance that future changes in enacted legislation
or the administrative practices required to interpret or administer
governmental healthcare programs will not have a material adverse affect on
the Company. See "THE COMPANY--Sources of Revenues" and "--Governmental
Regulation."
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. 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.
In addition, consolidation in the long-term care industry has resulted in the
Company being faced with larger competitors, many of whom have significant
financial and other resources. The Company expects that competition for the
acquisition of long-term care facilities may increase in the future as the
demand for long-term care increases and as the industry trend of consolidation
of providers continues.
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, however, 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, with the exception of Indiana which
terminated its CON program as of June 30, 1998. The Company believes that
these regulations reduce the possibility of overbuilding and promote higher
utilization of existing facilities. However, a relaxation
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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. In the states in which the Company currently
operates, except Indiana, these conversions are subject to state CON
regulations. The Company believes that the application of the new Medicare
prospective payment system rules will make such conversions less desirable.
New Jersey recently enacted legislation permitting acute care hospitals to
offer subacute care services under their existing hospital licenses subject to
first obtaining CON approval pursuant to an expedited CON review process. Ohio
has imposed a moratorium on the conversion of acute care hospital beds into
long-term care beds through June 30, 1999. See "THE COMPANY--Governmental
Regulation" and "--Competition."
STAFFING AND LABOR COSTS
Staffing and labor costs represent the Company's largest expense. The
Company competes with other healthcare providers in attracting and retaining
qualified or skilled personnel. The long-term care industry in general, and
the Company in particular, have, at times, experienced shortages of qualified
personnel. In addition, the long-term care industry typically experiences high
turnover of less skilled employees. 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 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. Approximately 450 employees at five of the
Company's facilities are covered by collective bargaining agreements. Although
the Company believes that it maintains good working 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. See "THE COMPANY--
Employees."
LIABILITY, INSURANCE AND LEGAL PROCEEDINGS
The Company's business entails an inherent risk of liability. In recent
years, participants in the long-term care industry have been subject to
lawsuits alleging malpractice or related legal theories, many of which involve
large claims and significant legal costs. The Company expects that from time
to time it may be subject to such suits as a result of the nature of its
business. The Company currently maintains insurance policies in amounts and
with coverage and deductibles it deems appropriate, based on the nature and
risks of its business, historical experience and industry standards. There can
be no assurance, however, that claims in excess of the Company's insurance
coverage or claims not covered by insurance will not arise. 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. In
addition, the Company's insurance policies must be renewed annually. There can
be no assurance that the Company will be able to obtain liability insurance
coverage in the future on acceptable terms. The Company is self-insured
(subject to contributions by covered employees) with respect to most of the
healthcare benefits and workers' compensation benefits available to its
employees. The Company believes that it has adequate resources to cover any
self-insured claims and the Company maintains excess liability coverage to
protect it against unusual claims in these areas. However, there can be no
assurance that the Company will continue to have such resources available to
it or that substantial claims will not be made against the Company. See "THE
COMPANY--Insurance" and "--Legal Proceedings."
ENVIRONMENTAL AND OCCUPATIONAL HEALTH AND SAFETY MATTERS
The Company is 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 such as the
Company are: air and water quality control requirements, occupational health
and safety requirements,
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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 remediating any hazardous substances that have
come to be located on the property, or such substances that may have migrated
off of, or been emitted, discharged, leaked, escaped or transported from, the
property. The Company's operations may involve the handling, use, storage,
transportation, disposal and/or discharge of hazardous, infectious, toxic,
radioactive, flammable and other hazardous materials, wastes, pollutants or
contaminants. Such activities may harm individuals, property or the
environment; may interrupt operations and/or increase their costs; may result
in legal liability, damages, injunctions or fines; may result in
investigations, administrative proceedings, penalties or other governmental
agency actions; and may not be covered by insurance. The cost of any required
remediation or removal of hazardous or toxic substances could be substantial
and the liability of an owner or operator for any property is generally not
limited under applicable laws and could exceed the property's value. Although
the Company is not aware of any material liability of the Company 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. See "--Governmental
Regulation."
IMPACT OF YEAR 2000 ISSUE
The Year 2000 issue arises as the result of computer programs having been
written, and systems having been designed, using two digits rather than four
to define the applicable year. Consequently, such software has the potential
to recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions, send bills for services or engage in similar normal business
activities. The Company is preparing all of its software products and internal
computer systems to be Year 2000 compliant. The Company has replaced its
financial reporting and payroll systems with systems that are Year 2000
compliant. The Company is in the process of evaluating several clinical
information software products, including one which is being installed in 13 of
its facilities, with the expectation that it will identify a Year 2000
compliant standard clinical information and patient billing system which will
be implemented at each of the Company's facilities. The Company currently
estimates that it will complete the selection of the standard clinical
information and patient billing software during 1998 and finalize the
conversion of its existing systems to the new platform during 1999. Although
the Company does not expect the cost of the conversion of its clinical and
patient billing systems to have a material adverse effect on its business or
future results of operations, there can be no assurance that the Company will
not be required to incur significant unanticipated costs in relation to its
compliance obligations. The Company currently estimates that full compliance
will be achieved during 1999; however, there can be no assurance 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. If the systems of the Company, businesses
acquired by the Company in the future or other companies on whose services the
Company depends or with whom the Company's systems interface are not Year 2000
compliant, there could be a material adverse effect on the Company's financial
condition or results of operations.
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated balance sheet data of
Harborside as of December 31, 1996 and 1997 and selected consolidated income
statement data for each of the years in the three year period ended December
31, 1997 which have been derived from, and should be read in conjunction with,
the audited consolidated financial statements of Harborside appearing
elsewhere in this Proxy Statement/Prospectus. The selected consolidated
balance sheet data as of March 31, 1998 and selected consolidated income
statement data for the three months ended March 31, 1997 and March 31, 1998
have been derived from, and should be read in conjunction with, the unaudited
consolidated financial statements of Harborside appearing elsewhere in this
Proxy Statement/Prospectus. The following table also sets forth selected
unaudited pro forma consolidated financial data of Harborside (A) under the
caption "Pro Forma Before Merger" to give effect to (i) the asset acquisition
of Access Rehabilitation, Inc. ("Access Rehabilitation") on July 1, 1997, the
acquisition of four facilities in Massachusetts (the "Massachusetts
Facilities") on August 1, 1997, the acquisition of three facilities in Dayton,
Ohio (the "Dayton Facilities") on September 1, 1997 and the acquisition of
five facilities in Connecticut (the "Connecticut Facilities") on December 1,
1997 (collectively, the "Completed 1997 Acquisitions"); and (ii) the
acquisition of two facilities in Ohio (the "Briarfield Facilities") on April
1, 1998 and the acquisition of two facilities in Rhode Island (the "Rhode
Island Facilities") on May 8, 1998 (collectively, the "Completed 1998
Acquisitions") and (B) under the caption "Pro Forma" to give effect to the
Completed 1997 Acquisitions, the Completed 1998 Acquisitions, and the Merger.
Such unaudited pro forma financial information has been derived from, and
should be read in conjunction with, the Unaudited Pro Forma Consolidated
Financial Statements, including the notes thereto, set forth under the caption
"UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION," and the audited
consolidated financial statements of Harborside and the audited financial
statements of the Massachusetts Facilities and the Dayton Facilities appearing
elsewhere in this Proxy Statement/Prospectus. The unaudited pro forma balance
sheet data reflects the transactions reflected therein as if they had occurred
as of March 31, 1998. The unaudited pro forma statement of operations data
reflects the transactions reflected therein as if they had occurred on January
1, 1997 and excludes nonrecurring items directly attributable to the Merger.
The pro forma adjustments were applied to the historical financial statements
of the Company to reflect and account for the Merger as a recapitalization.
Accordingly, the historical basis of Harborside's assets and liabilities has
not been affected by the Merger.
30
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------- ------------------------------------
1997 1998
PRO FORMA PRO FORMA 1998
BEFORE 1997 PRO BEFORE PRO
1993 1994 1995 1996 1997 MERGER FORMA 1997 1998 MERGER FORMA
------- ------- -------- -------- -------- --------- --------- -------- ------- --------- -------
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA(1):
Total net
revenues........... $75,101 $86,376 $109,425 $165,412 $221,777 $305,334 $305,365 $ 47,384 $72,454 $77,302 $77,310
------- ------- -------- -------- -------- -------- -------- -------- ------- ------- -------
Expenses:
Facility
operating......... 57,412 68,951 89,378 132,207 176,404 242,864 242,864 37,452 57,381 61,212 61,212
Management fees... -- -- -- -- -- 3,137 3,137 -- -- 371 371
General and
administrative.... 3,092 3,859 5,076 7,811 10,953 11,332 11,332 2,389 3,365 3,365 3,365
Service charges
paid to
affiliate(2)...... 746 759 700 700 708 708 1,908 177 313 313 613
Special
compensation and
other............. -- -- -- 1,716 -- -- -- -- -- -- --
Depreciation and
amortization...... 4,304 4,311 4,385 3,029 4,074 4,074 6,541 922 1,085 1,085 1,577
Synthetic lease
rent.............. -- -- -- -- 511 4,286 -- -- 450 1,100 --
Facility rent..... 525 1,037 1,907 10,223 11,935 19,718 19,718 2,622 5,106 5,106 5,106
------- ------- -------- -------- -------- -------- -------- -------- ------- ------- -------
Total expenses.... 66,079 78,917 101,446 155,686 204,585 286,119 285,500 43,562 67,700 72,552 72,244
------- ------- -------- -------- -------- -------- -------- -------- ------- ------- -------
Income from
operations(2)...... 9,022 7,459 7,979 9,726 17,192 19,215 19,865 3,822 4,754 4,750 5,066
Other:
Net interest
expense........... (4,385) (4,437) (4,998) (4,531) (5,596) (5,596) (17,312) (1,375) (1,579) (1,579) (4,855)
Amortization of
debt issuance
costs............. (355) (172) (109) (103) (257) (257) (1,705) (17) (71) (71) (71)
------- ------- -------- -------- -------- -------- -------- -------- ------- ------- -------
Total interest
expense, net.... (4,740) (4,609) (5,107) (4,634) (5,853) (5,853) (19,017) (1,392) (1,650) (1,650) (4,926)
Loss on
investment in
limited
partnership....... -- (448) (114) (263) (189) (189) (189) 31 (31) (31) (31)
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 13,173 659 2,461 3,073 3,069 109
Income taxes...... -- -- -- (809) (4,347) (5,136) (256) (959) (1,198) (1,196) (42)
------- ------- -------- -------- -------- -------- -------- -------- ------- ------- -------
Income before
extraordinary
loss.............. 1,985 374 1,234 4,020 6,803 8,037 403 1,502 1,875 1,873 67
Extraordinary
loss on early
retirement of
debt, net of
tax............... -- -- -- (1,318) -- -- -- -- -- -- --
------- ------- -------- -------- -------- -------- -------- -------- ------- ------- -------
Net income........ $ 1,985 $ 374 $ 1,234 $ 2,702 $ 6,803 $ 8,037 $ 403 $ 1,502 $ 1,875 $ 1,873 $ 67
======= ======= ======== ======== ======== ======== ======== ======== ======= ======= =======
Net income........ $ 1,985 $ 374 $ 1,234 $ 2,702 $ 6,803 $ 8,037 $ 403 $ 1,502 $ 1,875 $ 1,873 $ 67
Preferred
dividends(3)...... -- -- -- -- -- -- (5,020) -- -- -- (1,351)
------- ------- -------- -------- -------- -------- -------- -------- ------- ------- -------
Net income (loss)
available
(attributable) to
common
stockholders...... $ 1,985 $ 374 $ 1,234 $ 2,702 $ 6,803 $ 8,037 $ (4,617) $ 1,502 $ 1,875 $ 1,873 $(1,284)
======= ======= ======== ======== ======== ======== ======== ======== ======= ======= =======
Net income (loss)
available
(attributable) to
common
stockholders per
share--basic...... $ 0.85 $ 1.00 $ (0.66) $ 0.19 $ 0.23 $ 0.23 $ (0.18)
Net income (loss)
available
(attributable) to
common
stockholders per
share--diluted.... $ 0.84 $ 0.99 $ (0.66) $ 0.19 $ 0.23 $ 0.23 $ (0.18)
</TABLE>
[Table continued on next page]
31
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------- -----------------------------------------
1997 1998
PRO FORMA PRO FORMA
BEFORE 1997 BEFORE 1998 PRO
1993 1994 1995 1996 1997 MERGER PRO FORMA 1997 1998 MERGER FORMA
------ ------- --------- ---------- ---------- --------- --------- ---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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(4):
Basic........... 4,425,000 4,425,000 6,396,142 8,037,026 8,037,026 7,027,517 8,024,746 8,058,548 8,058,548 7,027,517
Diluted......... 4,425,000 4,425,000 6,396,142 8,138,793 8,138,793 7,027,517 8,028,203 8,303,703 8,303,703 7,027,517
OPERATING DATA
(AS OF END OF
YEAR):
Facilities
operated(5)...... 17 19 20 30 45 49 49 31 45 49 49
Licensed
beds(5).......... 2,149 2,365 2,471 3,700 5,468 5,983 5,983 3,864 5,468 5,983 5,983
Average occupancy
rate(6).......... 93.7% 92.6% 92.5% 92.6% 92.3% 92.3% 93.1%
BALANCE SHEET
DATA (As of
Period End)(1):
Working
capital......... $6,511 $ 13,915 $ 10,735 $ 16,826 $ 22,554 $ 16,923 $ 21,177 $ 21,177 $ 20,841
Total assets.... 85,472 93,876 92,632 141,799 168,562 145,430 172,441 172,441 248,958
Total debt...... 40,708 53,296 43,496 18,208 33,642 18,167 33,595 33,595 121,889
Capital lease
obligation...... -- -- -- 57,277 56,285 57,080 56,270 56,270 56,270
Exchangeable
preferred stock,
redeemable(3)... -- -- -- -- -- -- -- -- 40,000
Stockholders'
equity.......... 4,918 2,866 4,130 44,880 51,783 46,382 53,681 53,681 1,904
</TABLE>
32
<PAGE>
- --------
(1) In 1993, 1994 and 1995, financial and operating data combine the
historical results of the Predecessor Entities (as defined below) that
became subsidiaries of the Company through the IPO Reorganization (as
defined under "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Overview--General") that occurred immediately
prior to the Company's initial public offering on June 14, 1996 (the
"Offering"). Prior to the IPO Reorganization, the Predecessor Entities
(primarily partnerships and subchapter S corporations) were not directly
subject to Federal or state income taxation. In calculating net income,
tax expense of 39% has been reflected for the periods prior to the IPO
Reorganization as if the Company had always owned the Predecessor
Entities.
(2) 1997 Pro Forma and 1998 Pro Forma include $1.2 and $0.3 million,
respectively, of non-cash charges representing the amortization of prepaid
management fees to Investcorp International, Inc., an affiliate of
Investcorp.
(3) Dividends on the exchangeable preferred stock are calculated based on an
assumed annual rate of 12%.
(4) In connection with 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 in
connection with the IPO Reorganization. For 1996 pro forma net income per
share is based on 4,400,000 shares outstanding for the entire year and the
appropriate weighting for shares issued in connection with the Offering.
(5) "Facilities operated" and "Licensed beds" include two managed facilities
with 178 total licensed beds.
(6) "Average occupancy rate" excludes managed facilities, and is computed by
dividing the number of billed licensed bed days by the total number of
available licensed bed days during each of the periods indicated.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
GENERAL
Harborside is a leading provider of high-quality long-term care and
specialty medical services in the Eastern United States. The Company has
focused on establishing strong local market positions with high-quality
facilities in five principal regions: the Midwest (Ohio and Indiana), New
England (Massachusetts and New Hampshire), the Northeast (Connecticut and
Rhode Island), the Southeast (Florida) and the Mid-Atlantic (New Jersey and
Maryland). As of June 30, 1998, the Company operated 49 long-term care
facilities with 5,983 licensed beds. The Company provides a broad continuum of
medical services including: (i) traditional skilled nursing care and (ii)
specialty medical services, including a variety of subacute care programs such
as orthopedic rehabilitation, CVA/stroke care, cardiac recovery, pulmonary
rehabilitation and wound care, as well as distinct programs for the provision
of care to Alzheimer's and hospice patients. As part of its subacute services,
the Company provides physical, occupational and speech rehabilitation therapy
services, both at Company-operated and non-affiliated facilities, through its
wholly-owned subsidiary, Theracor.
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 conducted operations 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 in
return an aggregate of 4,400,000 shares of the Company's common stock (the
"IPO Reorganization").
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 for periods 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
financial statements for periods prior to the date of the Offering do 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 audited
consolidated financial statements of the Company included elsewhere in this
Proxy Statement/Prospectus.
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 audited consolidated financial
statements of the Company included elsewhere in this Proxy
Statement/Prospectus, effective December 31, 1995, KYP sold the Seven
Facilities and a subsidiary of the Company began leasing the facilities from
the buyer. Prior to December 31, 1995, the accounts of KYP were included in
the Company's combined financial statements and the interest of the
Unitholders was reflected as minority interest. The net gain of $4,869,000
recognized by KYP in connection with the sale of the Seven Facilities was
allocated to the KYP Unitholders and is reflected in "minority interest in net
income." In March 1996, a liquidating distribution was paid to the
Unitholders.
As described in Note D to the audited consolidated financial statements of
the Company included elsewhere in this Proxy Statement/Prospectus, the Company
accounts for its investment in one of its owned facilities using the equity
method.
REVENUES
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. The Company derives its
34
<PAGE>
net patient service 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 total net revenues are
influenced by a number of factors, including: (i) the licensed bed capacity of
its facilities; (ii) the occupancy rates of its facilities; (iii) the payor
mix of its facilities 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
patients and paid for by the respective payment sources. 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
payors, primarily the Medicare and Medicaid programs, are recorded at amounts
estimated to be realized under these contractual arrangements. 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 Company's rehabilitation service
revenues are received directly from non- affiliated long-term care facilities,
which in turn are reimbursed by Medicare or other payors.
OPERATING EXPENSES
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.
POTENTIAL IMPACT OF MEDICARE PPS
Regulations regarding the Medicare prospective payment system were published
on May 12, 1998. (See "THE COMPANY--Government Regulation" for more
information about the prospective payment system for skilled nursing
facilities.) As the regulations were published recently, the Company has not
been able to fully assess and quantify the potential impact of the regulations
on the Company's consolidated financial position, results of operations or
liquidity. Based on a preliminary assessment, the Company believes that the
new regulations will result in a reduction of the Company's average Medicare
per diem reimbursement rate, which the Company expects to be able to
substantially offset primarily through reductions in facility operating costs.
However, no assurance can be given that the Company will be able to reduce
such costs.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997
Total Net Revenues. Total net revenues increased by $25,070,000, or 52.9%,
from $47,384,000 in the first quarter of 1997 to $72,454,000 in the first
quarter of 1998. This increase resulted primarily from the acquisition of the
Harford Gardens facility on March 1, 1997, the Massachusetts Facilities on
August 1, 1997, the Dayton Facilities on September 1, 1997 and the Connecticut
Facilities on December 1, 1997. Additionally, total net revenues increased as
a result of the generation of additional revenues from rehabilitation therapy
services provided to non-affiliated long-term care facilities and increased
net patient service revenues per patient day at the Company's "same store"
facilities. Of such increase, $1,329,000, or 5.3% of the increase, resulted
from the operation of the Harford Gardens facility; $4,848,000, or 19.3% of
the increase, resulted from the operation of the Massachusetts Facilities;
$3,769,000, or 15.0% of the increase, resulted from the operation of the
Dayton Facilities, and $11,354,000, or 45.3% of the increase, resulted from
the operation of the Connecticut Facilities. Revenues generated by providing
rehabilitation therapy services to non-affiliated long-term care facilities
increased $1,497,000, from $3,352,000 in the first quarter of 1997 to
$4,849,000 in the first quarter of 1998. The remaining $2,273,000, or 9.1% of
such increase was largely attributable to higher average net patient service
35
<PAGE>
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 $145.63 during the first quarter of
1997 to $151.77 during the first quarter of 1998. Occupancy at "same store"
facilities increased from 92.3% during the first quarter of 1997 to 92.9%
during the first quarter of 1998. The average occupancy rate at all of the
Company's facilities increased from 92.3% during the first quarter of 1997 to
93.1% during the first quarter of 1998. The Company's quality mix (non-
Medicaid revenues as a percentage of total net revenues) was 62.8% for the
three months ended March 31, 1997 as compared to 59.0% in the same period of
1998. The decrease in quality mix was primarily attributable to dilution
resulting from the acquisition of new facilities that generate a lower quality
mix.
Facility Operating Expenses. Facility operating expenses increased by
$19,929,000, or 53.2%, from $37,452,000 in the first quarter of 1997 to
$57,381,000 in the first quarter of 1998. Facility operating expenses as a
percentage of total net revenues increased from 79.0% in the first quarter of
1997 to 79.2% in the first quarter of 1998. Of the total increase in facility
operating expenses, the operation of the Harford Gardens facility accounted
for $1,064,000, or 5.3% of this increase, the operation of the Massachusetts
Facilities accounted for $3,848,000 or 19.3% of this increase, the operation
of the Dayton Facilities accounted for $3,061,000, or 15.4% of this increase,
and the operation of the Connecticut Facilities accounted for $9,371,000, or
47.0% of this increase. Operating expenses associated with additional
rehabilitation therapy services provided to non-affiliated long-term care
facilities increased $957,000, accounting for 4.8% of the total increase in
facility operating expenses. The remaining $1,628,000 of the increase in
facility operating expenses was due to increases in the costs of labor,
medical supplies and rehabilitation therapy services purchased from third
parties at "same store" facilities.
General and Administrative; Service Charges Paid to Affiliate. General and
administrative expenses increased by $976,000, or 40.9%, from $2,389,000 in
the first quarter of 1997 to $3,365,000 in the first quarter of 1998. This
increase resulted primarily from the acquisition of new facilities that
resulted in an increase in regional and corporate support, and additional
travel, consulting and systems development expenses. As a percentage of total
net revenues, general and administrative expenses decreased from 5.0% in the
first quarter of 1997 to 4.6% in the first quarter of 1998. 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 quarter of 1997, such
reimbursements totaled $177,000 compared to $313,000 during the first quarter
of 1998.
Depreciation and Amortization. Depreciation and amortization increased from
$922,000 in the first quarter of 1997 to $1,085,000 in the first quarter of
1998. The increase in depreciation and amortization was primarily due to
building improvements and investment in new computers and software.
Facility Rent. Facility rent expense increased by $2,934,000 from $2,622,000
in the first quarter of 1997 to $5,556,000 in the first quarter of 1998. The
increase in facility rent expense was primarily the result of new acquisitions
completed since the first quarter of 1997.
Interest Expense, Net. Interest expense, net, increased from $1,392,000 in
the first quarter of 1997 to $1,650,000 in the first quarter of 1998. This
increase was primarily due to additional interest expense associated with the
acquisition of Access Rehabilitation on July 1, 1997.
Income Taxes. Income tax expense increased from $959,000 in the first
quarter of 1997 to $1,198,000 in the first quarter of 1998.
Net Income. Net income was $1,502,000 in the first quarter of 1997 as
compared to net income of $1,875,000 in the first quarter of 1998.
36
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
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 facilities in Ohio (the "1996 Ohio
Facilities") on July 1, 1996, the Harford Gardens facility on March 1, 1997,
the Massachusetts Facilities on August 1, 1997, the Dayton Facilities on
September 1, 1997, and the Connecticut Facilities on December 1, 1997.
Additionally, total net revenues increased as a result of the generation of
additional 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 1996 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 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 to non-affiliated long-
term care facilities increased $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, was
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 the increase in total net revenues 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 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 quality mix was primarily attributable to dilution resulting
from the acquisition of new facilities that generated a lower quality mix.
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 1996 Ohio Facilities for a full year in 1997 accounted for
$13,499,000, or 30.5% of this increase; the operation of the Harford Gardens
facility 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 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 rehabilitation therapy services provided to non-affiliated
long-term care facilities increased as a result of additional therapy
contracts. Operating expenses associated with these contracts accounted for
$6,394,000, or 14.5%, of the total increase in facility operating expenses.
The remaining $6,993,000 of the increase in facility operating expenses was
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. As a percentage of total net revenues, general
administrative expenses increased from 4.7% in 1996 to 4.9% in 1997. This
increase resulted from the acquisition of new facilities that resulted in an
increase in regional and corporate support, and additional travel, consulting
and systems development expenses. 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.
Such reimbursements were not materially different in 1997 as compared with
those in 1996.
Special Compensation and Other. In connection with the Offering and IPO
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 IPO
Reorganization.
Depreciation and Amortization. Depreciation and amortization increased by
$1,045,000 from $3,029,000 in 1996 to $4,074,000 in 1997. The increase in
depreciation and amortization was primarily due to the acquisition of the 1996
Ohio Facilities on July 1, 1996.
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Facility Rent. Facility rent expense increased $2,223,000, from $10,223,000
in 1996 to $12,446,000 in 1997. The increase in facility rent expense was
primarily due to the acquisition of new facilities.
Interest Expense, Net. Interest expense, net, increased by $1,219,000, from
$4,634,000 in 1996 to $5,853,000 in 1997. This increase was primarily due to
additional interest expense resulting from the acquisition of the 1996 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 $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 by $3,538,000, 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 IPO
Reorganization.
Net Income. Net income increased by $4,101,000, from $2,702,000 in 1996 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 (the "New
Hampshire Facilities") on January 1, 1996 and the 1996 Ohio Facilities on July
1, 1996, the generation of increased 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 the $55,987,000 increase in total net revenues, $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 1996
Ohio Facilities. Revenues generated from rehabilitation therapy services
provided to non-affiliated long-term care facilities increased by $7,250,000,
from $3,045,000 in 1995 to $10,295,000 in 1996, resulting primarily from
additional therapy contracts. The remaining $7,999,000, or 14.3% of the
increase in total net revenues, was 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
higher acuity conditions. Average net patient service revenues per patient day
at "same store" facilities increased by 4.0% from $132.99 in 1995 to $138.31
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 total net revenues. The Company's quality mix 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 their
acquisition by the Company 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.
Facility operating expenses as a percentage of total net revenues decreased
from 81.7% in 1995 to 79.9% 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 1996 Ohio Facilities accounted
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for $13,712,000, or 32.0% of this increase. Operating expenses associated with
additional rehabilitation therapy services provided to non-affiliated long-
term care facilities accounted for $4,922,000 or 11.5% of the total increase
in facility operating expenses. The remaining $6,286,000 of the increase in
facility operating expenses was 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. As a percentage of total net revenues, general and
administrative expenses increased from 4.6% in 1995 to 4.7% in 1996.
Approximately $787,000 of this increase resulted from the acquisition of the
New Hampshire Facilities, and $290,000 resulted from the acquisition of the
1996 Ohio Facilities. Most of the remainder of this increase was associated
with the expansion of regional and corporate support, increases in salaries,
and additional travel and consulting expenses associated with the Company's
growth. The Company reimburses an affiliate for rent and other expenses
related to its corporate headquarters, as well as for certain data processing
and administrative services provided to the Company. In 1995 and 1996, such
reimbursements totaled $700,000.
Special Compensation and Other. In connection with the Offering and IPO
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 by
$1,356,000, from $4,385,000 in 1995 to $3,029,000 in 1996. This decrease in
depreciation and amortization was primarily due to the sale and subsequent
leaseback of the Seven Facilities effective December 31, 1995 and the
acquisition of the 1996 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 facility rent expense was
primarily due to the sale and subsequent leaseback of the Seven Facilities and
the acquisition of the New Hampshire Facilities 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 was primarily due to
the pay down of debt associated with the Seven Facilities, the repayment of
$25,000,000 of long-term debt using proceeds from the Offering, partially
offset by additional interest expense resulting from the acquisition of the
1996 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 IPO
Reorganization.
Net Income. Net income increased by $1,468,000, from $1,234,000 in 1995 to
$2,702,000 in 1996. This increase in net income was primarily due to increased
operating income in 1996 and the elimination of the minority interest charge
resulting from the liquidation of KYP.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are for acquisitions, capital expenditures,
working capital, debt service and general corporate purposes. The Company has
historically financed these requirements primarily through a combination of
internally generated cash flow, mortgage financing and operating leases, in
addition to funds borrowed under the Company's revolving credit facility. The
Company's 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 trust established in conjunction with
the Company's existing synthetic lease facility that was entered into in
September 1997. In addition, in 1996 the Company financed the acquisition of
the 1996 Ohio Facilities from the owner by means of a lease which is accounted
for as a capital lease for financial reporting purposes. 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 date of such lease,
thus allowing the Company to realize the value appreciation, if any, of the
facility while maintaining financial flexibility.
The Company's operating activities during the first three months of 1997
used net cash of $480,000 as compared to $1,702,000 during the same period in
1998, an increase of $1,222,000. Most of the increase in cash used by
operations was the result of increases in accounts receivable associated with
the acquisition of new facilities, partially offset by an increase in accrued
employee compensation and benefits attributable to these facilities. 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 $537,000 during the first three
months of 1997 as compared to $4,060,000 used during the same period in 1998.
The primary use of invested cash during these periods related to additions to
property and equipment ($848,000 in 1997 compared to $3,419,000 in 1998),
additions to intangible assets ($1,186,000 in 1997 compared to $404,000 in
1998) and transfers to restricted cash. Net cash used by 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 collateralized loan to the seller of $7,487,000 in connection with
the acquisition of the Connecticut Facilities on December 1, 1997.
Net cash used by financing activities during the first three months of 1997
was $950,000 as compared to $805,000 used during the same period in 1998. 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 of the New
Hampshire Facilities in connection with the leasing of such 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. Such
borrowings were primarily used to finance part of the acquisition of the
Connecticut Facilities, as well as the asset acquisition of Access
Rehabilitation, a therapy services company. In addition, during 1997 the
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 Facilities and the Dayton
Facilities.
At March 31, 1998, the Company had two mortgage loans outstanding in the
aggregate amount of $17,995,000, in addition to $15,600,000 in advances
outstanding under its revolving credit facility and $56,270,000 of capital
lease obligations. One of the Company's mortgage loans had an outstanding
principal balance of $16,421,000, of which $15,140,000 is due at maturity in
2004. This loan bears interest at an annual rate of 10.65% plus additional
interest equal to 0.3% of the difference between the annual operating revenues
of
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the four mortgaged facilities and the actual revenues of the four mortgaged
facilities during the twelve-month base period. The Company's other mortgage
loan, which encumbers a single facility, had an outstanding principal balance
of $1,574,000, of which $1,338,000 is due in 2010. As of March 31, 1998, the
Company had $23,600,000 of borrowings drawn under its existing synthetic lease
facility, and through June 30, 1998, the Company had increased the drawings
under its existing synthetic lease facility by a total of $35,650,000 in order
to finance the acquisition of the Briarfield and Rhode Island Facilities.
The Company's existing synthetic leasing facility (the "Leasing Facility")
is funded by the same group of banks that fund the Company's existing
revolving credit facility. Under the Leasing Facility a master trust (the
"Trust") acquires long-term care facilities which the Trust then leases to the
Company. The Trust finances its acquisition by making an equity contribution
of 3% or more of the related purchase price and obtaining bank loans for the
remainder. The Company's rental payments to the Trust are determined based on
the purchase price and an interest rate factor which is based on LIBOR (or at
the Company's option, the agent bank's prime rate) and which varies with a
leverage ratio of the Company. As of December 31, 1997 and March 31, 1998, the
interest rates for amounts outstanding under the Leasing Facility were
approximately 7.5% and 7.3%, respectively. The Company's Leasing Facility
expires in August 2002, and the Company at that time will be required to
either renew the Leasing Facility, exercise its option to purchase the
facilities acquired through the Leasing Facility for an amount equal to the
purchase price at the date of initial acquisition, or arrange for the sale of
the facilities. Additionally, at any time during the term of the Leasing
Facility, the Company may exercise its purchase option for the leased
facilities. The Company's obligations under the lease are collateralized by a
collateral pool which also collateralizes the Company's borrowings under its
existing revolving credit facility. The Company believes that synthetic lease
financing provides it with the flexibility of lease financing while offering
it the ability to exercise fixed price purchase options at any time during the
term of the Leasing Facility. The Leasing Facility is expected to be
terminated effective as of the Effective Time.
At March 31, 1998, pro forma for the Merger Financings, the Company would
have had approximately $178,159,000 of consolidated indebtedness outstanding,
consisting of $100,000,000 of senior subordinated debt, $56,270,000 of capital
lease obligations, $17,995,000 of mortgage loans, and approximately $3,894,000
in revolving credit borrowings under the new $250,000,000 senior secured
credit facility, with no synthetic lease drawings outstanding. In addition,
the Company would have had $40,000,000 of exchangeable preferred stock
outstanding. While the Company will have approximately $246,106,000 available
under the new senior secured credit facility (exclusive of outstanding letters
of credit), borrowings under it will be subject to compliance with extensive
financial covenants.
The Company expects that its capital expenditures for 1998, excluding
acquisitions of new long-term care facilities, will aggregate approximately
$10,000,000, $3,400,000 of which had already been invested through March 31,
1998. The Company expects that its capital expenditures for 1999, excluding
acquisitions of new long-term care facilities, will also aggregate
approximately $10,000,000. The Company's expected capital expenditures will
relate to, among other things, maintenance capital expenditures, system
enhancements, special construction projects and other capital improvements.
After the Merger, the Company expects that the majority of its facility
acquisitions will be financed with borrowings under its new senior secured
credit facility. However, the Company may be required to assume debt or to
obtain other debt and/or equity financing to finance any significant
acquisitions or real estate/construction projects in the future.
After the Merger is consummated, the Company's principal sources of funds
are expected to be cash flow from operations and borrowings under its senior
secured credit facility. It is anticipated that these funds will be used to
finance acquisitions, finance working capital, meet debt service and capital
expenditure requirements, lease real estate and for general corporate
purposes. In addition, a portion thereof will be available for the issuance of
letters of credit. The Company believes that operating cash flow and
availability under the new senior secured credit facility will be adequate to
meet its liquidity needs for the foreseeable future, although no assurance can
be given in this regard.
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In connection with the Merger and the Merger Financings, the Company will
incur certain significant nonrecurring expenses (See "UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION"). The Company will incur approximately
$23,239,000 in estimated transaction fees and expenses as a result of the
Merger, a $336,000 non-cash charge related to the forgiveness of employee
loans, and a $897,000 non-cash charge associated with the elimination of
deferred financing costs related to retired debt. The Company will also incur
a compensation charge of approximately $7,871,000 relating to the conversion
into cash of 648,923 stock options.
SEASONALITY
The Company's earnings generally fluctuate from quarter to quarter. This
seasonality is related to a combination of factors which include, among other
things, the timing and amount of Medicaid rate increases, seasonal census
cycles and the number of calendar days in a given quarter.
INFLATION
The healthcare industry is labor intensive. Wages and other labor related
costs are especially sensitive to inflation. 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 generally increased its charges
for services. The Company's operations could be adversely affected if it is
unable to recover future cost increases or if the Company experiences
significant delays in Medicaid and Medicare revenue sources increasing their
rates of reimbursement.
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 financial
reporting and payroll systems with systems that are Year 2000 compliant. The
Company is in the process of evaluating several clinical information software
products, including one which is being installed in 13 of its facilities, with
the expectation that it will identify a Year 2000 compliant standard clinical
information and patient billing system which will be implemented at each of
the Company's facilities. The Company currently estimates that it will
complete the selection of the standard clinical information and patient
billing software during 1998 and finalize the conversion of its existing
systems to the new platform during 1999. Although the Company does not expect
the cost of the conversion of its clinical and patient billing systems to have
a material adverse effect on its business or future results of operations,
there can be no assurance that 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 assurance 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 currently estimates the cost of replacing the clinical and billing
systems at its existing facilities to be approximately $1,000,000. The Company
will fund the costs associated with these system conversions through cash
flows from operations or borrowings under its new senior secured credit
facility. The Company's ongoing facility acquisition strategy will require it
to evaluate acquisition candidates for Year 2000 compliance. See "RISK
FACTORS--Impact of Year 2000 Issue."
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
the retained earnings and additional paid-in equity section of a statement of
financial position. Additionally, in June 1997, the FASB issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that an enterprise (a) report financial and descriptive information
about its reportable operating segments, (b) report a measure of segment
profit or loss, certain specific revenue and expense items, and segment assets
with reconciliations of such amounts to the enterprise's financial statements
and (c) report information about revenues derived from the Company's products
or services and information about major customers. 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 financial position or results of operations.
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PRICES OF HARBORSIDE COMMON STOCK AND DIVIDEND POLICY
The Harborside Common Stock is listed and traded on the NYSE under the
symbol "HBR." The following table shows, for the fiscal periods indicated, the
high and low sale prices of a share of Harborside Common Stock on the NYSE
Composite Transactions Tape. The Company completed its initial public offering
on June 14, 1996.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal 1996
First Quarter (ended March 31, 1996)...................... -- --
Second Quarter (ended June 30, 1996)...................... $11.000 $ 9.500
Third Quarter (ended September 30, 1996).................. $10.750 $ 9.500
Fourth Quarter (ended December 31, 1996).................. $12.250 $ 9.000
Fiscal 1997
First Quarter (ended March 31, 1997)...................... $12.875 $11.000
Second Quarter (ended June 30, 1997)...................... $14.375 $11.125
Third Quarter (ended September 30, 1997).................. $18.750 $14.250
Fourth Quarter (ended December 31, 1997).................. $21.750 $16.750
Fiscal 1998
First Quarter (ended March 31, 1998)...................... $24.000 $18.000
Second Quarter (ended June 30, 1998)...................... $24.063 $20.250
Third Quarter (to July 15, 1998).......................... $24.375 $23.813
</TABLE>
On April 15, 1998, the last trading day before the public announcement of
the execution of the Merger Agreement, the last sale price of Harborside
Common Stock as reported on the NYSE Composite Transactions Tape was $21.50
per share.
On July 15, 1998, the most recent practicable date prior to the printing of
this Proxy Statement/Prospectus, the last sale price of Harborside Common
Stock as reported on the NYSE Composite Transactions Tape was $24.38 per
share. Harborside stockholders should obtain current market prices for
Harborside Common Stock.
The Company has never declared or paid any dividends on Harborside Common
Stock since its initial public offering in 1996. The Company does not
anticipate paying cash dividends on Harborside Common Stock for the
foreseeable future and intends to retain all of its earnings to provide funds
for the operation and expansion of the Company's business and to repay
outstanding indebtedness. The Company's debt agreements contain, and the
agreements related to the Merger Financings are expected to contain, certain
covenants restricting the payment of dividends on, or repurchases of,
Harborside Common Stock. The Company's ability to pay dividends may also be
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.
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THE COMPANY
GENERAL OVERVIEW
Harborside is a leading provider of high-quality long-term care and
specialty medical services in the Eastern United States. The Company has
focused on establishing strong local market positions with high-quality
facilities in five principal regions: the Midwest (Ohio and Indiana), New
England (Massachusetts and New Hampshire), the Northeast (Connecticut and
Rhode Island), the Southeast (Florida) and the Mid-Atlantic (New Jersey and
Maryland). As of June 30, 1998, the Company operated 49 long-term care
facilities with 5,983 licensed beds. The Company provides a broad continuum of
medical services including: (i) traditional skilled nursing care and (ii)
specialty medical services, including a variety of subacute care programs such
as orthopedic rehabilitation, CVA/stroke care, cardiac recovery, pulmonary
rehabilitation and wound care, and distinct programs for the provision of care
to Alzheimer's and hospice patients. As part of its subacute services, the
Company provides physical, occupational and speech rehabilitation therapy
services, both at Company-operated and non-affiliated facilities, through its
wholly-owned subsidiary, Theracor.
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, a rehabilitation
services company and a skilled nursing facility in Maryland with 163 beds. 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.
Harborside was formed in March 1996, in anticipation of the Offering, in
order to combine under its control the operations of various long-term care
facilities and ancillary businesses 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 in return an aggregate of 4,400,000 shares of the
Company's common stock.
POST-MERGER BUSINESS STRATEGY
The Company intends to continue achieving growth in revenues, earnings and
margins while providing high quality long-term care and medical services
through the following business strategies:
Selectively Acquire Additional Long-Term Care Facilities. The Company
believes that it will continue to have numerous acquisition opportunities due
primarily to the highly fragmented nature of the long-term care industry and
the inability of smaller, less sophisticated operators to effectively treat
higher acuity patients and adapt to the increasing complexity of the
reimbursement and regulatory environment. The Company will continue to focus
primarily on acquiring facilities in its existing regions where it has
established strong market positions. The Company will also selectively
evaluate new geographic markets possessing favorable demographic and
regulatory environments where it can establish strong market positions. The
Company believes that concentrating its long-term care facilities within
selected geographic regions provides it with greater local market share and
more effective relationships with patient referral sources, as well as the
ability to achieve operational efficiencies through economies of scale,
greater leverage of corporate overhead, more effective regional management and
marketing efficiencies. The Company's acquisition strategy is particularly
focused on states with CON programs or similar regulations limiting the supply
of new licensed beds. Since the beginning of 1996, the Company has expanded
its number of licensed beds by over 140% through the completion of eight
acquisitions representing a total of 29 long-term care facilities with 3,512
licensed beds.
Expand High Acuity Specialty Medical Services. The provision of high acuity
specialty medical services allows the Company to better serve its patient
referral sources along a broader continuum of care, and take
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advantage of the continued increased flow of high acuity patients from
hospital settings. The provision of such services also typically generates
higher revenues and profits per patient day than traditional skilled nursing
care services. The Company expects to continue to expand the range of
specialty medical services provided at both its existing and acquired
facilities, with an emphasis on expanding the number of its specialized
subacute programs. Within its specialized subacute programs, the Company will
continue to design and implement clinical pathways and protocols for its high
acuity services. The Company also plans to continue to develop additional
specialty medical programs for patients with Alzheimer's disease and hospice
units for patients with terminal illnesses.
Expand Ancillary and Other Businesses. The Company intends to seek contracts
for the provision of its physical, occupational and speech rehabilitation
therapy services with additional non-affiliated facilities. The Company is
also evaluating opportunities to acquire additional ancillary businesses (such
as institutional pharmacy and infusion therapy) which would allow the Company
to provide these ancillary services directly to patients at its facilities and
which the Company believes would allow it to reduce its facility operating
costs. Additionally, these ancillary services could be provided to non-
affiliated facilities. The Company will also selectively evaluate
opportunities to acquire assisted living facilities and home health agencies
in markets where it operates facilities. The Company believes that these
opportunities would allow it to provide a broader continuum of care while
leveraging its existing general and administrative expenses.
Continue to Achieve High Occupancy Rates and a Strong Quality Mix. The
Company seeks to continue to achieve high occupancy rates primarily by
continuing to develop new and existing patient referral sources, enhance its
marketing programs and closely monitor census information and other patient
data at the corporate, regional and facility levels. In addition, the Company
seeks to continue to achieve a strong quality mix primarily by continuing to
expand the breadth and improve the quality of its specialty medical services.
An integral part of the Company's acquisition strategy has been to acquire
high-quality facilities from smaller, less sophisticated operators whose
facilities tend to offer lower acuity services than those offered by the
Company, thereby initially diluting the Company's quality mix. The Company
subsequently implements an expanded range of specialty medical services at
these facilities which typically improves its quality mix. For the year ended
December 31, 1997 and three months ended March 31, 1998, the Company's
occupancy rate was 92.3% and 93.1%, respectively, and its quality mix was
60.0% and 59.0%, respectively.
Implement Cost Control Initiatives in Response to Medicare Prospective
Payment System. Beginning January 1, 1999, the Company will be reimbursed for
services it provides to Medicare patients under the Medicare Prospective
Payment System ("Medicare PPS"), which will be phased in over a period of four
years. Medicare PPS will result in the Company being reimbursed under an
acuity-based per diem rate system rather than under the current cost-based
reimbursement system. The Company believes that implementing cost control
initiatives will enable it to maximize its profitability under Medicare PPS.
Accordingly the Company has identified and intends to implement, among other
things, programs designed to reduce its costs of providing nursing and therapy
services while maintaining quality and outcomes. The Company already has
significant experience providing quality, cost-effective services under
acuity-based prospective payment systems, as 54% of its existing licensed beds
are located in states with acuity-based Medicaid systems.
PATIENT SERVICES
TRADITIONAL SKILLED NURSING CARE
Traditional skilled nursing care is typically 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 for the
facility monitors all aspects of
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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 services 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
revenues per patient day than traditional skilled nursing care 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 care,
cardiac recovery, digestive care, immuno-suppressed disease care, post-
surgical recovery, wound care, CVA/stroke care, hemodialysis, infusion
therapy, diabetes management 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, clinical psychologists or social
workers. 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, CVA/stroke recovery, cardiac recovery,
pulmonary rehabilitation and wound care management. These clinical pathways
are designed to achieve specified measurable outcomes in an efficient, cost-
effective and patient-friendly 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.
REHABILITATION THERAPY SERVICES
The Company currently provides in-house rehabilitation services, including
physical, occupational and speech therapy, at most of the Company's facilities
through the Company's wholly-owned subsidiary, Theracor. As of June 30, 1998,
Theracor also had contracted to provide rehabilitation services to 53 non-
affiliated facilities. The Company also seeks to offer its rehabilitation
therapy services through Theracor at newly acquired facilities.
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OPERATIONS
Facility Operations. 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.
Regional Operations. 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
Midwest (Ohio and Indiana), New England (Massachusetts and New Hampshire),
Northeast (Connecticut and Rhode Island), the Southeast (Florida) 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.
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 above-mentioned
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. Theracor
maintains offices in Palm Harbor, Florida and Framingham, Massachusetts.
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 care 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 June 30,
1998, 63% of the Company's facilities had received accreditation, and of these
35% had received accreditation "with Commendation." The Company has scheduled
accreditation reviews for an additional 16% of its facilities during the
remainder of 1998 and intends to seek accreditation for substantially all of
its remaining non-accredited facilities in the near future.
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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. 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
traditional skilled nursing care and developing semi-annual marketing plans in
consultation with the Company's regional marketing and operations staff.
Traditional skilled nursing care is 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 that its occupancy rates and quality mix demonstrate
the effectiveness of its marketing program. The Company's quality mix was
60.0% for the fiscal year ended December 31, 1997. 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%, respectively. 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 net patient service 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) the occupancy rates of its facilities;
(iii) the payor mix of its facilities 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 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 table set forth below identifies the percentage of the Company's total
net revenues attributable to each of its payor sources for each of the periods
indicated. The increase in Medicaid revenues as a percentage of total net
revenues during the periods indicated has resulted primarily from the
acquisition of new facilities with a higher percentage of their net revenues
derived from the Medicaid program. An integral part of the Company's
acquisition strategy has been to acquire high-quality facilities from smaller,
less sophisticated operators whose facilities tend to offer lower acuity
services than those offered by the Company, thereby initially diluting the
Company's quality mix. The Company subsequently implements an expanded range
of specialty medical services at these facilities which typically leads to an
improved quality mix. The Company believes that, over time, its facilities
have experienced stable to increasing percentages of revenues derived from
payor sources other than Medicaid following their acquisition by the Company.
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TOTAL NET REVENUES (1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Private and other........... 35.1% 35.5% 34.1% 33.8% 32.4%
Medicare.................... 31.7 26.3 25.9 29.0 26.6
Medicaid.................... 33.2 38.2 40.0 37.2 41.0
------- ------- ------- --------- ---------
Total..................... 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ========= =========
</TABLE>
- --------
(1) Total net revenues exclude net revenues of the Larkin Chase Center which
is owned by 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 Offering
Memorandum.
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 uncertified 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 currently depends on
the type of therapy provided. The Medicare program 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. With respect to occupational
therapy and speech language pathology, Medicare currently provides
reimbursement for 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
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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 BBA become effective. See "--Governmental Regulation."
Under the Medicare Part A program, the Company is reimbursed under the
existing cost-based reimbursement system for its allowable direct costs (which
consist of routine, ancillary and capital expenses) plus an allocation of
allowable 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 the Medicare program. 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 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 through fee schedules
established by HCFA. The BBA further limits reimbursement for Part B therapy
services by establishing annual limitations on Part B therapy charges per
beneficiary.
Since the Medicare prospective payment system will be all inclusive, the BBA
requires skilled nursing facilities to institute "consolidated billing" for a
variety of services and supplies. Under consolidated billing, the skilled
nursing facility must submit all Medicare claims for all the services and
supplies that its residents receive (both Part A and Part B), with the
exception of mainly physicians' services. Payments for these services and
supplies billed on a consolidated basis will be made directly to the skilled
nursing facility, whether or not the services are provided directly by the
skilled nursing facility or by others under a contractual arrangement. Among
the services and goods which the skilled nursing facility will be responsible
for billing are: physical therapy, occupational therapy, speech therapy,
laboratory services, diagnostic x-rays, medical supplies, surgical dressings,
prosthetic devices/ostomy, colostomy, enteral/parenteral nutrition, orthotics,
limbs, etc., EKGs, vaccines, certain ambulance services and psychological
services by a social worker. Examples of Part B services and goods which will
not be billed by skilled nursing facilities are physicians' services,
physician assistants under physician supervision, nurse practitioners,
certified nurse-midwives, qualified psychologists, certified registered
nurses, anesthetists, home dialysis supplies and equipment, self-care home
dialysis support services and institutional dialysis services and supplies,
erythropoietin for certain dialysis patients, hospice care related to a
beneficiary's terminal illness, an ambulance trip to the skilled nursing
facility from the initial admission or from the skilled nursing facility
following a final discharge and transportation costs of electrocardiogram
equipment (for 1998 only).
In mid-April, 1998, HCFA issued a Program Memorandum to Medicare
Intermediaries and Carriers with detailed instructions concerning consolidated
billing. Under the Program Memorandum, skilled nursing facilities have the
option of utilizing a transition period from July 1, 1998 through December 31,
1998 in cases where the skilled nursing facility will not have the systems and
billing capability to submit claims to the intermediary for
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services and supplies rendered on or after July 1, 1998. Intermediaries are to
use this transition period to educate providers regarding these new
requirements through December 31, 1998. For those skilled nursing facilities
utilizing the transition period, all claims for all services and supplies
rendered on or after January 1, 1999 must be billed to the intermediary. There
will be no extension of the transition period beyond January 1, 1999.
Regulations regarding Medicare PPS were published on May 12, 1998. The
regulations include (i) the unadjusted federal per diem rates to be applied to
days of covered skilled nursing facility services furnished during the fiscal
year, (ii) the case mix classification system to be applied with respect to
such services during the fiscal year and (iii) the factors to be applied in
making area wage adjustments with respect to such services. The regulations
also contain provisions for skilled nursing facility consolidated billing of
Medicare Part A and certain services and items furnished to residents of the
skilled nursing facility under Part B. (See the discussion below under "--
Government Regulation" for more information about the prospective payment
system for skilled nursing facilities.) As the regulations were published
recently, the Company has not been able to fully assess and quantify the
potential impact of the regulations on the Company's consolidated financial
position, results of operations or liquidity. Based on a preliminary
assessment, the Company believes that the new regulations will result in a
reduction of the Company's average Medicare per diem reimbursement rate, which
the Company expects to be able to substantially offset primarily through
reductions in facility operating costs. However, no assurance can be given
that the Company will be able to reduce such costs. See "THE COMPANY--Post-
Merger Business Strategy."
Medicaid. The Medicaid program 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, provided that the state has submitted an acceptable state plan
for medical assistance. 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
allowable Medicaid payment. All but two of the Company's facilities
participate in the Medicaid program of the states in which they are located.
These two non-participating 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 while 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 a state's Medicaid plan were
available to recipients at least to the extent that those services are
available to the general population. In the past, several states' healthcare
provider organizations and providers 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. Some
state Medicaid programs in states in which the Company currently operates
currently include incentive allowances for providers whose costs are less than
certain ceilings and who meet other requirements.
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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 before services are rendered. Actual costs incurred by operators during
a period are used by the state to establish the prospective rate for
subsequent periods. 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 through
its rehabilitation therapy business by providing rehabilitation therapy
services to patients at non-affiliated long-term care facilities. In general,
payments for these services are received directly from the non-affiliated
long-term care facilities, which in turn are reimbursed by the Medicare
program or other payors. The revenues that the Company derives for these
services are typically subject to adjustment in the event the facility is
denied reimbursement by the Medicare program or any other applicable payor on
the basis that the services provided by the Company were not medically
necessary.
MANAGEMENT INFORMATION SYSTEMS
With the exception of the Connecticut Facilities, which were acquired by the
Company in December 1997, all of the Company's facilities are supported by a
centralized, integrated financial reporting system which processes financial
transactions and which enables Company personnel to monitor and respond on a
timely basis to key operating and financial data and budget variances. The
Company expects all newly acquired facilities to utilize the centralized
financial reporting system beginning with, or shortly after, their date of
acquisition. Additionally, the Company utilizes a payroll processing service
company to process payroll for all of its facilities with the exception of the
recently acquired Connecticut Facilities. The Company intends to convert the
Connecticut Facilities to the Company's standard financial reporting and
payroll systems during 1998. The Company's financial reporting and payroll
systems are Year 2000 compliant.
The Company's facilities utilize various clinical information and patient
billing software packages, some of which are not Year 2000 compliant. The
Company is in the process of evaluating several clinical information software
products, including one which is being installed in 13 of its facilities, with
the expectation that it will identify a Year 2000 compliant standard clinical
information and patient billing system which will be implemented at each of
the Company's facilities. The Company currently estimates that it will
complete the selection of the standard clinical information and patient
billing software during 1998 and finalize the conversion of its existing
systems to the new platform during 1999. Although the conversion of the
clinical information and patient billing systems is in some cases driven by
the need for all of its systems to be Year 2000 compliant, the Company
believes that the implementation of the Company-wide standard clinical
information and patient billing system will offer significant advantages by
facilitating the adherence to Company billing standards and by providing a
consolidated database from which it can extract valuable clinical information.
There can be no assurance that the Company will be able to complete this
conversion in a timely manner. See "RISK FACTORS--Impact of Year 2000 Issue."
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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
payment 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 program
or the Medicare program, offset of amounts due against future billings to the
Medicare or Medicaid programs, denial of payments under the state Medicaid
program 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 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 and the
actions taken by the reviewing agency based upon such inspections will not
have a material adverse effect on the Company.
Certificates of Need. All but one of the states in which the Company
operates have adopted CON or similar laws that 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. Indiana's CON program
expired as of June 30, 1998. 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. 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.
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<PAGE>
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 through fee
schedules established by HCFA. The BBA also requires uniform coding specified
by HCFA for skilled nursing facility Part B bills. 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 a variety of services and supplies. Under consolidated billing,
the skilled nursing facility must submit all Medicare claims for all the
services and supplies that its residents receive (both Part A and Part B
services), with the exception of mainly physicians' services. Payments for
these services and supplies billed on a consolidated basis will be made
directly to the skilled nursing facility, whether or not the services were
provided directly by the skilled nursing facility or by others under a
contractual arrangement. The skilled nursing facility will be responsible for
paying the provider of the services or the supplier. The payment to the
skilled nursing facility for these services and supplies will be based upon
the amounts allowable to the skilled nursing facility based on the Medicare
PPS law and regulations.
Medicare PPS will be phased in over a period of four years, beginning with
skilled nursing facility cost reporting periods ending on or after July 1,
1998. "New facilities," which first received Medicare payments on or after
October 1, 1995, move to the federal per diem rate effective with the cost
report periods beginning on or after July 1, 1998 and do not have a
transitional period. All other facilities will be "phased-in" by a formula
effective with the cost report period beginning on or after July 1, 1998 and
through which Medicare PPS will blend together facility-specific rates and
federal industry per diems according to the following schedule: Year One--75%
facility-specific, 25% federal per diem; Year Two--50% each; Year Three--25%
facility-specific, 75% federal per diem; Year Four--100% federal per diem. As
a result of Medicare PPS being effective for cost reports beginning on or
after July 1, 1998, Medicare PPS will not directly impact the Company's
Medicare reimbursement until the fiscal year beginning January 1, 1999. When
fully implemented, Medicare PPS will result in each skilled nursing facility
being reimbursed on a per diem rate basis with acuity-based per diem rates
being established as applicable to all Medicare Part A beneficiaries who are
residents of the skilled nursing facility. The per diem rates will be all-
inclusive rates through which the skilled nursing facility is reimbursed for
its routine, ancillary and capital costs. During the transition period, the
per diem rates for each facility will consist of a blending of facility-
specific costs and federal per diem rates. The unadjusted federal per diem
rates to be applied to days of covered skilled nursing facility services
furnished during the first year, the case mix classification system to be
applied with respect to such services, and the factors to be applied in making
area wage adjustments with respect to such services, are included in the
Medicare PPS regulations.The federal Medicare PPS rates were developed by HCFA
based on a blend of allowable costs from hospital-based and freestanding
skilled nursing facility cost reports for reporting periods beginning in
Federal Fiscal Year 1995 (i.e., October 1, 1994--September 30, 1995). The data
used in developing the federal rates incorporate an estimate of the amounts
payable under Part B for covered skilled nursing facility services furnished
during Federal Fiscal Year 1995 to individuals who were residents of a
facility and receiving Part A covered services. HCFA updated costs to the
first year of Medicare PPS using a skilled nursing facility market basket
index standardized for facility differences in case-mix and for geographic
variations in wages. Providers that received "new provider" exemptions from
the routine cost limits were excluded from the database used to compute the
federal payment rates. In addition, costs related to payments for exceptions
to the routine cost limits are excluded from the database used to compute the
federal payment rates. The facility-specific portion will be based on each
facility's Medicare cost report for cost reporting periods beginning in
Federal Fiscal Year 1995, including routine cost limit exception and exemption
payments up to 150% of the routine cost limit, the allowable costs to be
updated under Medicare PPS for the skilled nursing facility market basket
minus 1% through 1999 and the full skilled nursing facility market basket
after 1999. A variety of other adjustments will be made in developing the
Medicare PPS rates pursuant to the BBA and the regulations. As noted, except
in the case of "new facilities," in the first year of the transition to
Medicare PPS, the per diem rates will consist of a blend of 25% federal per
diem rates 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% federal per diem rates. "New facilities" will be on 100% federal
per diem rates for cost reporting periods beginning on or after July 1, 1998.
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Details of the Medicare PPS, including the unadjusted federal per diem
rates, were published in the Federal Register on May 12, 1998. As the
regulations were published recently, the Company has not been able to fully
assess and quantify the potential impact of the regulations on the Company's
consolidated financial position, results of operations or liquidity. Based on
a preliminary assessment, the Company believes that the new regulations will
result in a reduction of the Company's average Medicare per diem reimbursement
rate, which the Company expects to be able to substantially offset primarily
through reductions in facility operating costs. However, no assurance can be
given that the Company will be able to reduce such costs.
Fee Splitting and Referrals. The Company is also subject to federal and
state laws that govern financial and other arrangements between healthcare
providers. Federal laws, as well as the laws of certain states, prohibit
direct or indirect payments or fee splitting arrangements between healthcare
providers that are designed to induce or encourage the referral of patients
to, or the recommendation of, a particular provider for medical products and
services. These laws include the federal "anti-kickback law" which prohibits,
among other things, the offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of Medicare and Medicaid patients. A
wide array of relationships and arrangements, including ownership interests in
a company by persons in a position to refer patients and personal service
agreements have, under certain circumstances, been alleged to violate these
provisions. Certain discount arrangements may also violate these laws. Because
of the broad reach of these laws, the federal government has published certain
"safe harbors," which set forth the requirements under which certain
relationships will not be considered to violate such laws. 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, the Omnibus Budget Reconciliation Act of 1993 ("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 physical therapy, occupational therapy,
infusion therapy and enteral and parenteral nutrition. Various exceptions to
the application of this law exist, including 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.
Potential 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
55
<PAGE>
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.
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.
In general, consolidation in the long-term care industry has resulted in the
Company being faced with larger competitors, many of whom have significant
financial and other resources. The Company expects that this continuing
consolidation may increase the competition for the acquisition of long-term
care facilities.
The Company believes that state regulations which require a CON before a new
long-term care facility can be constructed or additional licensed beds can be
added to existing facilities reduce the possibility of overbuilding and
promote higher utilization of existing facilities. CON legislation is
currently in place in all states in which the Company operates or expects to
operate with the exception of Indiana which terminated its CON program as of
June 30, 1998. Several of the states in which the Company operates have
imposed moratoriums on the issuance of CONs for new skilled nursing facility
beds. Connecticut has imposed a moratorium on the addition of any new skilled
nursing facility beds, including chronic and convalescent nursing facility
beds and rest home beds with nursing supervision, until the year 2002.
Massachusetts has imposed a moratorium on the addition of any new skilled
nursing facility beds until the year 2000, except that an existing facility
can add up to 12 beds without being subject to CON review. New Hampshire has
imposed a moratorium on the addition of any new beds to skilled nursing
facilities, intermediate care homes and rehabilitation homes until December
31, 1998. Legislation has been introduced in New Hampshire to extend this
moratorium until the year 2001, or in the alternative until the year 2003.
Ohio has imposed a moratorium until the year 1999 on the addition of any new
skilled nursing facility beds. Rhode Island has imposed a moratorium on the
issuance of any new initial licenses for skilled nursing facilities and on the
increase in the licensed bed capacity of any existing licensed skilled nursing
facility until July 1, 1999, except that an existing facility may increase its
licensed bed capacity to the greater of 10 beds or 10% of the facility's
licensed bed capacity. The other states in which the Company conducts business
do not currently have a moratorium on new skilled nursing facility beds in
effect, but New Jersey only accepts applications for a CON when the state CON
agency issues a call for additional long-term care beds. There is presently no
such call for additional beds. 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. In the states
in which the Company currently operates, these conversions are subject to
state CON regulations. The Company believes that the application of the new
Medicare PPS rules will make such conversions less desirable. New Jersey
recently enacted legislation permitting acute care hospitals to offer subacute
care services under their
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<PAGE>
existing hospital licenses, subject to first obtaining CON approval pursuant
to an expedited CON review process. Ohio has imposed a moratorium on the
conversion of acute care hospital beds into long-term care beds through June
30, 1999. See "THE COMPANY--Government Regulation."
EMPLOYEES
As of May 31, 1998, the Company employed approximately 9,000 facility-based
personnel on a full- and part-time basis. The Company's corporate and regional
staff consisted of approximately 100 persons as of such date. Approximately
450 employees at five of the Company's facilities are covered by collective
bargaining agreements. The Company believes that it maintains good
relationships with its employees and the unions that represent certain of its
employees.
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 in
general, and the Company in particular, have, at times, experienced shortages
of qualified personnel. In addition, the long-term care industry typically
experiences high turnover of less skilled employees. 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 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. See "RISK FACTORS--Staffing and Labor Costs."
INSURANCE
The Company carries general liability, professional liability, comprehensive
property damage and other insurance coverages that management considers
adequate for the protection of its assets and operations based on the nature
and risks of its business, historical experience and industry standards. There
can be no assurance, however, that the coverage limits of such policies will
be adequate or that insurance will continue to be available to the Company on
commercially reasonable terms in the future. A successful claim against the
Company not covered by, or in excess of, its insurance coverage could have a
material adverse effect on the Company. Claims against the Company, regardless
of their merit or eventual outcome, may also have a material adverse effect on
the Company's business and reputation, may lead to increased insurance
premiums and may require the Company's management to devote time and attention
to matters unrelated to the Company's business. The Company is self-insured
(subject to contributions by covered employees) with respect to most of the
healthcare benefits and workers' compensation benefits available to its
employees. The Company believes that it has adequate resources to cover any
self-insured claims and the Company maintains excess liability coverage to
protect it against unusual claims in these areas. However, there can be no
assurance that the Company will continue to have such resources available to
it or that substantial claims will not be made against the Company.
PROPERTIES
The following table summarizes certain information regarding the Company's
existing facilities. For a description of the lease and other financing
arrangements regarding the Company's facilities, see Notes D, H, I and J of
the notes to the audited consolidated financial statements of the Company
included elsewhere in this Proxy Statement/Prospectus. The following table
also summarizes certain information regarding facilities in Attleboro and
Newton Upper Falls, Massachusetts that are managed by the Company. The average
occupancy rate for the Company's facilities during the years ended 1995, 1996
and 1997 was 92.5%, 92.6% and 92.3%, respectively. See Note 6 to the selected
consolidated financial and operating data of the Company set forth under the
caption "SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA" appearing
elsewhere in this Proxy Statement/Prospectus.
57
<PAGE>
SUMMARY OF FACILITIES
<TABLE>
<CAPTION>
OWNED/ PURCHASE
YEAR LEASED/ OPTION LICENSED
LICENSED FACILITY LOCATION ACQUIRED MANAGED PRICE(1) BEDS
- ----------------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
MIDWEST REGION
OHIO
Beachwood Beachwood 1996 Owned(2) Fixed 274
Broadview Heights Broadview Heights 1996 Owned(2) Fixed 159
Dayton Dayton 1997 Owned -- 100
Defiance Defiance 1993 Leased Fixed 100
Laurelwood Dayton 1997 Owned -- 115(3)
New Lebanon New Lebanon 1997 Owned -- 126(3)
Northwestern Ohio Bryan 1993 Leased Fixed 189
Perrysburg Perrysburg 1990 Owned -- 100
Point Place Toledo 1998 Owned -- 98
Swanton Swanton 1995 Leased Market 100
Sylvania Sylvania 1998 Owned -- 150
Troy Troy 1989 Leased Market 195
Westlake I Westlake 1996 Owned(2) Fixed 153
Westlake II Westlake 1996 Owned(2) Fixed 106
INDIANA
Decatur Indianapolis 1988 Owned -- 88
Indianapolis Indianapolis 1988 Leased Market 104
New Haven New Haven 1990 Leased Market 120
Terre Haute Terre Haute 1990 Owned -- 120
-----
2,397
-----
NEW ENGLAND REGION
NEW HAMPSHIRE
Applewood Winchester 1996 Leased Market 70
Crestwood Milford 1996 Leased Market 82
Milford Milford 1996 Leased Market 52
Northwood Bedford 1996 Leased Market 147
Pheasant Wood Peterborough 1996 Leased Market 99
Westwood Keene 1996 Leased Market 87
MASSACHUSETTS
Amesbury Amesbury 1997 Leased Market 120
Bristol Nursing Home Attleboro 1997 Managed -- 72
Cedar Glen Danvers 1997 Leased Market 100
Danvers--Twin Oaks Danvers 1997 Leased Market 101
North Shore Saugus 1997 Leased Market 80
The Stone Institute Newton Upper Falls 1997 Managed -- 106
-----
1,116
-----
NORTHEAST REGION
CONNECTICUT
Arden House Hamden 1997 Leased Fixed 360
Governor's House Simsbury 1997 Leased Fixed 73
Madison House Madison 1997 Leased Fixed 90
The Reservoir West Hartford 1997 Leased Fixed 75
Willows Woodbridge 1997 Leased Fixed 86
RHODE ISLAND
Greenwood Warwick 1998 Owned -- 136
Pawtuxet Village Warwick 1998 Owned -- 131
-----
951
-----
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
OWNED/ PURCHASE
YEAR LEASED/ OPTION
LICENSED FACILITY LOCATION ACQUIRED MANAGED PRICE(1) BEDS
- ----------------- -------- -------- ------- -------- -----
<S> <C> <C> <C> <C> <C>
SOUTHEAST REGION
FLORIDA
Brevard Rockledge 1994 Leased Market 100
Clearwater Clearwater 1990 Owned -- 120
Gulf Coast New Port Richey 1990 Owned -- 120
Naples Naples 1989 Leased Market 120
Ocala Ocala 1990 Owned -- 120(4)
Palm Harbor Palm Harbor 1990 Owned -- 120
Pinebrook Venice 1989 Leased Market 120
Sarasota Sarasota 1990 Leased Market 120
Tampa Bay Oldsmar 1990 Owned -- 120
-----
1,060
-----
MIDATLANTIC REGION
MARYLAND
Harford Gardens Baltimore 1997 Leased Fixed 163
Larkin Chase Center Bowie 1994 Owned(5) -- 120
NEW JERSEY
Woods Edge Bridgewater 1988 Leased Market 176
-----
459
-----
TOTAL 5,983
=====
</TABLE>
- --------
(1) Indicates, for each leased facility, if the Company's option price to
acquire the facility is stated as a fixed amount in the lease ("Fixed") or
is based on the fair market value of the facility at the option exercise
date, which may be subject to a minimum price ("Market"). With regard to
leases with a fixed purchase option price, the Company believes that the
purchase option price stated in the lease is, in each case, equal to the
fair market value of the facility at the inception date of such lease.
(2) Indicates an owned facility the acquisition of which has been accounted
for as a capital lease.
(3) Includes 115 and 6 beds licensed for assisted living for the Laurelwood
and New Lebanon facilities, respectively.
(4) Does not include a 60 bed addition currently under construction at this
facility, which is expected to become operational in the third quarter of
1998.
(5) Owned by Bowie L.P., in which the Company owns a 75% interest. 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 of
one of its current principal stockholders. The Company has entered into a
lease for new office space with an unaffiliated third party and expects to
relocate its offices during the third or fourth quarter of 1998. In connection
with such relocation, the Company is considering subleasing excess space at
its new headquarters to an existing affiliate on a short-term basis. The
Company also leases regional offices in Clearwater, Florida, Topsfield,
Massachusetts, and Indianapolis, Indiana, and owns a regional office in
Peterborough, New Hampshire. The Company's regional office in West Hartford,
Connecticut is located in The Reservoir, a skilled nursing facility listed in
the table above. Theracor leases offices in Palm Harbor, Florida and
Framingham, Massachusetts. The Company considers its properties to be in good
operating condition.
LEGAL PROCEEDINGS
The Company is a party to claims and legal actions arising in the ordinary
course of business. The Company does not believe that unfavorable outcomes in
any such matters, individually or in the aggregate, would have a material
adverse effect on the Company.
59
<PAGE>
THE SPECIAL MEETING
MATTERS TO BE CONSIDERED
The purpose of the Special Meeting is to vote upon (i) a proposal to approve
and adopt the Merger Agreement entered into between MergerCo and Harborside,
and to approve the transactions contemplated thereby, including the Merger,
and (ii) the Amendment Proposal. If the Merger and the Amendment Proposal are
approved by the stockholders of Harborside, MergerCo will merge with and into
Harborside and the shares of Harborside Common Stock currently held by
Harborside's existing stockholders will be converted, at the election of the
holder thereof, into either (a) the right to receive $25.00 in cash or (b) the
right to retain one Non-Cash Election Share, except that (i) as described in
greater detail below, all stockholders who elect to retain Harborside Common
Stock will experience proration of such shares, resulting in their retaining
only a portion of the shares of Harborside Common Stock they elect to retain
and receiving $25.00 per share in cash for each of their other shares of
Harborside Common Stock, (ii) an aggregate of 225,651 shares of Harborside
Common Stock held by the Senior Management Stockholders will not be subject to
the election described above and instead will be converted into the right to
retain the same number of shares of Harborside Common Stock which, upon
consummation of the Merger, will be denominated as Harborside Class A Common
Stock, (iii) each other share of Harborside Common Stock held by the Senior
Management Stockholders, constituting an aggregate of 106,663 shares of
Harborside Common Stock, and each share of Harborside Common Stock held by
certain other specified officers of the Company, constituting an aggregate of
3,846 shares of Harborside Common Stock, will not be subject to the election
described above and instead will be converted into the right to receive $25.00
in cash, (iv) shares of Harborside Common Stock held by Harborside, its
subsidiaries, MergerCo or any of its affiliates will be canceled and retired,
and (v) shares of Harborside Common Stock with respect to which appraisal
rights have been perfected will be treated as described herein.
The shares of Harborside Class A Common Stock which are to be retained by
existing Harborside stockholders will represent approximately 9% of the
outstanding common stock, and will have approximately 9% of the voting power,
of the Company. The shares of Harborside Class B Common Stock, Harborside
Class C Common Stock and Harborside Class D Common Stock will collectively
represent approximately 91% of the outstanding common stock of the Company
after the Merger. Shares of Harborside Class D Common Stock will have
approximately 91% of the voting power after the Merger and shares of
Harborside Class B Common Stock and Harborside Class C Common Stock will not
have voting rights. See "DESCRIPTION OF HARBORSIDE CAPITAL STOCK--Harborside's
Capital Stock Following the Merger."
A copy of the Merger Agreement is attached to this Proxy
Statement/Prospectus as Annex I. See "THE MERGER" and "MATERIAL PROVISIONS OF
THE MERGER AGREEMENT." A copy of the proposed Restated Certificate of
Incorporation of the Company is attached to this Proxy Statement/Prospectus as
Annex V. For a description of the classes of common stock to be authorized
pursuant to the proposed Restated Certificate of Incorporation, as well as a
description of other changes to be effected by the Amendment Proposal, see
"DESCRIPTION OF HARBORSIDE CAPITAL STOCK--Harborside's Capital Stock Following
the Merger" and "--Changes to Terms of Harborside Common Stock." The Merger
will not be effected unless the Amendment Proposal is approved, and the
Amendment Proposal will not be effected unless the Merger is approved.
The Board of Directors, and the independent members of the Board, have each
unanimously approved the Merger Agreement and the Amendment Proposal and each
recommend a vote FOR approval of the Merger Agreement, the Merger and the
Amendment Proposal.
REQUIRED VOTES
The approval of the Merger Agreement, the Merger and the Amendment Proposal
will require the affirmative vote of the holders of a majority of the shares
of Harborside Common Stock entitled to vote thereon. Pursuant to the
Stockholder Agreement, the Subject Stockholders, who as of the Record Date
owned and are entitled to vote an aggregate of approximately 54% of the
Harborside Common Stock outstanding, have agreed,
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<PAGE>
subject to certain conditions, to vote all shares of Harborside Common Stock
held by them in favor of the Merger Agreement and the transactions
contemplated thereby (which include the Amendment Proposal) and the Merger.
Thus, the requisite vote of the holders of shares of Harborside Common Stock
to approve and adopt the Merger Agreement and the Merger and to approve the
Amendment Proposal is assured. The Subject Stockholders are The Berkshire
Companies Limited Partnership, The Douglas Krupp 1994 Family Trust, The George
Krupp 1994 Family Trust, Krupp Enterprises, L.P. and Messrs. Guillard and
Dell'Anno. Douglas Krupp, who together with his brother George Krupp, controls
The Berkshire Companies Limited Partnership (a real estate and financial
services firm) and Krupp Enterprises, L.P. (a real estate investment firm), is
a director of the Company. A copy of the Stockholder Agreement is attached as
Annex II to this Proxy Statement/Prospectus. See "CERTAIN RELATED AGREEMENTS--
Stockholder Agreement."
As of the Record Date, directors and executive officers of the Company and
their affiliates held an aggregate of 3,765,160 shares of Harborside Common
Stock (approximately 47% of the outstanding shares).
VOTING AND REVOCATION OF PROXIES
Shares of Harborside Common Stock that are entitled to vote and are
represented by a Proxy properly signed and received at or prior to the Special
Meeting, unless subsequently properly revoked, will be voted in accordance
with the instructions indicated thereon. If a Proxy is signed and returned
without indicating any voting instructions, shares of Harborside Common Stock
represented by such Proxy will be voted FOR the proposal to approve the Merger
Agreement and the transactions contemplated thereby, including the Merger, and
FOR the Amendment Proposal. The Board of Directors is not currently aware of
any business to be acted upon at the Special Meeting other than as described
herein. If, however, other matters are properly brought before the Special
Meeting or any adjournments or postponements thereof, the persons appointed as
proxies will have the discretion to vote or act thereon in accordance with
their best judgment, unless authority to do so is withheld in the Proxy. The
persons appointed as proxies will not exercise their discretionary voting
authority to vote any such Proxy in favor of any adjournments or postponements
of the Special Meeting if instruction is given to vote against the approval of
the Merger and the other proposals.
Any Proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the shares represented by such Proxy are voted at
the Special Meeting by (i) attending and voting in person at the Special
Meeting, (ii) giving notice of revocation of the Proxy at the Special Meeting,
or (iii) delivering to Scott D. Spelfogel, Secretary of Harborside (a) a
written notice of revocation or (b) a duly executed Proxy relating to the same
shares and matters to be considered at the Special Meeting, bearing a date
later than the Proxy previously executed. Attendance at the Special Meeting
will not in and of itself constitute a revocation of a Proxy. All written
notices of revocation and other communications with respect to revocation of
proxies should be addressed as follows: Harborside Healthcare Corporation, 470
Atlantic Avenue, Boston, Massachusetts 02210, Attention: Scott D. Spelfogel,
Secretary, and must be received before the taking of the votes at the Special
Meeting.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
Only holders of Harborside Common Stock at the close of business on July 16,
1998, the Record Date, will be entitled to receive notice of and to vote at
the Special Meeting. At the close of business on the Record Date, 8,011,164
shares of Harborside Common Stock were outstanding and entitled to vote, which
were owned by approximately 1,500 stockholders of record. Shares of Harborside
Common Stock represented by Proxies which are marked "abstain" or which are
not marked as to any particular matter or matters will be counted as shares
present for purposes of determining the presence of a quorum on all matters.
Proxies relating to "street name" shares that are voted by brokers will be
counted as shares present for purposes of determining the presence of a quorum
on all matters, but will not be treated as shares having voted at the Special
Meeting as to any proposal as to which authority to vote is withheld by the
broker.
The presence, in person or by proxy, at the Special Meeting of the holders
of at least a majority of the votes entitled to be cast at the Special Meeting
is necessary to constitute a quorum for the transaction of business.
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Abstentions will be counted as present for the purposes of determining whether
a quorum is present but will not be counted as votes cast in favor of the
Merger Agreement or the Amendment Proposal. Because the vote on the Merger
Agreement, the Merger and the Amendment Proposal requires the approval of a
majority of the votes entitled to be cast by the holders of the outstanding
shares of Harborside Common Stock, abstentions will have the same effect as a
negative vote on these proposals.
STOCKHOLDERS' APPRAISAL RIGHTS
Each stockholder of Harborside Common Stock has a right to dissent from the
Merger, and, if the Merger is consummated, to receive "fair value" for his or
her shares in cash by complying with the provisions of Delaware law, including
Section 262 of the DGCL. The dissenting stockholder must deliver to the
Company, prior to the vote being taken on the Merger at the Special Meeting, a
written demand for appraisal of such stockholder's shares of Harborside Common
Stock and must not vote in favor of the Merger. Any stockholder voting in
favor of the Merger will be deemed to have waived any available appraisal
rights under Delaware law. The full text of Section 262 of the DGCL is
attached as Annex IV hereto. See "STOCKHOLDERS' APPRAISAL RIGHTS" for a
further discussion of such rights and the legal consequences of voting shares
of Harborside Common Stock in favor of the Merger Agreement and the Merger.
SOLICITATION OF PROXIES
The Company will bear the cost of the solicitation of Proxies and the cost
of printing and mailing this Proxy Statement/Prospectus. In addition to
solicitation by mail, the directors, officers and employees of the Company may
solicit Proxies from stockholders of the Company by telephone, telegram or by
personal interview. Such directors, officers and employees will not be
additionally compensated for any such solicitation but may be reimbursed for
reasonable out-of-pocket expenses in connection therewith. Arrangements will
also be made with brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of solicitation material to the beneficial
owners of shares held of record by such persons and the Company will reimburse
such custodians, nominees and fiduciaries for their reasonable out-of-pocket
expenses in connection therewith.
If you have any questions or require additional material, please call
Harborside Investor Relations at (888) 742-7267.
HOLDERS OF HARBORSIDE COMMON STOCK SHOULD NOT SEND STOCK CERTIFICATES WITH
THEIR PROXY CARDS, EXCEPT THAT HOLDERS OF HARBORSIDE COMMON STOCK WHO WISH TO
MAKE A NON-CASH ELECTION ARE REQUIRED TO SEND STOCK CERTIFICATES WITH THEIR
FORM OF ELECTION. HOLDERS OF HARBORSIDE COMMON STOCK WHO DO NOT MAKE A NON-
CASH ELECTION (i.e., WHO ELECT TO RECEIVE CASH) WILL RECEIVE, BY MAIL, AFTER
THE EFFECTIVE TIME OF THE MERGER, LETTERS OF TRANSMITTAL WITH WHICH SUCH STOCK
CERTIFICATES SHOULD BE RETURNED. SEE "THE MERGER--NON-CASH ELECTION" AND "--
NON-CASH ELECTION PROCEDURE."
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THE MERGER
BACKGROUND OF THE MERGER
During the third quarter of 1997, the Executive Committee (whose members are
Stephen L. Guillard and Douglas Krupp) of the Board of Directors of the
Company had several meetings to discuss the future direction of the Company
and to evaluate options to maximize value for the Company's stockholders.
Among the options considered was a possible merger of the Company with another
long-term healthcare company. However, after preliminary discussions with that
company, that company indicated that it was not interested in pursuing a
business combination with the Company. During this same time period, the
Executive Committee also evaluated various potential opportunities to acquire
other larger long-term healthcare companies; however, the Executive Committee
concluded that the Company lacked adequate capital to support a successful
offer for a larger company. Other options evaluated by the Executive Committee
included a possible equity and/or high yield debt offering and a sale of the
Company. The Executive Committee met telephonically with the Company's Board
of Directors to discuss these options. After evaluating the various options,
the Board of Directors concluded that the value that possibly could be
achieved through a sale or merger of the Company would likely be greater than
that achieved through an equity or debt offering, and authorized the Executive
Committee to engage an investment banking firm to begin a formal process of
pursuing a possible sale of the Company.
On October 20 and 21, 1997, the Executive Committee of the Board met at the
offices of the Company's legal counsel in New York and began the process of
interviewing a number of investment banking firms. Subsequent to this
interview process, Schroders, one of the firms under consideration, was
selected by the Board of Directors, based on a recommendation by the Executive
Committee. By letter dated November 25, 1997, Schroders was formally engaged
to act as the Company's exclusive financial advisor in connection with a
possible transaction whereby control of the Company is changed or all or
substantially all of the assets of the Company is acquired. Subsequent to the
selection of Schroders, Company officials met with representatives of
Schroders (i) to discuss various strategies that might maximize stockholder
value, including merging the Company with logical strategic partners and
selling the Company to a strategic or financial buyer, and (ii) to compile a
list of those parties that represented appropriate candidates with whom to
conduct discussions. At that time, approximately 15 prospective parties were
identified, including five potential strategic buyers and ten financial
organizations known to have an interest in investing in the long-term
healthcare industry. Each of these prospective buyers was subsequently
contacted to determine if there was any interest in consummating a
transaction.
The Company, with the assistance of Schroders, then prepared a confidential
memorandum for distribution to the identified parties. Schroders commenced a
process of meeting with the various parties identified as potential buyers in
order to solicit indications of interest from them. A total of 11 of the
contacted buyers indicated an interest in pursuing a transaction with the
Company, signed confidentiality agreements through late November and were
provided a copy of the confidential memorandum. Of these prospective buyers,
five potential purchasers held meetings with management of the Company and a
total of three of the potential purchasers submitted a written proposal to the
Company. Of these three bidders, one was a strategic buyer in the healthcare
industry that was significantly larger than the Company, one was a financial
buyer interested in the healthcare industry and the third was Investcorp.
Various meetings were arranged between those parties and representatives of
the Company's management during the month of December. The chronology of this
process is set forth below.
On December 2, 1997, the Company held its initial meeting with
representatives from Investcorp, which was conducted in New York. Schroders
was also present at this meeting. Additional meetings were conducted with
representatives of the Company's management and (i) other interested parties
and (ii) Investcorp throughout the month of December. Meetings with Investcorp
were held on December 8, 1997 in New York and on December 15, 1997 in Boston
at which the Company's management provided Investcorp with information about
the Company and responded to questions asked by Investcorp's staff. Throughout
this period, Company representatives met with and responded to inquiries from
other parties that had entered into confidentiality agreements, and provided
additional information to these parties as well.
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On December 31, 1997, Schroders, on behalf of the Company, received a letter
from Investcorp, on behalf of its affiliate, AIBC Finance, Ltd., indicating a
preliminary indication of interest. In that correspondence, Investcorp
indicated a willingness to consider an acquisition of all or substantially all
of the outstanding shares of the Company (including the shares underlying any
outstanding options) at a price per share of $22.00 to $26.00 in cash. The
offer was subject to certain conditions regarding recapitalization accounting
treatment, and set forth Investcorp's understanding as to levels of net debt
then in effect for the Company. Investcorp requested a 45 day due diligence
process and provided to the Company an outline of Investcorp's proposed
activity relating thereto, including, but not limited to: (i) an analysis of
the Company's financial statements and financial performance through December
31, 1997; (ii) an evaluation of competitive, environmental, and regulatory
factors; (iii) a review of capital expenditure commitments; (iv) a review of
arrangements with referral sources for patients; and (v) a review of the
Company's management information systems, leases, permits, agreements,
litigation, tax matters and other customary due diligence assessments. In
addition, Investcorp indicated that the final purchase price determination was
to be significantly affected by (1) a review of the Company's pipeline of
pending acquisitions and the likelihood of achieving the projected acquisition
volume; (2) the acquisition prices per unit and returns on investment as
reflected in management's projections; (3) a review of the potential effect of
governmental regulatory reform on the Company, and specifically the pro forma
financial impact of the new Medicare reimbursement guidelines outlined in the
Balanced Budget Act of 1997; and (4) a review of the Company's historical
success at integrating completed acquisitions. Investcorp additionally
indicated the importance of management continuing in their current positions,
managing the Company under the proposed change in ownership, and entering into
employment agreements satisfactory to Investcorp.
On January 13, 1998, Schroders received a letter from a second bidder
indicating a willingness to consider an all-cash purchase price of $26.00 per
share plus assumption of net debt of $64.3 million in an offer that was not
subject to financing but was contingent on due diligence. The second bidder
subsequently indicated to Schroders orally that its bid also was subject to
the bidder's successful completion of an unrelated acquisition. A third offer
was received on January 14, 1998 indicating an offer of $22.50 in cash,
subject to financing and other conditions. These proposals were thoroughly
evaluated by representatives of the Company and Schroders. On January 16,
1998, a meeting of the Board of Directors of the Company was convened and the
three proposals were reviewed and evaluated. The proposal submitted by the
second bidder, although potentially offering a price per share at the high end
of Investcorp's range, was deemed less attractive because it was conditioned
on the completion of a significant contingency and thus put at risk the
ultimate consummation of a transaction with this bidder. The proposal
submitted by the third bidder was at an indicated price per share that was
less than Investcorp's bid, was subject to conditions as to financing, which
increased the uncertainty of consummating a transaction with this bidder, and
thus was deemed less attractive as well. After full discussion with Schroders
and management present at the meeting, the Board of Directors authorized
management to pursue the Investcorp offer on the basis of (i) the indicated
price range, (ii) the likelihood of a successful conclusion, (iii)
Investcorp's reputation, and (iv) the timing of Investcorp's due diligence
process. The Board also authorized management not to pursue further
discussions with the other two bidders for the Company, if required by
Investcorp.
Investcorp and Schroders (on behalf of the Company) thereafter entered into
a letter agreement, dated as of February 2, 1998, pursuant to which the
Company agreed, among other things, that, until March 18, 1998, it would not,
directly or indirectly, solicit or initiate discussions, proposals or offers
from, or participate in any negotiations or discussions with, or enter into
any type of agreement with, or provide any information to, any entity other
than Investcorp relating to any proposal or offer for or inquiry about a sale
of all or substantially all of the Company. The letter agreement did not
prohibit the Company from taking any action authorized by its Board of
Directors in response to an unsolicited offer or proposal received after the
date of the letter agreement if the Company was advised by outside legal
counsel that failure of the Board of Directors to authorize the taking of such
action could reasonably constitute a breach of the Board's fiduciary duties.
The Company also agreed to provide Investcorp with access to its facilities,
personnel and to all information and data necessary for Investcorp to evaluate
entering into an agreement with respect to the purchase of all or
substantially all of the Company.
On February 2, 1998, management and Investcorp met at the Company's offices
in Boston to commence the due diligence process. Investcorp received access to
a special data room set up by the Company and also had
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the opportunity to meet with management of the Company and to visit the
Company's various facilities. On February 6, 1998, the Company made a formal
presentation to Investcorp and certain of its consultants in a day long
session in Boston, including an extensive question and answer period. On March
4, 1998, a second presentation was made by management to Investcorp, its legal
counsel, investment bankers and others as part of the overall due diligence
process. Schroders also was present at these meetings.
While Investcorp was conducting its due diligence, the Company and
Investcorp began negotiating the terms of the Merger Agreement. On March 16,
1998, Investcorp communicated to Schroders that, after completion of its due
diligence, it was willing to proceed at $24.00 per share. Investcorp also
raised a number of business terms, including a requirement that the Subject
Stockholders agree to enter into the Stockholder Agreement. In addition, as a
condition to agreeing to proceed with the transaction, Investcorp required
that the transaction be structured in a manner that would permit the
transaction to be accounted for as a recapitalization for financial reporting
purposes. In order to meet the accounting treatment requirements, Investcorp
required that the transaction be structured such that existing non-management
Harborside stockholders would retain an ownership interest in the post-Merger
company that aggregated 6%. Consistent with its investment policy that
management of a company being acquired by Investcorp have an economic stake in
the growth of the subject company, Investcorp also required that the Senior
Management Stockholders agree to retain a portion of their equity interests in
the Company. With respect to the 6% ownership interest in the post-Merger
company required by Investcorp to be retained by existing stockholders,
although Investcorp at first required that the Berkshire Stockholders agree to
retain such 6% interest, the Company and the Berkshire Stockholders did not
want the Berkshire Stockholders to be treated differently from the
unaffiliated (non-management) stockholders of the Company, and thus insisted
that each such stockholder be given the opportunity to participate, on a pro
rata basis, with the Berkshire Stockholders' obligation to retain such 6%
interest in the post-Merger company. After further negotiations between the
Company and Investcorp regarding business terms of the Merger, between
Investcorp and the Subject Stockholders regarding the Stockholder Agreement,
and between Investcorp and the Berkshire Stockholders regarding the 6%
retained interest in the post-Merger company, Investcorp reported to Schroders
on March 18, 1998 that it was willing to revise its $24.00 per share bid,
provided that certain closing conditions were included in the Merger
Agreement. Representatives of the Company and Investcorp continued
negotiations on March 19 and 20 and, on March 20, 1998, after having reached
substantial agreement on the closing conditions to be included in the Merger
Agreement, Investcorp advised Schroders that it was willing to proceed at a
purchase price of $25.00 per share. During the following three weeks, the
Company and Investcorp continued negotiations until they reached agreement on
the other terms of the Merger Agreement. During this same time period,
Investcorp and the Subject Stockholders reached agreement with respect to the
terms of the Stockholder Agreement, Investcorp and the Senior Management
Stockholders reached agreement with respect to the arrangements with the
Senior Management Stockholders described elsewhere in this Proxy
Statement/Prospectus, Investcorp and the Berkshire Stockholders reached
agreement with respect to the 6% retained interest, and Investcorp and Messrs.
Douglas Krupp and George Krupp reached agreement with respect to the Non-
Compete Agreements.
On April 15, 1998, a special meeting of the Board was held at which the
Board, management and Schroders extensively discussed the Investcorp offer. At
the meeting, legal counsel reviewed applicable legal principles and described
in detail the terms of the Merger Agreement (a substantially final draft of
which had been distributed to the Board a week prior to the meeting), the
Stockholder Agreement, the compensation arrangements with management (which
were discussed without the presence of Mr. Guillard, the sole management-
director) and the other agreements relating to the proposed transaction.
Schroders then made a full financial presentation and rendered to the Board
its oral and written opinion that, as of such date and based upon and subject
to certain matters stated in such opinion, the $25.00 per share cash
consideration to be received by the Company's stockholders in the proposed
Merger was fair, from a financial point of view, to such holders. Schroders
extensively reviewed with the Board the financial analyses performed by
Schroders in connection with its opinion (see "--Opinion of Schroders").
On the basis of Schroders' opinion concerning the fairness of the
consideration, and having determined that the Merger is in the best interests
of the Company and its stockholders, based on the factors described below
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under "Recommendation of the Board of Directors; Reasons for the Merger," the
Board of Directors, and the members of the Board of Directors other than
Stephen L. Guillard and Douglas Krupp (who have certain interests in the
Merger (see "--Interests of Certain Persons in the Merger")), each unanimously
determined that the Merger Agreement and the transactions contemplated thereby
are in the best interests of the Company and its stockholders, and resolved to
recommend to the Company's stockholders that they approve and adopt the Merger
Agreement and the transactions contemplated thereby, including the Merger.
RECOMMENDATION OF THE BOARD OF DIRECTORS; REASONS FOR THE MERGER
At its meeting on April 15, 1998 the Board of Directors, and the independent
members of the Board (Robert T. Barnum, David F. Benson, Robert M. Bretholtz
and Sally W. Crawford), each unanimously determined, among other things, that
the transactions contemplated by the Merger Agreement, including the Merger,
are in the best interests of the stockholders of Harborside. The Board of
Directors, and the independent members of the Board, each recommends that
holders of Harborside Common Stock vote FOR the proposal to approve and adopt
the Merger Agreement and the Merger.
The recommendation by the Board, and the independent members of the Board,
that the Company's stockholders approve and adopt the Merger Agreement and the
Merger is not, and should not be considered to be, a recommendation as to
whether stockholders should retain shares of Harborside Common Stock.
In the course of reaching its decision to approve the Merger Agreement and
the Merger, the Board consulted with the Company's legal counsel and Schroders
and considered a number of factors, including, among others, the following
material factors:
(1) The opinion of Schroders delivered at the April 15, 1998 meeting of
the Board to the effect that, as of such date, and based upon the
assumptions made, matters considered and limits of review set forth in such
opinion, the $25.00 per share consideration to be received by the holders
of Harborside Common Stock in the Merger is fair to such stockholders from
a financial point of view; and the presentation of Schroders at the April
15, 1998 meeting of the Board of Directors in connection with its opinion.
See "THE MERGER--Opinion of Schroders."
(2) The fact that Schroders, on behalf of the Company, had contacted a
number of likely potential bidders, that the process by which such
potential bidders were contacted (i.e., each of the potential bidders knew
that the proposals were being solicited from other potential bidders at the
same time) was designed to create a competitive environment that would tend
to enhance stockholder value, and that Investcorp's proposal emerged as the
most attractive proposal of those received in such process.
(3) The fact that the $25.00 per share consideration to be received by
holders of Harborside Common Stock in the Merger represented a premium over
recent and historical trading prices of Harborside Common Stock.
(4) The belief of the Board of Directors that, based on the advice of
management and Schroders and the factors enumerated herein, the Merger
constituted, as of the date of the determination of the Board, the best
transaction reasonably available to maximize stockholder value.
(5) The fact that the stockholders of the Company (other than the
Restricted Management Stockholders) will have the right to elect to receive
cash or to retain Harborside Common Stock (up to the Non-Cash Election
Number of shares in the aggregate), subject to proration, which right the
Board believed would provide the possibility of some flexibility to any of
the Company's stockholders who might desire to retain more Harborside
Common Stock after the Merger than would automatically be retained under a
non-election based formula. This election would also provide the
possibility that the Company's stockholders who desire to receive more cash
for their shares than would be provided under a non-election based formula
would receive such additional cash.
(6) The fact that the Company may terminate the Merger Agreement in order
to pursue another offer if the Board determines that doing so is required
by its fiduciary duty to the stockholders of the Company,
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and that the break-up fee that may be payable under such circumstances was
considered by the Board to be reasonable in the context of the entire
transaction in light of the fact that Investcorp required that such break-
up fee be payable under such circumstances and in light of the fact that,
after consultation with Schroders, the amount of such fee was considered to
be reasonable in relation to fees payable under comparable circumstances in
comparable deals.
(7) The fact that the Merger Agreement is not subject to a financing
contingency, which increases the likelihood of consummating the Merger.
(8) The fact that the Berkshire Stockholders, who hold approximately 50%
of the outstanding shares of Harborside Common Stock, indicated to the
Board that they believed that Investcorp's proposal and the consideration
to be received in the Merger were attractive and in the best interests of
the Company and its stockholders.
(9) The fact that the representations and warranties made by the Company
in the Merger Agreement will not survive the closing, as a result of which
MergerCo will not have the contractual right to seek indemnification from
the Company's stockholders in the event such representations and warranties
prove not to have been true when made.
(10) The terms of the Merger Agreement, including the representations,
warranties and covenants of the parties and the conditions to their
respective obligations set forth in the Merger Agreement.
(11) The fact that stockholders who do not vote in favor of the Merger
will have statutory appraisal rights.
(12) The fact that the obligations of MergerCo under the Merger Agreement
is guaranteed by Investcorp Bank E.C., an entity reported to have
substantial assets.
All of the foregoing factors were viewed by the Board as positive factors in
determining to recommend that stockholders approve and adopt the Merger
Agreement.
The Board of Directors, without the presence of Stephen L. Guillard (who was
excused from the meeting during the discussion of the management compensation
arrangements), also considered the interests described under "THE MERGER--
Interests of Certain Persons in the Merger" that certain members of management
have in the Merger. The Board concluded that Investcorp's requirement that the
Senior Management Stockholders retain a portion of their equity interests in
the Company, and not have the opportunity to elect to receive cash for such
portion or to be pro-rated, was reasonable in the context of the entire
transaction in light of the fact that the Company was advised by Investcorp
that Investcorp believed that the Senior Management Stockholders should
continue to have an economic stake in the growth of the post-transaction
company. The new employment agreements expected to be entered into by
management at the Effective Time of the Merger, and the new stock options
expected to be granted to management at such time, each of which were
negotiated between Investcorp and management (represented by counsel that was
not also representing the Company in the Merger), were considered by the Board
to be reasonable in the context of the entire transaction in light of the fact
that the Company was advised by Investcorp that Investcorp believed such
arrangements were necessary in order to provide incentives to management to
continue to manage the Company successfully. The Board concluded that the fact
that existing stock options previously granted to management will vest as a
result of the Merger transaction, and that certain members of management will
receive payments as a result of the Merger pursuant to the Change in Control
Agreements, all as described under "THE MERGER--Interests of Certain Persons
in the Merger," were reasonable given that the related stock option plan and
such agreements had previously been approved by the Board of Directors of the
Company prior to the proposed Merger transaction, and that such options would
have been granted and such payments made in the event of the consummation of
any similar transaction.
The Board also considered the interests of the Berkshire Stockholders
described under "THE MERGER--Interests of Certain Persons in the Merger" and
"--Master Rights Agreement" (pursuant to which the Berkshire Stockholders will
be granted certain "piggy-back" registration rights, rights to receive certain
periodic financial
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information regarding the Company so long as the Berkshire Stockholders
continue to own Harborside Common Stock representing at least 5% of the post-
transaction company, and certain rights (which will be available to all
holders of Harborside Common Stock) to participate in future equity financings
under certain circumstances), and concluded such rights were reasonable in the
context of the entire transaction in that they do not provide materially
significant benefits to the Berkshire Stockholders than those granted or
otherwise available to the non-affiliated stockholders. The Board also
considered the 6% ownership interest in the post-transaction company to be
retained by the Berkshire Stockholders (subject to proration to the extent
other Harborside stockholders elect to retain shares), and concluded that such
arrangement was reasonable in light of (i) Investcorp's requirement that the
transaction be structured in such a manner in order to permit the transaction
to be accounted for as a recapitalization for financial reporting purposes,
(ii) the fact that all (non-management) stockholders would have the
opportunity to participate, on a pro rata basis, with the Berkshire
Stockholders' obligation to retain the 6% interest and (iii) Investcorp's
willingness to pay $25.00 per share to stockholders who elect to receive cash
for, and not to retain, their shares of Harborside Common Stock.
The Board considered the noncompete arrangements described under "THE
MERGER--Interests of Certain Persons in the Merger," and concluded that the
$250,000 payment to be paid to each of Messrs. Douglas Krupp and George Krupp
was reasonable in the context of the entire transaction in relation to the
non-competition covenants being made by such persons.
The Board considered the termination of the Directors Retainer Fee Plan
described under "THE MERGER--Interests of Certain Persons in the Merger," and
concluded that such termination, and cash payment to three directors affected
by such termination (Robert T. Barnum, David S. Benson and Sally W. Crawford),
was reasonable in the context of the entire transaction in light of
Investcorp's requirement that such plan be terminated, and in light of the
fact that such payments did not represent a per share payment greater than
that being offered to the other stockholders.
The Board considered the fact that stockholders who elect to retain shares
of Harborside Common Stock will have limited liquidity with respect to such
shares as a result of the intention to delist the Harborside Common Stock
after the Merger. In the Board's view, however, this negative factor was
offset in part by the fact that no unaffiliated stockholder would be required
to elect to retain shares of Harborside Common Stock and in part by provisions
in the Company's post-Merger charter, which provide that, prior to an initial
public offering by the Company, holders of Harborside Class A Common Stock
will participate with holders of Harborside Class D Common Stock in any sales
of common stock of Harborside pursuant to certain "tag-along" rights set forth
in such charter. See "DESCRIPTION OF HARBORSIDE CAPITAL STOCK--Harborside's
Capital Stock Following the Merger." In further considering the nature of the
rights of a stockholder electing to retain shares of Harborside Common Stock
(as set forth in the Company's post-Merger charter), the Board viewed it to be
a positive factor that such charter provides that such stockholders are
required to receive the same per share consideration as will be received by
holders of Harborside Class B Common Stock, Harborside Class C Common Stock
and Harborside Class D Common Stock in any merger or other sale of the
Company. See "DESCRIPTION OF HARBORSIDE CAPITAL STOCK--Harborside's Capital
Stock Following the Merger." This "fair treatment" provision had been included
in the charter at the request of the Board.
The Board of Directors considered the fact that no third party appraisal was
requested or obtained by the Company with respect to the value of the retained
shares, and that Schroders was not asked to give its opinion with respect to
the fairness of such shares. Although this lack of valuation would make a
stockholder's decision as to whether to elect to receive $25.00 per share or
to retain shares more difficult, the Board decided not to request such a
valuation or fairness opinion. This decision was based on a number of factors.
As a condition to Investcorp's agreeing to enter into the Merger Agreement,
Investcorp required that the transaction be structured such that 6% of the
post-Merger company would be retained by existing (non-management)
stockholders in order to enable the transaction to be treated as a
recapitalization for financial reporting purposes. In connection therewith,
Investcorp required that the Berkshire Stockholders agree to retain such 6%
ownership. Because the recapitalization structure was a condition to
Investcorp's willingness to proceed with the transaction, the Berkshire
Stockholders agreed to retain such shares. However, because the value of those
shares potentially
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could be greater than the $25.00 per share being offered to the other
stockholders and because the Company and the Berkshire Stockholders did not
want the Berkshire Stockholders to be treated differently from the other (non-
affiliated) stockholders, the transaction was structured to provide such
stockholders with the opportunity to participate, on a pro rata basis, with
the Berkshire Stockholders' obligation to retain such ownership interest. In
making its determination to not seek a valuation with respect to such shares,
the Board took into account the fact that (i) no unaffiliated stockholder
would be required to retain shares of the Company, (ii) any such valuation of
or fairness opinion with respect to the retained shares would have been of
limited value because such valuation would have been based on material
assumptions regarding the capitalization of the Company (including the debt
structure), which had not been definitely determined as the date of the Board
meeting (and which still has not been finalized), and would therefore have
been preliminary and subject to material change, (iii) obtaining such a
valuation would have been costly and time consuming, and (iv) notwithstanding
the fact that the unaffiliated stockholders would have the same opportunity to
participate in the obligation of the Berkshire Stockholders to retain shares,
the Board believed it unlikely that many of such stockholders would elect to
retain shares and forego the opportunity to receive $25.00 per share in cash
for their stock (based on the advice from Schroders as to the fairness of the
price, from a financial point of view, and on the fact that such price
represented a premium over recent trading prices of such stock). For all of
the above reasons, the Board decided not to request such a valuation or
fairness opinion.
The Board of Directors also considered the terms of the Stockholder
Agreement, described under "CERTAIN RELATED AGREEMENTS--Stockholder
Agreement," pursuant to which, among other things, the Subject Stockholders
have agreed to grant MergerCo an option to purchase their shares under the
circumstances set forth in the Stockholder Agreement. The Board concluded
that, given the ownership position of the Subject Stockholders, the
Stockholder Agreement would make it very unlikely that a third party other
than a MergerCo-affiliated entity would make a business combination proposal
for the Company. In the Board's view, however, this negative factor was offset
by (i) the fact that Investcorp had specifically stated that the lock-up of
the Subject Stockholders was a condition of its entering into the Merger
Agreement, (ii) the fact that, given that Investcorp had emerged as the most
attractive bidder among a number of other potential bidders, it was unlikely
that another party would appear at this point and be in a position to
consummate a transaction on terms more attractive and on a faster time frame
than those contemplated in the Merger Agreement, (iii) the fairness opinion of
Schroders and (iv) the fact that the Subject Stockholders, which beneficially
own more than 54% of the Company's stock, were willing to enter into the
Stockholder Agreement.
In considering the Merger and related transactions, the Board of Directors
was not required to, and did not, appoint a Special Committee to consider the
terms of the Merger on behalf of the Company. Four out of the six members of
the Board are independent (in that none of such persons is an employee or,
other than by reason of being a director, an affiliate of the Company), and
were in a position to consider the terms of the Merger without having
interests that differed in any material respect from the interests of the
Harborside stockholders. With respect to the interests of Douglas Krupp, a
director who also is an affiliate of the Berkshire Stockholders, and Stephen
L. Guillard, a director who is also a Senior Management Stockholder, such
interests were fully disclosed to and considered by the Board. See "THE
MERGER--Interests of Certain Persons in the Merger."
The foregoing discussion of the information and factors considered by the
Board is not intended to be exhaustive but is believed to include all material
factors considered by the Board. In view of the variety of factors considered
in connection with its evaluation of the Merger, the Board did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weight to the specific factors considered in reaching its determination. In
addition, individual members of the Board may have given different weights to
different factors. The independent members of the Board did not, as a group,
engage in any separate analysis or have separate meetings apart from those
described above with respect to the full Board (although, as described above,
Stephen L. Guillard, the sole management-director, was not present during the
Board's discussion of the management compensation arrangements). In the course
of its deliberations, the Board did not establish a range of values for the
Company; however, based on the factors outlined above and on the presentation
and opinion of Schroders, the Board determined that the Merger Agreement and
the Merger are in the best interests of the Company and its stockholders.
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OPINION OF SCHRODERS
On April 15, 1998, Schroders rendered its opinion to the Board of Directors
of the Company to the effect that, as of the date of such opinion, the cash
consideration of $25.00 per share (the "Consideration") to be received by the
holders of shares of Harborside Common Stock (other than Dissenting Shares (as
defined below), shares of Common Stock held in treasury, shares owned by
MergerCo or any affiliate of MergerCo, and the 225,651 shares held by the
Senior Management Stockholders) is fair, from a financial point of view, to
the Company's stockholders.
A COPY OF THE SCHRODERS OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY
SCHRODERS, IS ATTACHED AS ANNEX III TO THIS PROXY STATEMENT/PROSPECTUS. THE
SCHRODERS OPINION IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF
VIEW, OF THE CASH CONSIDERATION OF $25.00 PER SHARE TO BE RECEIVED BY THE
HOLDERS OF HARBORSIDE COMMON STOCK IN THE MERGER. THE SCHRODERS OPINION DOES
NOT ADDRESS THE FAIRNESS OF THE NON-CASH ELECTION SHARES TO BE RETAINED BY THE
HOLDERS OF HARBORSIDE COMMON STOCK WHO ELECT NOT TO RECEIVE THE CONSIDERATION
IN THE MERGER. THE SCHRODERS OPINION WAS PROVIDED AT THE REQUEST AND FOR THE
INFORMATION OF THE COMPANY'S BOARD OF DIRECTORS IN EVALUATING THE
CONSIDERATION AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER
CONCERNING WHETHER TO ELECT TO RECEIVE THE CONSIDERATION OR VOTE IN FAVOR OF
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT. THE SUMMARY OF THE
SCHRODERS OPINION SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS DOES NOT
PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF THE SCHRODERS OPINION ATTACHED AS ANNEX III HERETO. STOCKHOLDERS
OF HARBORSIDE SHOULD READ THE SCHRODERS OPINION CAREFULLY IN ITS ENTIRETY FOR
INFORMATION WITH RESPECT TO THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY SCHRODERS IN RENDERING
ITS OPINION. SCHRODERS HAS CONSENTED TO THE REFERENCES TO SCHRODERS AND THE
SCHRODERS OPINION IN THIS PROXY STATEMENT/PROSPECTUS, AND TO THE ATTACHMENT OF
THE SCHRODERS OPINION TO THIS PROXY STATEMENT/PROSPECTUS AS AN ANNEX HERETO.
In arriving at the Schroders Opinion, Schroders: (i) reviewed the Merger
Agreement; (ii) visited the executive offices and certain operations of the
Company and participated in due diligence meetings with the Company and
Investcorp; (iii) reviewed the Company's Annual Reports on Form 10-K filed
with the Commission for the fiscal years ended December 31, 1996 and 1997;
(iv) reviewed projected financial statements of the Company prepared by
management of the Company; (v) held discussions with management of the Company
and Investcorp regarding the business, operations and prospects of the Company
and the long-term care industry; (vi) performed various financial analyses, as
Schroders deemed appropriate, of the Company using generally accepted
analytical methodologies, including: (a) an analysis of premiums paid in
recent public merger and acquisition transactions; (b) the application of the
public trading multiples of companies that Schroders deemed comparable to the
Company to the financial results of the Company; (c) the application of the
multiples reflected in recent public mergers and acquisitions for businesses
that Schroders deemed comparable to the Company to the financial results of
the Company; and (d) a discounted projected cash flow analysis; (vii) reviewed
the historical trading prices and volumes of the Common Stock on the NYSE; and
(viii) performed such other financial studies, analyses, inquiries and
investigations as Schroders deemed appropriate.
Schroders assumed and relied, without independent verification, upon the
accuracy and completeness of all the information supplied or otherwise made
available to Schroders by the Company or from other sources, and upon the
assurance of the Company's management that they were not aware of any
information or facts that would make the information provided to Schroders
incomplete or misleading. Schroders did not undertake an independent appraisal
of the assets or liabilities (contingent or otherwise) of the Company, nor was
Schroders furnished with any such appraisals. With respect to the projected
financial statements referenced in the preceding paragraph, Schroders was
advised by the Company, and assumed without independent investigation, that
they
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were reasonably prepared and reflected the best currently available estimates
and judgements of the future results of operations and financial condition at
and for the periods specified therein, and Schroders expressed no opinion with
respect to such financial statements.
No limitations were imposed by the Company on the scope of Schroders'
investigation or the procedures to be followed by Schroders in rendering the
Schroders Opinion. The Schroders Opinion was necessarily based upon financial,
economic, market and other conditions as they existed and could be evaluated
by Schroders on the date of the Schroders Opinion. Schroders disclaimed any
undertaking or obligation to advise any person of any change in any fact or
matter affecting the Schroders Opinion which might come or be brought to
Schroders' attention after the date of the Schroders Opinion. The Schroders
Opinion did not constitute a recommendation as to any action taken by the
Board of Directors or the Company and did not constitute a recommendation to
any stockholder with respect to whether to elect to receive the Consideration
or vote in favor of the transactions contemplated by the Merger Agreement, and
should not be relied upon by any stockholder as such. Schroders and the
Company entered into a letter-form engagement agreement dated November 25,
1997 (the "Engagement Agreement"), pursuant to which Schroders was retained
"solely as an advisor to the Company, and not as an advisor to or agent of any
other person," to render the Schroders Opinion and act as the Company's
exclusive financial advisor in connection with the Merger. The Engagement
Agreement explicitly provided that "the Company's engagement of Schroders is
not intended to confer any rights upon any person not a party hereto
(including, among others, security holders, employees or creditors of the
Company) as against Schroders, Schroders' affiliates or their respective
directors, agents and employees." Accordingly, the Schroders Opinion stated
Schroders' understanding that such opinion would be used by the Company's
Board of Directors solely in connection with its consideration of the fairness
of the Consideration to be received in the Merger by the stockholders of the
Company and for no other purpose, and that in rendering the Schroders Opinion,
Schroders specifically disclaimed being engaged as an agent or fiduciary of
the Company's stockholders or any third party.
By virtue of the foregoing provisions of the Engagement Agreement and the
inclusion of such disclaimer in the Schroders Opinion, Schroders believes that
the Company's stockholders cannot rely upon the Schroders Opinion to support
any claims against Schroders arising under applicable state law. The
availability of any such defense will, however, be resolved by a court of
competent jurisdiction applying applicable state law to the relevant facts,
and the resolution of the question of the availability of any such defense
will have no effect on the rights and responsibilities of the Company's Board
of Directors under applicable state law. Furthermore, the availability of such
a state law defense to Schroders would have no effect on the rights and
responsibilities of either Schroders or the Company's Board of Directors under
the federal securities laws.
The Schroders Opinion related solely to the fairness, from a financial point
of view, of the Consideration to be received by the stockholders in the
Merger, and Schroders expressed no opinion as to the structure, terms or
effect of any other aspect of the Merger or the provisions of the Merger
Agreement.
The following is a summary of all of the material financial analyses
performed by Schroders in arriving at the Schroders Opinion and was provided
by Schroders for inclusion herein.
Stock Trading History. Schroders reviewed the history of the trading prices
and trading volume of Harborside Common Stock since its initial public
offering on June 11, 1996 and the relative trading price of Harborside Common
Stock over the prior twelve month, six month, three month and one month
periods, respectively, in relation to the market prices of (i) the Standard &
Poor's 500 Index (the "S&P 500"), (ii) the NASDAQ Composite Index (the "NASDAQ
Composite") and (iii) an index of long-term care companies (the "Long-Term
Care Index") consisting of the following companies: Advocat Inc., Beverly
Enterprises, Inc., Centennial Healthcare, Inc., Genesis Health Ventures, Inc.,
Harborside Healthcare Corporation, Health Care & Retirement Corporation,
Integrated Health Services, Inc., Manor Care, Inc., Mariner Health Group,
Inc., Paragon Health Network, Inc., Summit Care Corporation, Sun Healthcare
Group, Inc. and Vencor, Inc. Such review indicated that for the twelve months
ended April 9, 1998, Harborside Common Stock outperformed the S&P 500, the
NASDAQ Composite and the Long-Term Care Index. During the six month period
ended April 9, 1998, Harborside Common Stock outperformed the NASDAQ Composite
and Long-Term Care Index, but was
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outperformed by the S&P 500. During the three month and one month period ended
April 9, 1998, Harborside Common Stock was outperformed by the S&P 500, the
NASDAQ Composite and the Long-Term Care Index.
The premiums paid analysis performed by Schroders reflected an implied value
of $25.24 per share for Harborside based upon the price of Harborside Common
Stock one day prior to the public announcement of the Merger, $26.05 based
upon such price one week prior to such announcement, and $25.75 based upon
such price four weeks prior to such announcement. Schroders noted that the
Consideration approximated the foregoing implied values and considered also
that the market price of Harborside Common Stock as at the reference dates had
likely been affected by general speculation within the long-term care industry
following the announcement on February 6, 1998 of the intention of Fountain
View Affiliates to acquire Summit Healthcare. As noted below, in arriving at
its opinion, Schroders considered the results of all of its analyses as a
whole and did not attribute any particular weight to any analysis, factor or
ratio considered by it.
Selected Comparable Public Company Analysis. Schroders compared selected
projected financial and operating data of Harborside to the corresponding data
of a group of publicly traded companies that Schroders deemed to be similar to
Harborside. In determining the appropriate comparable company universe for
Harborside, Schroders considered a variety of factors including market
capitalization, revenues, cash flow, business focus, and patient capacity.
These companies included: Advocat Inc., Beverly Enterprises, Inc., Centennial
Healthcare, Inc., Genesis Health Ventures, Inc., Health Care & Retirement
Corporation, Integrated Health Services, Inc., Mariner Health Group, Inc.,
Paragon Health Network, Inc. and Sun Healthcare Group, Inc. (collectively, the
"Comparable Companies"). Schroders calculated multiples of Adjusted Enterprise
Value (defined as market value plus total debt plus capitalized rents (i.e.,
ten times rents) less cash and cash equivalents) to patient capacity (defined
as total operating beds), to the latest twelve months ("LTM") revenues and LTM
earnings before interest, taxes, depreciation, amortization and rent
("EBITDAR"). Schroders also calculated multiples of Enterprise Value (defined
as market value plus total debt less cash and cash equivalents) to LTM
earnings before interest, taxes, depreciation and amortization ("EBITDA") and
LTM earnings before interest and taxes ("EBIT"). Schroders also calculated
multiples of the market value of equity to LTM earnings per share ("EPS"),
projected 1998 EPS and projected 1999 EPS based on information provided by a
variety of sources including analyst research reports and information
published by First Call (an on-line data services which compiles estimates
developed by research analysts). Finally, Schroders calculated multiples of
the market value of equity to book value per share. The operating bed values
ranged from $22,300 to $139,800, with mean and median values of $78,900 and
$70,200, respectively (as compared to $64,600 for Harborside), implying a
value of $30.62 per share for Harborside based upon the mean of the values for
the comparable companies. The multiple of LTM revenues ranged from 1.2x to
2.6x, with mean and median multiples of 1.7x and 1.6x, respectively (as
compared to 1.7x for Harborside), implying a value of $21.98 per share for
Harborside based upon the mean of the multiples for the comparable companies.
The multiple of LTM EBITDAR ranged from 7.0x to 14.4x, with mean and median
multiples of 10.1x and 10.4x, respectively (as compared to 11.0x for
Harborside), implying a value of $16.77 per share for Harborside on a similar
basis. The multiple of LTM EBITDA ranged from 8.7x to 14.7x, with mean and
median multiples of 10.7x and 11.0x, respectively (as compared to 11.5x for
Harborside), implying a value of $18.39 per share for Harborside on a similar
basis. The multiple of LTM EBIT ranged from 11.8x to 19.5x, with mean and
median multiples of 14.7x and 14.6x, respectively (as compared to 14.2x for
Harborside), implying a value of $21.48 per share for Harborside on a similar
basis. The multiple of LTM EPS ranged from 13.4x to 28.7x, with mean and
median multiples of 19.8x and 18.1x, respectively (as compared to 24.1x for
Harborside), implying a value of $16.66 per share for Harborside on a similar
basis. The multiple of 1998 EPS ranged from 11.4x to 24.1x, with mean and
median multiples of 15.9x and 15.3x, respectively (as compared to 19.5x for
Harborside), implying a value of $16.70 per share for Harborside on a similar
basis. The multiple of 1999 EPS ranged from 10.1x to 20.3x, with mean and
median multiples of 14.1x and 14.0x, respectively (as compared to 15.5x for
Harborside), implying a value of $18.62 per share for Harborside on a similar
basis. The multiple of market value of equity to book value of equity ranged
from 1.5x to 13.1x, with mean and median multiple of 3.3x and 1.8x,
respectively (as compared to 3.2x for Harborside), implying a value of $21.47
per share for Harborside on a similar basis.
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In applying the foregoing analyses to reach the conclusion expressed in the
Schroders Opinion, Schroders noted that, except for the implied value per
share of Harborside calculated on the basis of the mean of the operating bed
values for the comparable companies, the Consideration to be received by the
holders of shares of Harborside Common Stock exceeded each of the implied
values based on the mean multiples for the comparable companies and fell
within the range of multiples for the comparable companies. As noted below, in
arriving at the Schroders Opinion, Schroders considered the results of all of
its analyses as a whole and did not attribute any particular weight to any
analysis, factor or ratio considered by Schroders.
Comparable Transaction Analysis. Schroders considered the terms, to the
extent publicly available, of selected transactions comparable to the Merger
(the "Comparable Transactions") and sought to compare the Consideration with
the considerations involved in such transactions. The Comparable Transactions
and their pertinent dates were as follows: the announced acquisition of
Paragon Health Network Inc. by Mariner Health Group, Inc. (announced April
1998); the announced acquisition by Fountain View, Inc. of Summit Care
Corporation (announced February 1998); the acquisition by Integrated Health
Services, Inc. of HealthSouth Corporation's skilled nursing facilities
(completed December 1997); the acquisition by Extendicare Inc. of Arbor Health
Care Company (completed December 1997); the acquisition by Sun Healthcare
Group of Regency Health Services, Inc. (completed October 1997); the
acquisition by Genesis Health Ventures, Inc. of The Multicare Companies, Inc.
(completed October 1997); the announced acquisition by Sun Healthcare Group,
Inc. of Retirement Care Associates, Inc. (announced February 1997); the
acquisition by Paragon Health Network, Inc. of GranCare, Inc. (completed
November 1997); the acquisition by Paragon Health Network, Inc. of Living
Centers of America, Inc. (completed November 1997); the acquisition by
HealthSouth Corporation of Horizon Healthcare Corporation (completed October
1997); the acquisition by Vencor, Inc. of TheraTx, Inc. (completed March
1997); the acquisition by Genesis Health Ventures, Inc. of Geriatric & Medical
Companies, Inc. (completed October 1996); the acquisition by Vencor, Inc. of
The Hillhaven Corporation (completed September 1995); the acquisition by
GranCare, Inc. of Evergreen Healthcare, Inc. (completed July 1995); the
acquisition by The Hillhaven Corporation of Nationwide Care, Inc. (completed
July 1995); the acquisition by Living Centers of America, Inc. of The Brian
Center Corporation (completed May 1995); and the acquisition by Sun Healthcare
Group, Inc. of The Mediplex Group, Inc. (completed June 1994). Schroders
reviewed the multiples of (i) Adjusted Enterprise Value to total operating
beds, LTM revenues and LTM EBITDAR, (ii) Enterprise Value to LTM EBITDA and
LTM EBIT and (iii) Market Value of Equity to Net Income and Book Value of
Equity for each of the Comparable Transactions. The mean and median operating
bed values were $84,600 and $74,500, respectively (as compared to $72,600
implied for Harborside). The operating bed values ranged from $39,500 to
$165,500, with mean and median values of $84,600 and $74,500, respectively (as
compared to $72,600 for Harborside), implying a value of $34.73 per share for
Harborside based upon the mean of the values in the comparable transactions.
The multiple of LTM revenues ranged from 1.2x to 2.5x, with mean and median
multiples of 1.7x and 1.6x, respectively (as compared to 1.9x for Harborside),
implying a value of $20.30 per share for Harborside based upon the mean of the
multiples in the comparable transactions. The multiple of LTM EBITDAR ranged
from 6.8x to 14.4x, with mean and median multiples of 10.1x and 9.6x,
respectively (as compared to 12.3x for Harborside), implying a value of $16.99
per share for Harborside on a similar basis. The multiple of LTM EBITDA ranged
from 5.1x to 16.3x, with mean and median multiples of 10.5x and 9.7x,
respectively (as compared to 13.7x for Harborside), implying a value of $17.82
per share for Harborside on a similar basis. The multiple of LTM EBIT ranged
from 6.5x to 30.8x, with mean and median multiples of 14.7x and 12.9x,
respectively (as compared to 16.9x for Harborside), implying a value of $21.47
per share for Harborside on a similar basis. The multiple of LTM EPS ranged
from 9.4x to 29.0x, with mean and median multiples of 21.2x and 22.2x,
respectively (as compared to 24.1x for Harborside), implying a value of $17.79
per share for Harborside on a similar basis. The multiple of market value of
equity to book value of equity ranged from 1.6x to 10.0x, with mean and median
multiples of 3.6x and 2.7x, respectively (as compared to 4.0x for Harborside),
implying a value of $23.43 per share for Harborside on a similar basis.
In arriving at the fairness opinion, Schroders noted that except for the
implied value per share of Harborside calculated on the basis of the mean of
the operating bed values in the comparable transactions, the Consideration of
$25.00 per share exceeded each of the implied values based on the mean
multiples in the comparable
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transactions and fell within the range of multiples for the comparable
transactions. As noted above and below, in arriving at its opinion, Schroders
considered the results of all of its analyses as a whole and did not attribute
any particular weight to any analysis, factor or ratio considered by it.
In addition, Schroders reviewed and analyzed the premiums paid per share
above market value in each of the Comparable Transactions and compared these
premiums paid to the premium to be paid for Harborside implied by an assumed
equity value of $25.00 per share of Harborside Common Stock as of April 9,
1998. For purposes of the following calculations, market value equals the per
share closing stock price as of the relevant measuring date. Schroders
analyzed the premiums paid in the Comparable Transactions at three different
times prior to public announcement of the transactions. As of the date four
weeks prior to announcement of the acquisitions, the premiums paid above
market value ranged from 4.6% to 100.0% with a mean of 35.8% and a median of
31.3% (as compared to 5.0% for Harborside). As of the date one week prior to
public announcement of the acquisitions, the premiums paid above market value
ranged from 5.7% to 56.7% with a mean of 27.5% and a median of 24.6% (as
compared to 19.4% for Harborside). As of the date one day prior to public
announcement of the acquisitions, the premiums paid above market value ranged
from -0.4% to 49.8% with a mean of 23.5% and a median of 22.6% (as compared to
22.3% for Harborside). Schroders noted that on February 6, 1998 a significant
increase in the Company's share price and trading volume occurred following
the announcement of the acquisition of Summit Care Corporation by Fountain
View, Inc.
Discounted Cash Flow Analysis. Schroders performed discounted cash flow
analyses of the projected free cash flows of Harborside for the fiscal years
1998 through 2002 based on projections prepared by management. The discounted
cash flow analyses of Harborside were determined by (i) adding (a) the present
value of the projected free cash flows of Harborside for its base portfolio of
facilities (the "Base Business") over the five-year period from 1998 to 2002,
(b) the present value of the projected free cash flows of Harborside for its
anticipated acquisition growth plans (the "Growth Component") over the five-
year period from 1998 to 2002, (c) the present value of the estimated terminal
value of the Base Business at the end of 2003 and (d) the present value of the
estimated terminal value of the Growth Component at the end of 2003 and (ii)
subtracting the current net debt outstanding of Harborside. The range of
estimated terminal values at the end of the five-year period was calculated by
applying terminal multiples ranging from 8.0x and 10.0x to the projected 2003
EBITDA for the Base Business and to the Growth Component. Estimated cash flows
and terminal values were discounted to present value using discount rates
ranging from 11.5% to 13.5% for the Base Business, with particular focus on
12.5% and discount rates ranging from 25.0% to 30.0% for the Growth Component,
with particular focus on 27.5%. Based on such terminal value multiples and
discount rates, the sum of the Base Business and the Growth Component resulted
in equity reference ranges for Harborside of approximately $18.72 to $28.81.
In reaching the conclusion expressed in the Schroders Opinion, Schroders
observed that the Consideration fell within the foregoing reference range of
$18.72 to $28.81 per share of Harborside Common Stock. As noted above and
below, however, Schroders considered the results of all of its analyses as a
whole and did not attribute any particular weight to any analysis, factor or
ratio considered by Schroders.
The preparation of a fairness opinion is a complex process involving various
determinations as to the most appropriate and relevant quantitative and
qualitative methods of financial analysis and the application of those methods
to the particular circumstances and, therefore, is not readily susceptible to
partial analysis or summary description. In arriving at its opinion, Schroders
considered the results of all its analyses as a whole and did not attribute
any particular weight to any analysis, factor or ratio considered by it.
Subject to the matters set forth in the Schroders Opinion, the judgments made
by Schroders as to its analyses and the factors considered by Schroders caused
Schroders to be of the opinion, as of the date of the Schroders Opinion, that
the Consideration was fair, from a financial point of view, to the holders of
the Company's Common Stock. Schroders' analyses must be considered as a whole
and considering any portion of such analyses and of the factors considered,
without considering all analyses and factors, could create a misleading or
incomplete view of the process underlying the Schroders Opinion. In performing
its analyses, Schroders made numerous assumptions with respect to the industry
performance, general business and economic conditions and other matters, many
of which are beyond the control of the Company. Any estimates contained in
Schroders' analyses were not necessarily
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indicative of actual values or predictive of future results or values, which
may be significantly more or less favorable than as set forth therein.
Estimated values do not purport to be appraisals or to reflect the prices at
which businesses or companies may be sold in the future and such estimates are
inherently subject to uncertainty.
Schroders is an internationally-recognized investment banking firm with
experience in the valuation of businesses and their securities in connection
with mergers, acquisitions, sales and distributions of listed and unlisted
securities, private placements and valuations for corporate and other
purposes. The extensive experience of Schroders' health care investment
banking group in providing corporate finance and advisory services to
companies in the long-term care industry was a significant factor in the
Company's decision to select Schroders to be its financial advisor for the
Merger.
Schroders has performed investment banking and financial advisory services
for the Company from time to time. In the ordinary course of business,
Schroders actively trades the securities of the Company for its own account
and the accounts of its customers and, accordingly, may at any time hold a
long or a short position in such securities. Schroders may provide investment
banking or financial advisory services to the Company or Investcorp in the
future.
Pursuant to the Engagement Letter, Harborside paid Schroders a fee of
$250,000 (the "Fairness Opinion Fee") upon delivery of the Schroders Opinion
and has agreed to pay, contingent upon consummation of the Merger, an
additional fee (the "Transaction Fee") of approximately $2,250,000, equal to
0.75% of the aggregate consideration involved in the Merger, determined after
including the amount of all indebtedness assumed or retired in connection with
the Merger, and after deducting the amount of the Fairness Opinion Fee.
Harborside has also agreed to reimburse Schroders for its out-of-pocket
expenses incurred by it in connection with its engagement, including all fees
and expenses of its counsel, not to exceed $25,000. In addition, Harborside
has agreed to indemnify Schroders against certain expenses and liabilities in
connection with its engagement. The Fairness Opinion Fee was not conditioned
upon the conclusion reached by Schroders as to the fairness of the
Consideration, nor upon the ultimate consummation of the Merger.
MERGER CONSIDERATION
Subject to certain provisions as described herein with respect to fractional
shares and Dissenting Shares, each issued and outstanding share of Harborside
Common Stock will be converted, at the election of the holder thereof, into
either (a) the right to receive $25.00 in cash or (b) the right to retain one
share of Harborside Common Stock which, upon consummation of the Merger, will
be denominated as Harborside Class A Common Stock and will have certain
additional rights, powers, privileges and restrictions described in this Proxy
Statement/Prospectus under the caption "DESCRIPTION OF HARBORSIDE CAPITAL
STOCK--Harborside's Capital Stock Following the Merger" (which will relate
primarily to the relationship between the Harborside Class A Common Stock and
the other classes of capital stock to be authorized in connection with the
Merger), except that (i) as described in greater detail below, all
stockholders who elect to retain Harborside Common Stock will experience
proration of such shares, resulting in their retaining only a portion of the
shares of Harborside Common Stock they elect to retain and receiving $25.00
per share in cash for each of their other shares of Harborside Common Stock,
(ii) an aggregate of 225,651 shares of Harborside Common Stock held by the
Senior Management Stockholders will not be subject to the election described
above and instead will be converted into the right to retain the same number
of shares of Harborside Common Stock which, upon consummation of the Merger,
will be denominated as Harborside Class A Common Stock, (iii) each other share
of Harborside Common Stock held by the Senior Management Stockholders,
constituting an aggregate of 106,663 shares of Harborside Common Stock, and
each share of Harborside Common Stock held by certain other specified officers
of the Company, constituting an aggregate of 3,846 shares of Harborside Common
Stock, will not be subject to the election described above and instead will be
converted into the right to receive $25.00 in cash, and (iv) shares of
Harborside Common Stock held by Harborside, its subsidiaries, MergerCo or any
of its affiliates will be canceled and retired.
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In addition, as of the Effective Time, the shares of MergerCo's Class B
Stock, Class C Stock and Class D Stock issued and outstanding immediately
prior to the Effective Time shall be converted into shares of Class B Common
Stock, Class C Common Stock and Class D Common Stock, respectively, of the
Company.
The Merger Agreement requires that a number of shares of Harborside Common
Stock equal to the Non-Cash Election Number be retained by existing Harborside
stockholders (excluding Management Rollover Shares), and that each other share
held by existing Harborside stockholders (excluding Management Rollover
Shares) be converted into cash, as described above.
The Non-Cash Election Number is a calculated number which will not be less
than 361,500 nor more than 500,600, and will represent 6% of the total number
of shares of all classes of the Company's common stock to be issued and
outstanding immediately after giving effect to the Merger. The Non-Cash
Election Number is calculated as the product (rounded to the nearest whole
number) of (i) the sum of (A) the total number of shares of Common Stock (if
any), Class A Stock (if any), Class B Stock, Class C Stock and Class D Stock
of MergerCo outstanding immediately prior to the Effective Time of the Merger
and (B) the Management Rollover Shares, multiplied by (ii) 0.06383, subject to
the limitation that the Non-Cash Election Number shall not be less than
361,500 nor more than 500,600. The actual Non-Cash Election Number will depend
on how many shares of the Class B Stock, Class C Stock and Class D Stock of
MergerCo will be outstanding immediately prior to the Merger, which will
depend on the aggregate amount of cash that MergerCo will need to raise from
certain affiliates of Investcorp and other international investors through
their purchase of such shares, at a price of $25.00 per share. The aggregate
amount of cash that MergerCo will need to raise through its sale of common
stock, and hence the number of shares that it will issue, will depend on the
aggregate amount of proceeds raised in offerings of preferred stock and
subordinated debt to institutional investors currently planned by MergerCo to
provide part of the financing for the Merger. The amount of proceeds of these
offerings will depend on market conditions at the time of the offerings. See
"The MERGER--Merger Financings" and "DESCRIPTION OF CAPITAL STOCK--
Harborside's Capital Stock Following the Merger." It is expected that the Non-
Cash Election Number will be determined shortly before the Special Meeting.
The Berkshire Stockholders have committed to elect to retain a number shares
of Harborside Common Stock equal to the Non-Cash Election Number. Thus, all
stockholders who do not elect to retain Harborside Common Stock will be
assured that they will receive $25.00 in cash for each share held by such
stockholders, and all stockholders who elect to retain Harborside Common Stock
will experience proration of such shares, resulting in their retaining only a
portion of the shares of Harborside Common Stock they elect to retain and
receiving $25.00 per share in cash for each of their other shares of
Harborside Common Stock. With respect to certain risks related to the
retention of Harborside Common stock, see "RISK FACTORS" above.
The following examples illustrate the potential effects of proration. The
examples assume that the Non-Cash Election Number will be 361,500.
A. HOLDER A OWNS 100 SHARES AND DOES NOT ELECT TO RETAIN ANY SHARES.
Because the Berkshire Stockholders have committed to elect to retain an
amount of shares of Harborside Common Stock equal to the Non-Cash Election
Number (which, in this example, is 361,500), all stockholders who do not elect
to retain shares of Harborside Common Stock will be assured that their shares
will be converted into cash. Therefore, Holder A will receive $2,500 for its
100 shares in the Merger.
B. HOLDER B OWNS 100 SHARES AND ELECTS TO RETAIN ALL ITS SHARES.
Because the Berkshire Stockholders have committed to elect to retain an
amount of shares of Harborside Common Stock equal to the Non-Cash Election
Number (which, in this example, is 361,500), Holder B will not be able to
retain all its shares and will be required to receive some cash. This is
because the Non-Cash Election Number requirement has been exceeded and thus
the number of shares which have been elected to be retained must be reduced in
order to meet exactly the Non-Cash Election Number requirement. For example,
if
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stockholders (including the Berkshire Stockholders) elect to retain 3,615,000
shares in the aggregate, then each holder, including Holder B, would be able
to retain only 10% of such holder's shares in order to reduce the number of
retained shares to 361,500 to meet the Non-Cash Election Number requirement.
Therefore, Holder B would be able to retain only 10 shares (or 10% of its 100
shares) and would receive $2,250 in cash (90 shares at $25.00 per share). In
the case of maximum proration (i.e., all stockholders elect to retain all
their shares), Holder B would be able to retain only 4 shares and would
receive $2,400 in cash.
C. HOLDER C OWNS 100 SHARES AND ELECTS TO RETAIN 50 SHARES AND CONVERT 50
SHARES TO CASH.
Because the Berkshire Stockholders have committed to elect to retain an
amount of shares of Harborside Common Stock equal to the Non-Cash Election
Number (which, in this example, is 361,500), all stockholders, including
Holder C, who elect to retain Harborside Common Stock will experience
proration of such shares, resulting in their retaining only a portion of the
shares of Harborside Common Stock they elect to retain and receiving $25.00
per share in cash for each of their other shares of Harborside Common Stock.
Therefore, Holder C will not be able to retain 50 shares, as elected. Again,
this is because the Non-Cash Election Number requirement has been exceeded and
thus the number of shares which have been elected to be retained must be
reduced in order to meet exactly the Non-Cash Election Number requirement. For
example, if stockholders elected to retain 3,615,000 shares in the aggregate,
then each holder, including Holder C, would be able to retain only 10% of the
shares such holder elected to retain in order to reduce the number of retained
shares to 361,500 to meet the Non-Cash Election Number requirement. Therefore,
Holder C would be able to retain only 5 shares (or 10% of the 50 shares he
elected to retain) and would receive $1,125 in cash (45 shares at $25.00 per
share) for the remaining shares Holder C sought to retain, plus $1,250 in cash
for 50 of the shares Holder C elected to convert to cash. If the stockholders
elected to retain more than 3,615,000 shares in the aggregate, Holder C would
receive fewer shares than in the example above, but would receive a
commensurately greater amount of cash.
The above examples assume that the Non-Cash Election Number will be 361,500.
If the Non-Cash Election Number is greater, then for the purposes of the above
examples (i) Holder A would receive the same treatment under the Merger and
(ii) Holders B and C would receive a greater number of shares, but would
receive a commensurately smaller amount of cash.
Fractional shares of Harborside Common Stock will not be issued in the
Merger. Holders of Harborside Common Stock otherwise entitled to a fractional
share of Harborside Common Stock following the Merger will be paid cash in
lieu of such fractional share determined and paid as described under "--
Fractional Shares" below.
Under Section 262 of the DGCL, a stockholder of the Company may dissent from
the Merger and obtain payment for the fair value of such stockholder's shares
of Harborside Common Stock. In order to properly dissent, (i) the dissenting
stockholder must deliver to the Company, prior to the vote being taken on the
Merger at the Special Meeting, a written demand for appraisal of such
stockholder's shares of Harborside Common Stock if the Merger is effected and
(ii) the dissenting stockholder must not vote in favor of the Merger. See
"STOCKHOLDERS' APPRAISAL RIGHTS" and Annex IV.
NON-CASH ELECTION
Record holders of shares of Harborside Common Stock (other than the
Restricted Management Stockholders) will be entitled to make a Non-Cash
Election on or prior to the Election Date (as defined below under "--Non-Cash
Election Procedure") to retain Non-Cash Election Shares. If the number of
Electing Shares exceeds the Non-Cash Election Number, however, then (i) the
number of Electing Shares covered by each Non-Cash Election to be converted
into the right to retain Non-Cash Election Shares will be determined by
multiplying the total number of Electing Shares covered by such Non-Cash
Election by a proration factor (the "Non-Cash Proration Factor") determined by
dividing the Non-Cash Election Number by the total number of Electing Shares
and (ii) such number of Electing Shares will be so converted. All Electing
Shares, other than those shares converted into the right to retain Non-Cash
Election Shares as described in the immediately
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preceding sentence, will be converted into cash (on a consistent basis among
stockholders who made the election to retain Non-Cash Election Shares, pro
rata on the basis of the number of shares as to which they made such election)
as if such shares were not Electing Shares.
Because the Berkshire Stockholders have committed to elect to retain a
number of shares of Harborside Common Stock equal to the Non-Cash Election
Number, all stockholders who do not elect to retain Harborside Common Stock
will be assured that they will receive $25.00 in cash for each share held by
such stockholder, and all stockholders who elect to retain Harborside Common
Stock will experience proration of such shares, resulting in their retaining
only a portion of the shares of Harborside Common Stock they elect to retain
and receiving $25.00 per share in cash for each of their other shares of
Harborside Common Stock. A stockholder who receives cash and retains a portion
of such stockholder's Harborside Common Stock may, depending on the particular
circumstances of the stockholder, be required to treat the receipt of a
portion of any cash received in the Merger as a distribution by the Company
that is taxable to the stockholder as ordinary dividend income to the extent
of the Company's current and accumulated earnings and profits dividend (rather
than as the receipt of proceeds from the sale or exchange of the Harborside
Common Stock, which would generally receive capital gain treatment). See "THE
MERGER--Material Federal Income Tax Consequences--Stockholders Receiving Cash
and Retaining a Portion of Their Stock."
Upon consummation of the Merger, the Non-Cash Election Shares will be
designated as shares of Harborside Class A Common Stock and will have the
rights, powers, privileges and restrictions specified in the Restated
Certificate of Incorporation of Harborside and described in this Proxy
Statement/Prospectus. See Annex V attached hereto and "DESCRIPTION OF
HARBORSIDE CAPITAL STOCK--Harborside Capital Stock Following the Merger."
These rights, powers, privileges and restrictions will differ in certain
respects from those of the Harborside Common Stock prior to the Merger. These
differences will primarily relate to the rights, powers, privileges and
restrictions of the Harborside Class A Common Stock relative to the other
classes of capital stock of Harborside that will be authorized in connection
with the Merger, including rights, powers, privileges and restrictions in
connection with any merger of Harborside with another entity (other than the
Merger) or any resale of shares of Harborside Class D Common Stock.
The Harborside Class A Common Stock will differ from the Harborside Common
Stock in the following respects. The rights of the holders of Harborside Class
A Common Stock to receive dividends and distributions will be subject to the
rights of the holders of the Harborside preferred stock to be authorized in
connection with the Merger and will be co-equal to the rights of the holders
of the other classes of common stock to be authorized in connection with the
Merger. In the event of any stock dividend, subdivision, combination or
reclassification of any other class of common stock, a corresponding change
will be made to the Harborside Class A Common Stock so that it is not
adversely affected. In the event of an initial public offering or sale of
Harborside, the outstanding shares of Harborside Class A Common Stock (as well
as the outstanding shares of Class B Common Stock, Class C Common Stock and
Class D Common Stock of Harborside) will automatically be converted into
shares designated as "Common Stock" of Harborside (without any separate class
designation). In the event of the merger of Harborside with another entity
(other than the Merger), the holders of Harborside Class A Common Stock will
be entitled to receive the same per share consideration as is received by the
holders of the other classes of common stock unless the holders of the
Harborside Class A Common Stock agree otherwise. The holders of Harborside
Class A Common Stock will have the right to "tag-along" in connection with any
resale of Harborside Class D Common Stock by selling to the proposed purchaser
up to the same percentage of their shares of Harborside Class A Common Stock
as the percentage of the total number of shares of Harborside Class D Common
Stock being sold in the transaction. The Harborside Class A Common Stock will
be subject to mandatory redemption by Harborside if and to the extent that the
holders thereof elect not to "tag-along" in connection with any such resale of
Harborside Class D Common Stock. For a discussion of how the mandatory
redemption provisions affect holders of Harborside Class A Common Stock, see
"RISK FACTORS--Terms of Harborside Common Stock--Mandatory Redemption."
With respect to certain risks related to the retention of Harborside Common
Stock, see "RISK FACTORS."
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NON-CASH ELECTION PROCEDURE
The form for making a Non-Cash Election (the "Form of Election") is being
mailed to holders of record of Harborside Common Stock concurrently with this
Proxy Statement/Prospectus. FOR A FORM OF ELECTION TO BE EFFECTIVE, HOLDERS OF
HARBORSIDE COMMON STOCK MUST PROPERLY COMPLETE SUCH FORM OF ELECTION, AND SUCH
FORM OF ELECTION, TOGETHER WITH ALL CERTIFICATES FOR SHARES OF HARBORSIDE
COMMON STOCK HELD BY SUCH HOLDER, DULY ENDORSED IN BLANK OR OTHERWISE IN FORM
ACCEPTABLE FOR TRANSFER ON THE BOOKS OF THE COMPANY (OR BY APPROPRIATE
GUARANTEE OF DELIVERY AS SET FORTH IN SUCH FORM OF ELECTION), MUST BE RECEIVED
BY THE BANK OF NEW YORK (THE "EXCHANGE AGENT") AT ONE OF THE ADDRESSES LISTED
ON THE FORM OF ELECTION AND NOT WITHDRAWN, BY 5:00 P.M., EASTERN TIME, ON THE
SECOND BUSINESS DAY (THE "ELECTION DATE") PRECEDING THE DATE OF THE SPECIAL
MEETING.
The determinations of the Exchange Agent as to whether or not Non-Cash
Elections have been properly made or revoked, and when such election or
revocations were received, will be binding.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware or such later time
within 24 hours after such filing as the Company and MergerCo may agree to be
specified in such Certificate of Merger. The filing of the Certificate of
Merger will occur on the date of the Closing. Subject to certain limitations,
the Merger Agreement may be terminated by either MergerCo or the Company if,
among other reasons, the Merger has not been consummated on or before January
10, 1999. See "MATERIAL PROVISIONS OF THE MERGER AGREEMENT--Conditions to the
Consummation of the Merger" and "--Termination."
CONVERSION/RETENTION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
The conversion of shares of Harborside Common Stock (other than Dissenting
Shares) into the right to receive cash or the right to retain shares of
Harborside Common Stock (which, upon consummation of the Merger, will be
denominated as Harborside Class A Common Stock) will occur at the Effective
Time.
As soon as practicable as of or after the Effective Time, the Exchange Agent
will send a letter of transmittal to each holder of Harborside Common Stock
(other than holders of Harborside Common Stock making a Non-Cash Election with
respect to all of such holders' shares who have properly submitted Forms of
Election and share certificates to the Exchange Agent). The letter of
transmittal will contain instructions with respect to the surrender of
certificates representing shares of Harborside Common Stock in exchange for
cash.
EXCEPT FOR HARBORSIDE COMMON STOCK CERTIFICATES SURRENDERED WITH A FORM OF
ELECTION AS DESCRIBED ABOVE UNDER "--NON-CASH ELECTION PROCEDURE,"
STOCKHOLDERS OF THE COMPANY SHOULD NOT FORWARD STOCK CERTIFICATES TO THE
EXCHANGE AGENT UNTIL THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL.
After the Effective Time, each holder of an outstanding certificate or
certificates which prior thereto represented shares of Harborside Common Stock
shall, upon surrender to the Exchange Agent of such certificate or
certificates and acceptance thereof by the Exchange Agent, be entitled to the
amount of cash into which the number of shares of Harborside Common Stock
previously represented by such certificate or certificates surrendered shall
have been converted pursuant to the Merger Agreement and a certificate or
certificates representing the number of full shares of Harborside Common
Stock, if any, to be retained by the holder thereof pursuant to the Merger
Agreement which, upon consummation of the Merger, will be denominated as
Harborside Class A Common Stock. The Exchange Agent will accept such
certificates upon compliance with such reasonable terms and conditions as the
Exchange Agent may impose to effect an orderly exchange thereof in accordance
with normal exchange practices. After the Effective Time, there will be no
further transfer on the
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records of the Company or its transfer agent of certificates representing
shares of Harborside Common Stock which have been converted, in whole or in
part, pursuant to the Merger Agreement into the right to receive cash, and if
such certificates are presented to the Company for transfer, they will be
canceled against delivery of cash and, if appropriate, certificates for
retained Harborside Common Stock which, upon consummation of the Merger, will
be denominated as Harborside Class A Common Stock. Until surrendered as
contemplated by the Merger Agreement, each certificate for shares of
Harborside Common Stock will be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender the consideration
contemplated by the Merger Agreement. No interest will be paid or will accrue
on any cash payable as consideration in the Merger or in lieu of any
fractional shares of retained Harborside Common Stock.
No dividends or other distributions with respect to retained Harborside
Common Stock with a record date after the Effective Time will be paid to the
holder of any unsurrendered certificate for shares of Harborside Common Stock
with respect to the shares of retained Harborside Common Stock represented
thereby and no cash payment in lieu of fractional shares shall be paid to any
such holder pursuant to the Merger Agreement until the surrender of such
certificate in accordance with the Merger Agreement. Subject to the effect of
applicable laws, following surrender of any such certificate, there shall be
paid to the holder of the certificate representing whole shares of retained
Harborside Common Stock issued in connection therewith, without interest, (i)
at the time of such surrender or as promptly thereafter as practicable, the
amount of any cash payable in lieu of a fractional share of retained
Harborside Common Stock to which such holder is entitled pursuant to the
Merger Agreement and the proportionate amount of dividends or other
distributions, if any, with a record date after the Effective Time theretofore
paid with respect to such whole shares of retained Harborside Common Stock,
and (ii) at the appropriate payment date, the proportionate amount of
dividends or other distributions, if any, with a record date after the
Effective Time but prior to such surrender and a payment date subsequent to
such surrender payable with respect to such whole shares of retained
Harborside Common Stock.
FRACTIONAL SHARES
No certificates or scrip representing fractional shares of retained
Harborside Common Stock will be issued in connection with the Merger, and such
fractional share interests will not entitle the owner thereof to vote or to
any rights of a stockholder of the Company after the Merger. Each holder of
shares of Harborside Common Stock exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of retained
Harborside Common Stock (after taking into account all shares of Harborside
Common Stock delivered by such holder) will receive, in lieu thereof, a cash
payment (without interest) equal to such fraction multiplied by $25.00.
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, the Company has agreed to conduct its
business and that of its subsidiaries prior to the Effective Time only in the
ordinary course of business and in compliance with applicable law. See
"MATERIAL PROVISIONS OF THE MERGER AGREEMENT--Certain Pre-Closing Covenants."
CONDITIONS TO THE CONSUMMATION OF THE MERGER
The obligations of Harborside and MergerCo to consummate the Merger are
subject to various conditions, including, without limitation, obtaining
requisite Harborside stockholder approval, obtaining certain regulatory
approvals and third-party consents required in connection with and as a result
of the Merger, the absence of any injunction or other legal restraint or
prohibition preventing the consummation of the Merger and the absence of the
occurrence of an event that has had or is reasonably likely to have a material
adverse effect with respect to the Company. See "MATERIAL PROVISIONS OF THE
MERGER AGREEMENT--Conditions to the Consummation of the Merger."
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion is the opinion of Paul, Weiss, Rifkind, Wharton &
Garrison, special counsel to the Company, as to the material United States
federal income tax consequences of the Merger. This discussion is based on the
Internal Revenue Code of 1986, as amended (the "Code"), its legislative
history, Treasury
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Regulations thereunder and administrative and judicial interpretations
thereof, as of the date hereof, all of which are subject to change (possibly
on a retroactive basis). This discussion does not address all the tax
consequences that may be relevant to a particular stockholder in light of the
stockholder's particular circumstances and it is not intended to be applicable
in all respects to all categories of stockholders, some of whom--such as
insurance companies, tax-exempt persons, financial institutions, regulated
investment companies, dealers in securities or currencies, persons that hold
Harborside Common Stock received in the exchange as a position in a
"straddle," as part of a "synthetic security," "hedge," "conversion
transaction" or other integrated investment, persons who received Harborside
Common Stock as compensation or persons whose functional currency is other
than United States dollars-- may be subject to different rules not discussed
below. In addition, this discussion does not address any state, local or
foreign tax considerations that may be relevant to a stockholder's decision
whether to retain Harborside Common Stock pursuant to the Merger. This
discussion addresses only Harborside Common Stock held as capital assets
within the meaning of Section 1221 of the Code.
ALL HOLDERS OF HARBORSIDE COMMON STOCK ARE ADVISED TO CONSULT THEIR OWN TAX
ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF
THE MERGER IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES.
Characterization of the Merger for U.S. Federal Income Tax Purposes. For
United States federal income tax purposes, MergerCo will be viewed as a
transitory entity and therefore disregarded, and the Merger of MergerCo with
and into the Company will be treated as a sale of a portion of a tendering
stockholder's Harborside Common Stock to the stockholders of MergerCo and as a
redemption of a portion of the stockholder's Harborside Common Stock by the
Company. There is no published authority directly addressing how proceeds
should be allocated between the sale and redemption. In view of such lack of
authority, the Company intends to take the position that the percentage of a
stockholder's Harborside Common Stock disposed of by the stockholder pursuant
to the Merger which will be treated as sold to the stockholders of MergerCo
will be a percentage of such Stock equal to (a) the amount contributed to
MergerCo by the stockholders of MergerCo in exchange for MergerCo stock
divided by (b) the aggregate amount of cash paid to stockholders pursuant to
the Merger. The remainder of the stockholder's Harborside Common Stock
disposed of in the Merger will be treated as redeemed by the Company. The
Internal Revenue Service (the "IRS") could, however, adopt a different
approach in determining the portion, if any, of a stockholder's Stock which is
treated as redeemed by the Company. See "--Stockholders Receiving Cash" below
for a discussion of the consequences of cash being deemed paid in redemption
of Harborside Common Stock.
As described more fully below, the United States federal income tax
consequences of the Merger with respect to a particular stockholder will
depend upon, among other things, (i) whether the stockholder retains any
Harborside Common Stock pursuant to the Merger, (ii) the extent to which a
stockholder is deemed to have sold its Harborside Common Stock to the
stockholders of MergerCo or is deemed to have had its Harborside Common Stock
redeemed by the Company and (iii) whether the redemption of a holder's
Harborside Common Stock by the Company will qualify as a sale or exchange
under Section 302 of the Code.
Stockholders Receiving Cash and Retaining No Stock. To the extent that a
stockholder is treated as having sold Harborside Common Stock to the
stockholders of MergerCo, such stockholder will recognize capital gain or loss
(assuming the Harborside Common Stock is held by such stockholder as a capital
asset) equal to the difference between the amount realized on its deemed sale
of Harborside Common Stock to the stockholders of MergerCo (i.e., the cash
proceeds properly allocated to such sale) and the stockholder's adjusted tax
basis in such Harborside Common Stock. The remainder of such stockholder's
Harborside Common Stock is treated as being redeemed by the Company.
A stockholder that receives cash and retains no Harborside Common Stock will
recognize capital gain or loss on the redemption by the Company of such
stockholder's Harborside Common Stock if the stockholder satisfies the
requirements of the "termination of shareholder's interest" test of Section
302 of the Code. Under Section 302 of the Code, a redemption that completely
terminates a stockholder's equity interest in a corporation
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is treated as a sale or exchange of the redeemed stock. In applying the
termination of shareholder's interest test, the constructive ownership rules
of Section 318 of the Code apply. (See "--Stockholders Receiving Cash and
Retaining a Portion of Their Stock" below for a more detailed discussion of
the constructive ownership rules.) If a stockholder could meet the termination
of shareholder's interest test except for attribution from family members,
such attribution can be waived if a number of requirements are met, including
the timely filing of an agreement with the IRS. Under certain circumstances,
sales of Harborside Common Stock by a stockholder that are contemporaneous
with the redemption by the Company of such stockholder's Harborside Common
Stock for cash may be taken into account in determining whether the
termination of shareholder's interest test is met. In the case of a
stockholder that does not meet the termination of shareholder's interest test,
see the discussion of Section 302 of the Code in "--Stockholders Receiving
Cash and Retaining a Portion of Their Stock" below. Each stockholder should
consult his or her own tax advisor as to the application of these rules to
such stockholder's particular situation.
Capital gain or loss recognized by the stockholder will be long-term capital
gain or loss if the Harborside Common Stock was held by the stockholder for
more than one year. Calculation of gain or loss must be made separately for
each block of Harborside Common Stock owned by a stockholder (i.e., Harborside
Common Stock acquired in a single transaction).
Stockholders Receiving Cash and Retaining a Portion of Their Stock. First,
to the extent that a stockholder is considered to have sold Harborside Common
Stock to the stockholders of MergerCo, such stockholder will recognize either
capital gain or loss (assuming the Harborside Common Stock is held by such
stockholder as a capital asset) equal to the difference between the amount
realized on its deemed sale of Harborside Common Stock to the stockholders of
MergerCo (i.e., the cash proceeds properly allocated to such sale) and the
stockholder's adjusted tax basis in such Harborside Common Stock. Such gain or
loss generally will be long-term capital gain or loss if the Harborside Common
Stock is held as a capital asset by the stockholder for more than one year.
Second, a stockholder receiving cash and retaining Harborside Common Stock
also will recognize either capital gain or loss to the extent that the portion
of such stockholder's Harborside Common Stock that is treated as redeemed by
the Company is treated as having been sold or exchanged under Section 302 of
the Code with respect to such stockholder. In the case of a stockholder who
receives cash and retains Harborside Common Stock, a redemption of Harborside
Common Stock pursuant to the Merger will, as a general rule, be treated under
Section 302 of the Code as a sale or exchange, provided that at least one of
the following tests is met: (a) there results from the exchange a
"substantially disproportionate" reduction of the stockholder's equity
interest in the Company; or (b) the receipt of cash in exchange for the
stockholder's Harborside Common Stock is not "essentially equivalent to a
dividend."
In applying the foregoing tests, the constructive ownership rules of Section
318 of the Code apply. Thus, a stockholder generally takes into account
Harborside Common Stock actually owned by the stockholder as well as
Harborside Common Stock actually (and in some cases constructively) owned by
others, but which the stockholder is treated as owning by reason of the
application of the constructive ownership rules. Pursuant to the constructive
ownership rules, a stockholder will be considered to own Harborside Common
Stock owned, directly or indirectly, by certain members of the stockholder's
family and certain related entities (such as corporations, partnerships,
trusts and estates) in which the stockholder has an interest, as well as
Harborside Common Stock which the stockholder has an option to purchase. Under
certain circumstances, sales of Harborside Common Stock by a stockholder which
are contemporaneous with such stockholder's exchange of Harborside Common
Stock for cash pursuant to the Merger may be taken into account in determining
whether any of the above tests are satisfied.
A "substantially disproportionate" reduction will occur if the stockholder's
percentage interest in each of the voting and common stock of the Company
immediately after the exchange is less than 80% of such stockholder's
percentage interest in the voting and common stock of the Company immediately
before the exchange, and immediately after the exchange the stockholder owns
less than 50% of the voting power of the Company.
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The receipt of cash by a stockholder pursuant to the Merger may not be
"essentially equivalent to a dividend" if, as a result of the exchange, the
stockholder has had a "meaningful reduction" in its proportionate equity
interest in the Company. The IRS has stated that the "meaningful reduction"
test is generally met by a minority stockholder with a minimal interest when
there is any reduction in such a stockholder's interest, so long as such
stockholder does not exercise any control over the affairs of the Company.
Each stockholder should consult his or her own tax advisor as to the
application of these rules to such stockholder's particular situation.
To the extent that an exchange of Harborside Common Stock for cash pursuant
to the Merger is treated as a sale because a stockholder meets any of the
above tests, the stockholder will recognize gain or loss on the exchange in an
amount equal to the difference between the amount of cash received allocable
to the redemption of such stockholder's Harborside Common Stock by the Company
and such stockholder's tax basis in such redeemed Harborside Common Stock.
Provided the stockholder holds the Harborside Common Stock as a capital asset,
such gain or loss will be a capital gain or loss and will be long-term capital
gain or loss if the Harborside Common Stock was held more than one year.
Calculation of gain or loss must be made separately for each block of
Harborside Common Stock owned by a stockholder (i.e., Harborside Common Stock
acquired in a single transaction). A stockholder may be able to designate
which blocks and the order of such blocks of Harborside Common Stock to be
tendered pursuant to the Merger.
If a stockholder's exchange of Harborside Common Stock for cash pursuant to
the Merger satisfies none of the foregoing tests under Section 302 of the
Code, the receipt of cash by the stockholder will be treated as a distribution
from the Company and will be taxed to the stockholder as ordinary dividend
income to the extent of the Company's current and accumulated earnings and
profits. Because such dividend treatment is determined by the particular facts
and circumstances of the stockholder, it is uncertain whether or to what
extent such dividend treatment will be required with respect to any particular
stockholder who retains a portion of such stockholder's Harborside Common
Stock. As a result, no opinion is being given as to whether or to what extent
dividend treatment will be required. Any portion of such a distribution that
is not taxed to the stockholder as a dividend will be treated first as a tax-
free return of capital to the stockholder, reducing the tax basis of the
stockholder's Harborside Common Stock by the amount of such portion of the
distribution (but not below zero), with any amount in excess of the
stockholder's tax basis taxable as capital gain (assuming the Harborside
Common Stock was held as a capital asset).
The Merger will have no tax consequences to a stockholder (and thus a
stockholder will not incur any tax liability as a result of the consummation
of the Merger), with respect to Harborside Common Stock retained by the
stockholder.
Backup Federal Income Tax Withholding. Payments in connection with the
Merger may be subject to "backup withholding" at a 31% rate. Backup
withholding generally applies if the stockholder (i) fails to furnish such
stockholder's social security number or other taxpayer identification number
("TIN"), (ii) furnishes an incorrect TIN, (iii) fails to properly report to
the IRS interest or dividends or (iv) under certain circumstances, fails to
provide a certified statement, signed under penalties of perjury, that the TIN
provided is such stockholder's current number and that such stockholder is not
subject to backup withholding. To prevent backup withholding, each stockholder
should complete the substitute IRS Form W-9 included in the Letter of
Transmittal or the Non-Cash Election Form, as applicable. Certain persons
generally are exempt from backup withholding, including corporations,
financial institutions and certain foreign stockholders. In order to qualify
for an exemption from backup withholding, a foreign stockholder must submit a
properly executed IRS Form W-8 to the Company.
Withholding for Non-U.S. Stockholders. Although a non-U.S. stockholder may
be exempt from U.S. federal backup withholding, certain payments to non-U.S.
stockholders are subject to U.S. withholding tax at a rate of 30%. The Company
will withhold the 30% tax from the amount of gross cash payments made to non-
U.S. stockholders pursuant to the Merger which is allocable to the redemption
of such non-U.S. stockholder's Harborside Common Stock unless the Company
determines that a non-U.S. stockholder is either exempt from the withholding
tax or entitled to a reduced withholding rate under an income tax treaty. For
purposes of this discussion, a "non-U.S. stockholder" means a stockholder who
is not (i) a citizen or resident of the United
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States, (ii) a corporation or partnership created or organized in the United
States or under the law of the United States or of any State or political
subdivision of the foregoing, (iii) an estate whose income is includible in
gross income for U.S. federal income tax purposes regardless of its source, or
(iv) a "United States Trust." A United States Trust is generally any trust if,
and only if, (i) a court within the United States is able to exercise primary
supervision over the administration of the trust and (ii) one or more U.S.
trustees have the authority to control all substantial decisions of the trust,
or in the case of certain trusts, a trust whose income is includible in gross
income for United States federal income tax purposes regardless of its source.
A non-U.S. stockholder will not be subject to the withholding tax if the
payment from the Company is effectively connected with the conduct of a trade
or business in the United States by such non-U.S. stockholder (and, if certain
tax treaties apply, is attributable to a United States permanent establishment
maintained by such non-U.S. stockholder) and the non-U.S. stockholder has
furnished the Company with a properly executed IRS Form 4224 prior to the time
of payment. In addition, a non-U.S. stockholder, upon a proper showing to the
Company, will not be subject to the withholding tax to the extent the payment
is treated as being made for the sale or exchange of the non-U.S.
stockholder's Harborside Common Stock, such payment is not effectively
connected with a trade or business of the non-U.S. stockholder in the United
States, and the non-U.S. stockholder was not present in the United States for
a total of 183 days or more during the taxable year. A non-U.S. stockholder
who is eligible for a reduced rate of withholding pursuant to a U.S. income
tax treaty must certify such to the Company by providing to the Company a
properly executed IRS Form 1001 prior to the time payment is made. A non-U.S.
stockholder may be eligible to obtain from the IRS a refund of tax withheld if
such non-U.S. stockholder is able to establish that no tax (or a reduced
amount of tax) is due.
THOUGH THE FOREGOING ARE THE MATERIAL UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS GENERALLY APPLICABLE TO THE MERGER, THE DISCUSSION DOES NOT
ADDRESS EVERY FEDERAL INCOME TAX CONCERN WHICH MAY BE APPLICABLE TO A
PARTICULAR STOCKHOLDER. EACH STOCKHOLDER IS URGED TO CONSULT SUCH
STOCKHOLDER'S OWN TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES TO SUCH
STOCKHOLDER, IN THE LIGHT OF SUCH STOCKHOLDER'S PARTICULAR CIRCUMSTANCES, OF
THE DISPOSITION OF STOCK PURSUANT TO THE MERGER.
ACCOUNTING TREATMENT
The Merger will be accounted for as a recapitalization for financial
reporting purposes. Accordingly, the historical basis of the Company's assets
and liabilities will not be impacted by the transaction.
TREATMENT OF EXISTING COMPANY STOCK OPTIONS
Pursuant to the stock option plan governing the Company Stock Options, all
issued and outstanding Company Stock Options (which, as of June 30, 1998, had
been granted to approximately 60 persons who are directors, officers and/or
employees of the Company, including directors Messrs. Barnum, Benson,
Bretholtz and Guillard and Ms. Crawford, and executive officers Messrs.
Beardsley, Dell'Anno, Raso and Stephan) will automatically become vested and
exercisable at the Effective Time. The Merger Agreement provides that each
Company Stock Option issued and outstanding immediately prior to the Effective
Time will be converted, at the election of the holder thereof and subject to
the terms and conditions described in the Merger Agreement, into (i) the right
to retain a fully vested and immediately exercisable option for the Elected
Portion of the number of shares of Harborside Common Stock subject to such
Company Stock Option immediately prior to the Effective Time at an exercise
price per share equal to the exercise price of such Company Stock Option
immediately prior to the Effective Time, and/or (ii) the right to receive an
amount in cash equal to (a) the excess, if any, of $25.00 over the per share
exercise price of such Company Stock Option, multiplied by (b) the number of
shares of Harborside Common Stock which are subject to such Company Stock
Option immediately prior to the Effective Time but which are not part of the
Elected Portion thereof (if any), reduced by (c) any applicable withholding
taxes. As a result of the automatic vesting described above, Company Stock
Options representing an aggregate of 380,417 shares of Harborside Common Stock
(at a weighted average exercise price of $14.53 per share) which
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were not previously vested will become vested and exercisable at the Effective
Time in connection with the Merger. Based on the $25.00 per share cash
consideration being offered for each share of Harborside Common Stock, the
aggregate value of the benefit of such automatic vesting, assuming all option
holders were to elect to receive cash for their shares, would be $3,982,966.
DIRECTORS RETAINER FEE PLAN
The Company currently has in effect a Directors Retainer Fee Plan pursuant
to which independent directors (currently Messrs. Barnum, Benson and Bretholtz
and Ms. Crawford) may elect to (i) receive certain fees relating to their
service as directors in cash or in shares of Harborside Common Stock or (ii)
defer payment of such fees and credit such fees to a Share Unit Account
consisting of Share Units that are equivalent in value to shares of Harborside
Common Stock. The Merger Agreement provides that each Share Unit outstanding
immediately prior to the Effective Time will be canceled in exchange for the
right of the holder thereof to receive an amount in cash equal to the product
of (i) the number of Share Units in such holder's Share Unit Account
outstanding immediately prior to the Effective Time and (ii) $25.00. Based on
the total number of Share Units outstanding as of June 30, 1998, such cash
amount would equal approximately $62,110, in the case of Robert T. Barnum,
approximately $59,110, in the case of David F. Benson, and approximately
$14,110, in the case of Sally W. Crawford. As of June 30, 1998, Mr. Bretholtz
had no outstanding Share Units in his Share Unit Account.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain directors and executive officers of the Company have interests,
described herein, that may present them with conflicts of interest in
connection with the Merger. The Board of Directors (including the independent
members of the Board) is aware of the interests described below and considered
them in addition to the other matters described under "THE MERGER--
Recommendation of the Board of Directors; Reasons for the Merger" when it
approved the Merger Agreement and recommended that stockholders vote in favor
of the Merger. As more fully described under "The MERGER--Recommendation of
the Board of Directors; Reasons for the Merger," the Board concluded that the
Merger Agreement, and the transactions contemplated thereby, do not provide
for material differences between the treatment of unaffiliated stockholders
and affiliated stockholders, and that the interests of the management
directors and officers are reasonable in the context of the entire
transaction.
Pursuant to the Merger Agreement, 177,688, 47,563 and 400 shares of
Harborside Common Stock held by Messrs. Guillard, Dell'Anno and Stephan,
respectively, will not be subject to the election to receive cash or retain
stock available generally to other stockholders and instead will be converted
into the right to retain the same number of shares of Harborside Common Stock,
which will be denominated as shares of Company Class A Common Stock as of the
Effective Time (the same denomination as the shares of Harborside Common Stock
to be retained by other existing Harborside stockholders). Each Management
Cash-Out Share also will not be subject to such election and instead will be
converted into the right to receive $25.00 in cash from the Company following
the Merger. Shares of Harborside Common Stock held by officers and directors
of Harborside (other than the shares referred to in the preceding two
sentences) will be subject to the same election as will be available generally
to other stockholders.
After giving effect to the Merger, the percentage of common stock of the
Company (not including stock options, which are discussed below) to be owned
by Mr. Guillard will range from 2.1% (assuming the Non-Cash Election Number
equals 500,600) to 2.9% (assuming the Non-Cash Election Number equals
361,500). The percentage of common stock of the Company to be owned by Messrs.
Stephan and Dell'Anno will, regardless of the Non-Cash Election Number, be
less than 1% after giving effect to the Merger.
Douglas Krupp, a director of the Company, is an affiliate of three out of
the four entities that constitute the Berkshire Stockholders and, as a result
of his affiliate status, is deemed to beneficially own approximately 42% of
the Company's shares. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT." Pursuant to the Stockholder Agreement, the Berkshire Stockholders
have agreed to make
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Non-Cash Elections with respect to an amount of Harborside Common Stock equal
to the Non-Cash Election Number, a calculated number which will represent 6%
of the total number of shares of common stock of the Company after giving
effect to the Merger. Assuming no other Harborside stockholder other than the
Berkshire Stockholders elects to receive Non-Cash Election Shares in
connection with the Merger, the Berkshire Stockholders will own 6% of
Company's common stock after giving effect to the Merger and Mr. Krupp, by
virtue of his affiliate status, will be deemed to beneficially own
approximately 3% of the Company's common stock. If other Harborside
stockholders elect to retain shares in connection with the Merger, the amount
of shares to be retained by the Berkshire Stockholders will be subject to
proration, and the percentage of the Company's common stock deemed to be owned
by Mr. Krupp will be reduced accordingly. The aggregate cash consideration
that the Berkshire Stockholders who are affiliates of Mr. Krupp will receive
for their 3,382,305 shares (representing approximately 42% of the shares of
Harborside Common Stock outstanding as of the Record Date) in connection with
the Merger will depend on the actual Non-Cash Election Number and the number
of shares as to which other Harborside stockholders make a Non-Cash Election.
Assuming that no Harborside stockholder other than the Berkshire Stockholders
elects to receive Non-Cash Election Shares in connection with the Merger, the
aggregate cash consideration that such Berkshire Stockholder affiliates will
receive for their shares in connection with the Merger will range from
$72,042,625 (assuming the Non-Cash Election Number equals 500,600) to
$75,520,125 (assuming the Non-Cash Election Number equals 361,500). If other
Harborside stockholders elect to retain shares in connection with the Merger,
the amount of shares to be retained by such Berkshire Stockholder affiliates
will be subject to proration, and any shares not retained by such Berkshire
Stockholder affiliates as a result of such proration will be converted into
the right to receive $25.00 in cash.
All of the Company Stock Options issued to directors and other employees
that have not as of yet vested will vest as a result of the Merger
transaction, and be treated as described in "--Treatment of Existing Company
Stock Options" above. The following table reflects the maximum cash amount
that directors and executive officers of the Company may elect to receive in
respect of their Company Stock Options upon consummation of the Merger.
<TABLE>
<CAPTION>
NET OPTION
NAME PROCEEDS
---- ----------
<S> <C>
Robert T. Barnum.................................................. $ 264,585
Bruce J. Beardsley(1)............................................. 435,378
David F. Benson................................................... 264,585
Robert M. Bretholtz............................................... 264,585
Sally W. Crawford................................................. 264,585
Damian N. Dell'Anno(2)............................................ 916,643
Michael E. Gomez, R.P.T........................................... 448,906
Stephen L. Guillard............................................... 1,854,500
Kenneth Montgomery................................................ 249,500
Steven V. Raso(1)................................................. 278,800
William H. Stephan(1)............................................. 432,506
----------
Total........................................................... $5,674,573
==========
</TABLE>
- --------
(1) Messrs. Beardsley, Raso and Stephan are expected to elect to retain
certain of their Company Stock Options which are exercisable into an
aggregate of 39,162, 15,850 and 38,332 shares of Harborside Common Stock,
respectively, because the grant of new stock options to them under the
Company's new Stock Option Plan is contingent upon such elections. The
amounts reflected under "Net Option Proceeds" assume that such options
will be retained. After giving effect to the Merger, such options will, in
each case, represent less than 1% of the common stock of the Company on a
fully diluted basis.
(2) Pursuant to a letter agreement, dated April 15, 1998, with the Company,
Mr. Dell'Anno has agreed to retain certain of his Company Stock Options
which are exercisable into an aggregate of 10,560 shares of Harborside
Common Stock. The amounts reflected under "Net Option Proceeds" assume
that such options
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will be retained. After giving effect to the Merger, such options will
represent less than 1% of the common stock of the Company on a fully
diluted basis.
Harborside and Messrs. Guillard, Dell'Anno, Stephan, Beardsley and Raso
intend to enter into employment agreements following the Effective Time
(collectively, the "Employment Agreements"). Under the terms of the Employment
Agreements, Mr. Guillard will serve as President and Chief Executive Officer
of the Company and will receive a minimum base salary payable at an annual
rate of $345,000, Mr. Dell'Anno will serve as Executive Vice President and
Chief Operating Officer of Harborside and will receive a minimum base salary
payable at an annual rate of $225,000, Mr. Stephan will serve as Senior Vice
President and Chief Financial Officer of Harborside and will receive a minimum
base salary payable at an annual rate of $190,000, Mr. Beardsley will serve as
Senior Vice President of Acquisitions of Harborside and will receive a minimum
base salary payable at an annual rate of $200,000 and Mr. Raso will serve as
Senior Vice President of Reimbursement of Harborside and will receive a
minimum base salary payable at an annual rate of $135,000. These salaries will
be payable retroactively from April 1, 1998. The salaries of Messrs. Guillard,
Dell'Anno, Stephan, Beardsley and Raso will be increased to $375,000,
$240,000, $200,000, $215,000 and $145,000, respectively, effective April 1,
1999. Under the terms of these Employment Agreements, the salaries of each
officer will be subject to further adjustment at the discretion of the
Compensation Committee of the Board of Directors of the Company.
The Employment Agreements also will provide (i) for an annual bonus to be
paid to Messrs. Guillard, Dell'Anno, Stephan, Beardsley and Raso, part of
which will be based upon achievements of specific performance targets and part
of which will be discretionary, in maximum amounts of 120% of base salary, 96%
of base salary, 78% of base salary, 78% of base salary and 78% of base salary,
respectively, and (ii) that upon termination of employment prior to an initial
public offering, the Company will have certain rights to call from such
officers shares of Harborside capital stock owned by such officers (including
shares underlying then-exercisable stock options), and such officers will have
certain rights to put such shares to an affiliate of Investcorp (subject to a
right of first refusal in favor of the Company).
Each officer will have the right to terminate his Employment Agreement on 30
days notice. The Company will have the right to terminate an Employment
Agreement without obligation for severance only for "Good Cause." The
Employment Agreements will provide for severance benefits to be paid in the
event an officer's employment is terminated if such termination is, in the
case of termination by the Company, without Good Cause, or, in the case of
termination by an officer, for "Good Reason." If the Company terminates the
employment of an officer without Good Cause or the officer terminates his
employment for Good Reason, the officer will be entitled to receive severance
benefits which will include (i) the vesting of the pro rata portion of stock
options subject to vesting in the then current year attributable to the part
of the year that the officer was employed, if the applicable performance
targets are met, (ii) the ability to exercise vested stock options for the
period ending on the earlier of the date that is 180 days from the date his
employment is terminated or the specific expiration date stated in the
options, and (iii) in the case of Mr. Guillard, for the period ending 24
months after termination, and in the case of Messrs. Dell'Anno, Stephan,
Beardsley and Raso, for the period ending 12 months after termination, payment
of the officer's compensation at the rate most recently in effect; subject to
such officer's compliance with noncompetition and nonsolicitation covenants
for such 12 or 24 month period, as applicable.
"Good Cause" will be defined as (i) the officer's conviction of a felony,
(ii) commission of an act of fraud involving dishonesty for personal gain
which is injurious to the Company, (iii) willful engagement in gross
misconduct injurious to the Company, or (iv) willful and continuous failure to
substantially perform assigned duties consistent with the officer's position,
provided that the officer is given notice and the opportunity to cure such
failure.
"Good Reason" will exist if (i) the Company reduces salary or bonus
opportunities, (ii) there is an adverse change in the officer's duties, (iii)
the Company forces the officer to relocate, (iv) in the case of Mr. Guillard,
Mr. Guillard is not elected to the Board of Directors of the Company, or (v)
the Company commits a material breach of the Employment Agreement and does not
cure such breach within 30 days after being notified by the
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officer of such breach, provided the officer has given to the Company within
30 days of first becoming aware of the facts constituting such breach.
Following the Effective Time, the Company intends to adopt the Stock Option
Plan. The number of shares that will be available to be awarded under the
Stock Option Plan will be approximately 10% of the shares of common stock of
Harborside outstanding immediately after the Effective Time, determined after
giving effect to the exercise of the options issued or issuable under the
Stock Option Plan. Options to purchase approximately 7.7% of such shares
(determined on such basis) are expected to be granted to current members of
Harborside's management upon consummation of the Merger. Options for the
remaining approximately 2.3% of the shares of capital stock of Harborside
(determined on such basis) will be reserved for grant to current or future
officers and employees of the Company. Messrs. Guillard, Dell'Anno, Stephan,
Beardsley and Raso are expected to receive seven-year options to purchase
2.06%, 1.34%. 0.93%, 0.93% and 0.65%, respectively, of the shares of common
stock of the Company outstanding immediately after the Effective Time,
determined after giving effect to the exercise of the options issued or
issuable under the Stock Option Plan, at a price of $25.00 per share,
contingent in the cases of Messrs. Dell'Anno, Stephan, Beardsley and Raso upon
their electing in connection with the Merger to retain Company Stock Options
previously granted to them with respect to 10,560, 38,332, 39,162 and 15,580
shares, respectively, rather than electing to receive cash for their options
with respect to such shares. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT" and "THE MERGER--Treatment of Existing Company Stock
Options."
The Stock Option Plan will be administered by Harborside's Board of
Directors or a committee designated by the Board. The Board will designate
which employees of the Company will be eligible to receive awards under the
Stock Option Plan, and the amount, timing and other terms and conditions
applicable to such awards. Options will be exercisable in accordance with the
terms established by the Board. Options will expire on the date determined by
the Board, which will not be later than 30 days after the seventh anniversary
of the grant date. An optionee will have certain rights to put to the Company,
and the Company will have certain rights to call from the optionee, vested
stock options issued to the optionee under the Stock Option Plan upon
termination of the optionee's employment with the Company prior to an initial
public offering.
Directors of the Company who have previously deferred certain director fees
pursuant to the Company's Directors Retainer Fee Plan will, as a result of the
Merger transaction, receive cash in exchange for such deferred compensation.
See "--Directors Retainer Fee Plan," above.
Pursuant to Change in Control Agreements dated as of January 15, 1998, at
the Effective Time each of Messrs. Guillard, Dell'Anno, Stephan, Beardsley and
Raso will receive a payment equal to his annual salary, except for Mr.
Guillard who will receive a payment equal to 1.5 times his annual salary. The
amounts of such payments will be as follows: Mr. Guillard, $517,500; Mr.
Dell'Anno, $225,000; Mr. Stephan, $190,000; Mr. Beardsley, $200,000; and Mr.
Raso, $135,000. In addition, the Change in Control Agreements provide that all
outstanding loans made by the Company to such officers for the purchase of
stock will be forgiven as of the Effective Time. Messrs. Guillard and
Dell'Anno have such outstanding loans from the Company which, as of March 31,
1998, had a remaining balance of $225,660 and $110,184, respectively. The
purpose of the Change in Control Agreements was to induce such officers to
remain in the employ of the Company and to assure them of fair severance
should their employment terminate in specified circumstances following a
change in control of the Company. Such officers are entitled to the payments
and loan forgiveness described above because the Merger constitutes a "change
in control" under the terms of the Change in Control Agreements. The Change in
Control Agreements also provide that if such officer's employment with the
Company is terminated by the Company for any reason other than cause within 12
months following a change in control, (i) such officer is entitled to receive
all accrued but unpaid salary and bonus amounts plus a lump-sum cash payment
equal to the amount of such officer's base salary (1.5 times the base salary
in the case of Mr. Guillard) at the rate in effect immediately prior to the
date of termination or at the rate immediately prior to the change in control,
whichever is higher, (ii) any unvested stock options previously granted to
such officer will automatically vest, (iii) subject to certain exceptions, the
Company will provide such officer with continued participation in its benefit
plans for two years,
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(iv) the Company will take all steps necessary to fully vest such officer in
the Supplemental Executive Retirement Plan dated as of September 15, 1995 and
the Company's 401(k) Plan, (v) the Company will reimburse such officer for
outplacement services up to a maximum reimbursement of $15,000 and (vi) the
Company will reimburse such officer for any legal fees incurred as a result of
such termination. The Change in Control Agreements are expected to be
terminated by mutual agreement of the parties as of the Effective Time, except
that the Company will comply with its obligations under the provisions
described in the first sentence of this paragraph.
The Merger Agreement provides that, at the Effective Time, the Company will
enter into a master rights agreement for the benefit of the Berkshire
Stockholders and the investors in MergerCo, which agreement will provide,
among other things, for the following: (i) certain rights to participate in
future equity financings (which rights will be available to all stockholders
of the Company who retain shares of Harborside Common Stock in connection with
the Merger); (ii) certain registration rights; and (iii) certain rights to
receive periodic information regarding the Company. See "THE MERGER
AGREEMENT--Master Rights Agreement."
The Company has entered into a Non-Compete Agreement, dated as of April 15,
1998, with each of Douglas Krupp, a director and beneficial stockholder of the
Company, and George Krupp, a beneficial stockholder of the Company, pursuant
to which each such individual has agreed for a one-year period commencing at
the Effective Time not to engage in certain business activities or to own
certain equity interests in any person or entity that engages in such business
activities. Pursuant to such agreements, the Company has agreed to pay
$250,000 to each of such individuals at the Effective Time.
Pursuant to the Merger Agreement, the Company has agreed that for six years
after the Effective Time, it will indemnify all current and former directors,
officers, employees and agents of the Company and its subsidiaries and will,
subject to certain limitations, maintain for six years a directors' and
officers' insurance and indemnification policy containing terms and conditions
which are not less advantageous than the policy in effect as of the date of
the Merger Agreement. See "MATERIAL PROVISIONS OF THE MERGER AGREEMENT--
Indemnification and Insurance."
AGREEMENTS WITH CERTAIN STOCKHOLDERS
See "CERTAIN RELATED AGREEMENTS" for a description of the Stockholder
Agreement among MergerCo and the Subject Stockholders and the Non-Compete
Agreements between the Company and each of Douglas Krupp and George Krupp.
EXECUTIVE OFFICERS AND DIRECTORS OF MERGERCO
Because MergerCo is an acquisition vehicle established solely to consummate
the Merger, it does not have any executive officers other than Christopher J.
O'Brien, who has been appointed as President and Secretary in order to effect
the consummation of the Merger. Mr. O'Brien will not be an officer of
Harborside after the Merger and has no interest in the Merger other than as an
executive and employee of Investcorp. In addition, Mr. O'Brien currently
serves as the sole director of MergerCo and will continue as a director of
Harborside after the Merger. Immediately prior to the Merger, the Senior
Management Stockholders are expected to become directors of MergerCo and will
continue as directors of Harborside after the Merger. They will not receive
any compensation for serving as such. See, however, "--Interests of Certain
Persons in the Merger." In addition, immediately prior to the Merger, Charles
J. Philippin, Christopher J. Stadler and Savio W. Tung are expected to become
directors of MergerCo and will continue as directors of Harborside after the
Merger. They will not receive any compensation for serving as such and will
have no interests in the Merger other than as executives or employees of
Investcorp.
DELISTING OF HARBORSIDE COMMON STOCK FROM NYSE
As a result of the Merger, it is likely that the Harborside Common Stock
will no longer meet the listing requirements of the NYSE and the NYSE may
unilaterally act to delist the Harborside Common Stock from the
89
<PAGE>
NYSE. Even if the NYSE does not act unilaterally to delist the Harborside
Common Stock, it is MergerCo's intention that, after the Effective Time, the
Harborside Common Stock will not be listed on the NYSE or any other national
securities exchange. Harborside and MergerCo have each agreed, pursuant to the
Merger Agreement, to cooperate in taking, or causing to be taken, all actions
necessary to delist the Harborside Common Stock from the NYSE. The delisting
of the Harborside Common Stock is likely to have a material adverse effect on
the trading market for, and the value of, the Harborside Common Stock and
there can be no assurance that any trading market will exist for the
Harborside Common Stock after the Merger.
TERMINATION OF SEC REPORTING
As a result of the Merger, it is expected that the shares of Harborside
Common Stock will be held by fewer than 300 stockholders of record. In such a
case, the Company will deregister the Harborside Common Stock from the
reporting requirements of the Exchange Act. If the Harborside Common Stock is
so deregistered, the Company will not be required to comply with the proxy or
periodic reporting requirements of the Exchange Act and does not plan to
provide any reports or information to its public stockholders other than
pursuant to the right to inspect the books and records of Harborside as
required by Delaware law. As a result, the information available to
stockholders on the business and financial condition of the Company would be
reduced, which could have a material adverse effect on the value of the
Harborside Common Stock. Although Harborside currently plans to register
certain debt securities and exchangeable preferred stock under the Securities
Act, Harborside will remain subject to the reporting requirements of the
Exchange Act only for a limited period of time and will remain subject to the
applicable reporting requirements of the terms of such securities only until
such securities are repaid or redeemed. In addition, under the terms of such
securities, the Company will be required to deliver reports only to the
holders of such securities and not to holders of Harborside Common Stock.
RESALE OF RETAINED HARBORSIDE COMMON STOCK FOLLOWING THE MERGER
The Harborside Common Stock to be retained in connection with the Merger
will be freely transferable, except that shares retained by any stockholder
who may be deemed to be an "affiliate" (as defined under the Securities Act
and generally including, without limitation, directors, certain executive
officers and beneficial owners of 10% or more of a class of capital stock) of
the Company for purposes of Rule 145 under the Securities Act will not be
transferable except in compliance with the Securities Act. This Proxy
Statement/Prospectus does not cover sales of Harborside Common Stock retained
by any person who may be deemed to be an affiliate of the Company.
MERGER FINANCINGS
At the time of the Merger, MergerCo expects to have received common equity
contributions of approximately $160 million from affiliates of Investcorp and
certain other international investors, including the companies identified as
stockholders under the caption "HH ACQUISITION CORP," at a price of $25.00 per
share. In addition, at the Effective Time, Harborside currently intends to
issue an aggregate of approximately $100 million in gross proceeds of
subordinated debt and an aggregate of approximately $40 million in gross
proceeds of exchangeable preferred stock in either the public or private
markets, and enter into a senior secured credit facility for approximately
$250 million (which amount will be available for, among other things,
synthetic lease financings). These financing arrangements will be in addition
to the Company's existing capital lease obligations and mortgage loans. The
subordinated debt securities are expected to be in the form of senior
subordinated notes due in approximately ten years. The exchangeable preferred
stock is expected to be non-voting except in certain circumstances, subject to
mandatory redemption in approximately 12 years and exchangeable at the option
of the Company into subordinated debt under certain circumstances. The
proceeds of the new debt and preferred stock issuances, the funds available
under the new senior secured credit facility and the common equity
contributions will be used to finance the conversion into cash, in the Merger,
of approximately 91% of the Harborside Common Stock currently outstanding, to
refinance certain existing indebtedness of Harborside, to pay the fees and
expenses associated with the Merger and the Merger Financings, to finance the
working capital needs of Harborside, to finance acquisitions and for general
corporate purposes. It
90
<PAGE>
is currently expected that less than $15 million of borrowings and lease
financings will be outstanding under the new senior secured credit facility
upon consummation of the Merger. See "RISK FACTORS--Substantial Leverage;
Liquidity."
The actual financing arrangements as well as the expected level of
outstanding borrowings under the new senior secured credit facility will not
be determined until shortly before the Effective Time and may be different
from those outlined above based on market conditions and whether the Company
chooses to refinance certain existing indebtedness. Depending on pricing and
other market conditions at the time of the offering of subordinated debt and
exchangeable preferred stock, MergerCo may determine that in order to have the
optimal financing for MergerCo under those conditions, the actual gross
proceeds of such offering should be higher or lower than $140 million. To the
extent that the amount of such gross proceeds differs from $140 million, the
amount of the common equity contributions and/or the amount of borrowings
under the new senior secured credit facility will be adjusted, or other
financing arrangements will be made, in order to result in the same total
proceeds from such offering and other sources in the aggregate. However,
MergerCo has agreed in the Merger Agreement that the common equity
contributions from investors in MergerCo will not be less than $135 million.
Consummation of these financing arrangements are not conditions to the
consummation of the Merger. The Merger Agreement contains a representation and
warranty from MergerCo that it will have sufficient funds available to
consummate the Merger. Investcorp Bank E.C., an affiliate of Investcorp, has
agreed to cause MergerCo to perform its obligations under the Merger Agreement
and to be liable in the event MergerCo fails to perform any of such
obligations.
91
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information (the
"Pro Forma Financial Information") is based on the audited historical
financial statements of the Company and the unaudited historical financial
statements of Access Rehabilitation, the Massachusetts Facilities, the Dayton
Facilities, the Connecticut Facilities, the Briarfield Facilities and the
Rhode Island Facilities. The Pro Forma Financial Information and accompanying
notes should be read in conjunction with the historical financial statements
included elsewhere herein pertaining to the Company, the Massachusetts
Facilities and the Dayton Facilities, in addition to the other financial
information included under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1997 and the three months ended March 31, 1998 have been
prepared to give effect to: (i) the Completed 1997 Acquisitions; (ii) the
Completed 1998 Acquisitions; and (iii) the Merger, as if each had occurred on
January 1, 1997; and exclude non-recurring items directly attributable to the
Merger. The unaudited pro forma consolidated balance sheet as of March 31,
1998 has been prepared as if each such transaction not yet consummated on
March 31, 1998 had occurred on that date.
The unaudited pro forma adjustments are based upon available information and
certain assumptions and adjustments described in the accompanying notes. The
Pro Forma Financial Information is not necessarily indicative of either future
results of operations or the results that might have been achieved if the
transactions reflected therein had been consummated on the indicated dates.
For the purpose of presenting the unaudited pro forma consolidated
statements of operations, "Completed 1997 Acquisitions Combined" refers to the
historical results of operations of the entities acquired as part of the
Completed 1997 Acquisitions, as adjusted, and "Completed 1998 Acquisitions
Combined" refers to the historical results of operations of the entities
acquired as part of the Completed 1998 Acquisitions, as adjusted.
For the purpose of presenting the unaudited pro forma consolidated balance
sheet, "Completed 1998 Acquisitions" refers to the historical balance sheets
of the entities acquired as part of the Completed 1998 Acquisitions, as
adjusted.
As used in the Unaudited Pro Forma Consolidated Financial Information, (i)
"Pro Forma Before Completed 1998 Acquisitions" gives pro forma effect to the
Completed 1997 Acquisitions, (ii) "Pro Forma Before Merger" gives pro forma
effect to the Completed 1997 Acquisitions and the Completed 1998 Acquisitions,
and (iii) "Pro Forma" gives pro forma effect to each of the foregoing
acquisitions and the Merger.
92
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------------------------------------------
PRO FORMA
HARBORSIDE COMPLETED BEFORE COMPLETED
HEALTHCARE 1997 COMPLETED 1998 PRO FORMA MERGER
CORPORATION ACQUISITIONS 1998 ACQUISITIONS BEFORE ADJUSTMENTS PRO FORMA
(A) COMBINED (B) ACQUISITIONS COMBINED (C) MERGER (D) (N)
----------- ------------ ------------ ------------ --------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Total net revenues....... $ 221,777 $63,684 $285,461 $19,873 $ 305,334 $ 31 (E) $ 305,365
Expenses:
Facility operating...... 176,404 51,155 227,559 15,305 242,864 -- 242,864
Management fees......... -- 1,384 1,384 1,753 3,137 -- 3,137
General and
administrative......... 10,953 379 11,332 -- 11,332 -- 11,332
Service charges paid to
affiliates............. 708 -- 708 -- 708 1,200 (F) 1,908
Depreciation and
amortization........... 4,074 -- 4,074 -- 4,074 2,467 (G) 6,541
Synthetic lease rent.... 511 1,173 1,684 2,602 4,286 (4,286)(H) --
Facility rent........... 11,935 7,783 19,718 -- 19,718 -- 19,718
--------- ------- -------- ------- --------- -------- ----------
Total expenses.......... 204,585 61,874 266,459 19,660 286,119 (619) 285,500
--------- ------- -------- ------- --------- -------- ----------
Income from operations... 17,192 1,810 19,002 213 19,215 650 19,865
Other:
Interest expense, net... (5,853) -- (5,853) -- (5,853) (13,164)(I) (19,017)
Loss on investment in
limited partnership.... (189) -- (189) -- (189) -- (189)
--------- ------- -------- ------- --------- -------- ----------
Income before income
taxes................... 11,150 1,810 12,960 213 13,173 (12,514) 659
Income taxes............. (4,347) (706) (5,053) (83) (5,136) 4,880 (J) (256)
--------- ------- -------- ------- --------- -------- ----------
Net income............... $ 6,803 $ 1,104 $ 7,907 $ 130 $ 8,037 $ (7,634) $ 403
========= ======= ======== ======= ========= ======== ==========
Net income............... $ 6,803 $ 8,037 $ 403
Preferred dividends...... -- -- (5,020)(K)
--------- --------- ----------
Net income (loss)
available (attributable)
to common stockholders.. $ 6,803 $ 8,037 $ (4,617)
========= ========= ==========
Net income (loss) available
(attributable) to common
stockholders per share:
Basic................... $ 0.85 $ 1.00 $ (0.66)
========= ========= ==========
Diluted................. $ 0.84 $ 0.99 $ (0.66)
========= ========= ==========
Weighted average number
of common shares used in
per share computations:
Basic................... 8,037,026 8,037,026 7,027,517
Diluted................. 8,138,793 8,138,793 7,027,517
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Consolidated Statements of
Operations
93
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1998
-------------------------------------------------------------------------------
HARBORSIDE COMPLETED
HEALTHCARE 1998 PRO FORMA MERGER
CORPORATION ACQUISITIONS BEFORE ADJUSTMENTS PRO FORMA
(L) COMBINED (M) MERGER (D) (N)
----------- ------------ --------- ----------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total net revenues......... $ 72,454 $ 4,848 $ 77,302 $ 8 (E) $ 77,310
Expenses:
Facility operating........ 57,381 3,831 61,212 -- 61,212
Management fees........... -- 371 371 -- 371
General and
administrative........... 3,365 -- 3,365 -- 3,365
Service charges paid to
affiliates............... 313 -- 313 300 (F) 613
Depreciation and
amortization............. 1,085 -- 1,085 492 (G) 1,577
Synthetic lease rent...... 450 650 1,100 (1,100)(H) --
Facility rent............. 5,106 -- 5,106 -- 5,106
--------- ------- --------- ------- ---------
Total expenses............ 67,700 4,852 72,552 (308) 72,244
--------- ------- --------- ------- ---------
Income from operations..... 4,754 (4) 4,750 316 5,066
Other:
Interest expense, net..... (1,650) -- (1,650) (3,276)(I) (4,926)
Loss on investment in
limited partnership...... (31) -- (31) -- (31)
--------- ------- --------- ------- ---------
Income before income
taxes..................... 3,073 (4) 3,069 (2,960) 109
Income taxes............... (1,198) 2 (1,196) 1,154 (J) (42)
--------- ------- --------- ------- ---------
Net income................. $ 1,875 $ (2) $ 1,873 $(1,806) $ 67
========= ======= ========= ======= =========
Net income................. $ 1,875 $ 1,873 $ 67
Preferred dividends........ -- -- (1,351)(K)
--------- --------- ---------
Net income (loss) available
(attributable) to common
stockholders.............. $ 1,875 $ 1,873 $ (1,284)
========= ========= =========
Net income (loss) available
(attributable) to common
stockholders per share:
Basic..................... $ 0.23 $ 0.23 $ (0.18)
========= ========= =========
Diluted................... $ 0.23 $ 0.23 $ (0.18)
========= ========= =========
Weighted average number of
common shares used in per
share computations:
Basic..................... 8,058,548 8,058,548 7,027,517
Diluted................... 8,303,703 8,303,703 7,027,517
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Consolidated Statements of
Operations
94
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(A) Represents the historical audited consolidated statement of operations of
the Company for the year ended December 31, 1997.
(B) During 1997, the Company acquired several facilities by entering into
operating leases for those facilities, with the exception of Access
Rehabilitation whose assets were acquired. To reflect the pro forma effect
of these acquisitions on Harborside's operations, the schedule below
presents the unaudited historical combined statements of operations of
Access Rehabilitation, the Massachusetts Facilities, the Dayton Facilities
and the Connecticut Facilities for the period from January 1, 1997 until
their respective acquisitions. Specifically, Access Rehabilitation, the
Massachusetts Facilities, the Dayton Facilities and the Connecticut
Facilities were acquired on July 1, August 1, September 1 and December 1,
1997, respectively:
<TABLE>
<CAPTION>
ACCESS MASSACHUSETTS DAYTON FACILITIES CONNECTICUT
REHABILITATION FOR FACILITIES FOR FOR THE FACILITIES FOR THE COMPLETED
THE SIX MONTHS THE SEVEN MONTHS EIGHT MONTHS ELEVEN MONTHS 1997
ENDED ENDED ENDED AUGUST 31, ENDED PRO FORMA ACQUISITIONS
JUNE 30, 1997 JULY 31, 1997 1997 NOVEMBER 30, 1997 ADJUSTMENTS COMBINED
------------------ ---------------- ----------------- ------------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total net revenues.... $4,310 $11,102 $8,600 $39,507 $ 165 (1) $63,684
Expenses:
Facility operating... 4,232 9,122 6,921 30,880 -- 51,155
Management fees...... -- -- 432 952 -- 1,384
General and adminis-
trative............. -- 379 -- -- -- 379
Depreciation and
amortization........ 8 172 361 831 (1,372)(2) --
Synthetic lease
rent................ -- -- -- -- 1,173 (2) 1,173
Facility rent........ 8 -- -- 5,316 2,459 (2) 7,783
------ ------- ------ ------- ------- -------
Total expenses..... 4,248 9,673 7,714 37,979 2,260 61,874
------ ------- ------ ------- ------- -------
Income from opera-
tions................ 62 1,429 886 1,528 (2,095) 1,810
Other:
Interest expense,
net................. (16) (68) (544) (1,057) 1,685 (2) --
------ ------- ------ ------- ------- -------
Income before income
taxes................ 46 1,361 342 471 (410) 1,810
Income taxes.......... -- -- -- -- (706)(3) (706)
------ ------- ------ ------- ------- -------
Net income............ $ 46 $ 1,361 $ 342 $ 471 $(1,116) $ 1,104
====== ======= ====== ======= ======= =======
</TABLE>
-------
(1) In Ohio, a portion of a facility's Medicaid reimbursement rate is
related to the capital costs incurred to finance the facility. As
facility financing changes as the result of an acquisition, the
reimbursement of such capital costs (and accordingly a facility's net
revenues) is affected as well. This adjustment represents the aggregate
increase in revenue that is directly attributable to the Company's
acquisition of the Dayton Facilities and the related financing. The
adjustment, which can occur upon a change of facility ownership, is
computed in accordance with the state Medicaid program cost reporting
rules and regulations by substituting the effects of the Company's
financing for the amounts included in the historical Medicaid cost
reports.
(2) Reflects the following adjustments related to the financing of these
acquisitions through operating leases rather than through asset
acquisitions: (a) the elimination of historical combined amounts
recorded by the acquired facilities for depreciation and amortization
expense which had been recorded as a result of the ownership of the
underlying assets; (b) the elimination of historical combined amounts
recorded by the acquired facilities for interest expense as the Company
did not assume the related indebtedness; (c) the elimination of
historical facility rent expense of Access Rehabilitation and the
Connecticut Facilities; and (d) the synthetic lease and facility rent
expense that the Company would have incurred had the Completed 1997
Acquisitions occurred on January 1, 1997. Specifically, the current
operating and synthetic lease terms for the acquired facilities, based
on executed agreements, are as follows:
<TABLE>
<CAPTION>
COMPLETED
1997
FACILITY RENT SYNTHETIC LEASE ACQUISITIONS
PER MONTH RENT PER MONTH COMBINED
------------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Dayton Facilities (i)........... $ -- $ 147 $ 1,173
========
Massachusetts Facilities........ $ 131 -- $ 917
Connecticut Facilities.......... $ 624 -- 6,866
--------
$ 7,783
========
</TABLE>
-------
(i) Based on a $23.6 million purchase price financed at 7.5%.
95
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(3) Reflects the adjustment to the provision for federal and state income
taxes which the Company would have recorded (based on the Company's
historical effective tax rate of 39%) had the Completed 1997
Acquisitions occurred on January 1, 1997.
(C) During 1998, the Company acquired the Briarfield and Rhode Island
Facilities through synthetic lease financings. To reflect the pro forma
effect of these acquisitions on Harborside's operations, the schedule
below presents the unaudited historical statements of operations of the
Briarfield Facilities and the Rhode Island Facilities, which were acquired
on April 1, 1998 and May 8, 1998, respectively, for the period from
January 1, 1997 through December 31, 1997.
<TABLE>
<CAPTION>
COMPLETED
RHODE ISLAND 1998
BRIARFIELD FACILITIES PRO FORMA ACQUISITIONS
FACILITIES (1) (2) ADJUSTMENTS COMBINED
-------------- ------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Total net revenues...... $9,290 $10,105 $ 478 (3) $19,873
Expenses:
Facility operating.... 7,095 8,210 -- 15,305
Management fees....... 986 767 -- 1,753
Depreciation and amor-
tization............. 335 177 (512)(4) --
Synthetic lease rent.. -- -- 2,602 (4) 2,602
------ ------- ------ -------
Total expenses...... 8,416 9,154 2,090 19,660
------ ------- ------ -------
Income from operations.. 874 951 (1,612) 213
Other:
Interest expense,
net.................. (618) (88) 706 (4) --
------ ------- ------ -------
Income before income
taxes.................. 256 863 (906) 213
Income taxes............ -- -- (83)(5) (83)
------ ------- ------ -------
Net income.............. $ 256 $ 863 $ (989) $ 130
====== ======= ====== =======
</TABLE>
--------
(1) Reflects the unaudited historical statements of operations of the
Briarfield Facilities for the year ended December 31, 1997.
(2) Reflects the unaudited historical statements of operations of the Rhode
Island Facilities for the year ended December 31, 1997.
(3) In Ohio and Rhode Island, a portion of a facility's Medicaid
reimbursement rate is related to the capital costs incurred to finance
the facility. As facility financing changes as a result of an
acquisition, the reimbursement of such capital costs (and accordingly,
a facility's net revenues) is affected as well. This adjustment
represents the aggregate increase in revenue that is directly
attributable to the Company's acquisition of the Briarfield and Rhode
Island Facilities and the related financings. The adjustment, which can
occur upon a change of facility ownership, is computed in accordance
with the state Medicaid program cost reporting rules and regulations by
substituting the effects of the Company's financing for the amounts
included in the historical Medicaid cost reports.
(4) Reflects the following adjustments related to the financing of these
acquisitions through synthetic leases rather than through asset
acquisitions: (a) the elimination of historical combined amounts
recorded by the Briarfield and Rhode Island Facilities for depreciation
and amortization expense which had been recorded as a result of the
ownership of the underlying assets; (b) the elimination of historical
combined amounts recorded by the Briarfield and Rhode Island Facilities
for interest expense as the Company did not assume the related
indebtedness; and (c) the synthetic lease rent that the Company would
have incurred had the Completed 1998 Acquisitions occurred on January
1, 1997. Specifically, the current synthetic lease terms for the
Briarfield and Rhode Island Facilities, based on executed agreements,
are as follows:
<TABLE>
<CAPTION>
COMPLETED
1998
SYNTHETIC LEASE ACQUISITIONS
RENT PER MONTH COMBINED
--------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Briarfield Facilities (i)................... $106 $1,277
Rhode Island Facilities (ii)................ 110 1,325
------
$2,602
======
</TABLE>
--------
(i) Based on a $17.5 million purchase price financed at 7.3%.
(ii) Based on an $18.15 million purchase price financed at 7.3%.
96
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(5) Reflects the adjustment to the provision for federal and state income
taxes which the Company would have recorded (based on the Company's
historical effective tax rate of 39%) had the Completed 1998
Acquisitions occurred on January 1, 1997.
(D) The Merger Adjustments give effect to the Merger (see "SUMMARY--The
Merger--Effect of the Merger") and certain Merger Financings which are
expected to occur in connection with the Merger. Although the specific
nature and amounts of the financings will be subject to change as a result
of a number of factors, including market conditions, the Merger Financings
are expected to include the following (see "'THE MERGER--Merger
Financings"): (i) the receipt of cash equity contributions of $159.5
million; (ii) the issuance of $40.0 million of exchangeable preferred
stock; (iii) the issuance of the subordinated debt, yielding gross
proceeds of $100.0 million; and (iv) the borrowing of $3.9 million under
the $250.0 million senior secured credit facility (which amount will be
available, among other things, for synthetic lease financings).
A portion of the net proceeds from the issuance of the senior subordinated
debt and borrowings under the senior secured credit facility are expected
to be used to refinance all borrowings under the Company's existing
revolving credit facility and to finance the purchase of certain of the
Company's facilities, which are currently leased through the Company's
existing synthetic leasing facility.
The unaudited pro forma consolidated statements of operations exclude the
following non-recurring items that are directly attributable to the Merger:
(i) $23.6 million of estimated fees and expenses to be incurred by the
Company in connection with the Merger, and a related income tax benefit of
$1.9 million; (ii) the write-off of $0.9 million of net debt issuance costs
related to debt retired in connection with the Merger, and a related income
tax benefit of $0.3 million; and (iii) a $7.9 million compensation charge
resulting from the conversion of outstanding stock options in connection
with the Merger, and a related income tax benefit of $3.1 million.
(E) In connection with the Merger, the existing synthetic leased financings
related to the Dayton Facilities, the Briarfield Facilities and the Rhode
Island Facilities are assumed to be eliminated and the Company is assumed
to purchase these facilities through the exercise of existing purchase
options using cash available to the Company through the issuance of
subordinated debt. In Ohio and Rhode Island, a portion of a facility's
Medicaid reimbursement rate is related to the capital costs incurred to
finance the facility. As facility financing changes as a result of an
acquisition, the reimbursement of such capital costs (and accordingly, a
facility's net revenue) is affected as well. This adjustment represents
the following aggregate increases (decreases) in total net revenues that
are directly attributable to the acquisition and related refinancing of
the following facilities at the time of the Merger:
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Dayton Facilities..................... $ 88 $ 22
Briarfield Facilities................. (87) (22)
Rhode Island Facilities............... 30 8
---- ----
$ 31 $ 8
==== ====
</TABLE>
(F) Reflects the amortization of prepaid management advisory and consulting
services fees to be paid to III as described under "HH ACQUISITION CORP."
(G) Depreciation expense related to the purchase of the Dayton Facilities, the
Briarfield Facilities and the Rhode Island Facilities is estimated using
the straight-line method. The estimates are calculated using the following
estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements...................................... 35 years
Furniture and equipment......................................... 7 years
</TABLE>
97
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following schedule presents the estimated purchase price and allocation
for the Dayton, Briarfield and Rhode Island Facilities:
<TABLE>
<CAPTION>
BUILDINGS AND FURNITURE AND
LAND IMPROVEMENTS EQUIPMENT TOTAL
------ ------------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Dayton Facilities.............. $ 462 $ 21,430 $ 1,708 $ 23,600
Briarfield Facilities.......... 626 15,581 1,293 17,500
Rhode Island Facilities........ 2,280 15,630 240 18,150
------ -------- ------- --------
Total........................ $3,368 $ 52,641 $ 3,241 $ 59,250
====== ======== ======= ========
</TABLE>
Had the Dayton Facilities, the Briarfield Facilities and the Rhode Island
Facilities been purchased on January 1, 1997, the resulting depreciation
and amortization would have been approximately $1,967 and $492 for the year
ended December 31, 1997 and the three months ended March 31, 1998,
respectively. In addition, in conjunction with the Merger, the two current
principal beneficial stockholders of the Company will have entered into
one-year non-compete agreements with the Company as described under
"CERTAIN RELATED AGREEMENTS." To reflect the one-year term, amortization of
the related $500 non-compete payment has been fully reflected only for the
year ended December 31, 1997.
(H) Reflects the elimination of synthetic lease rent as a result of the
elimination of the existing synthetic lease financings for the Dayton
Facilities, the Briarfield Facilities and the Rhode Island Facilities. In
connection with the Merger, the Company is assumed to purchase these
facilities for $59,250 through the exercise of existing purchase options.
See notes (E) and (G) above.
(I) In connection with the Merger, the Company's borrowings under its existing
revolving credit facility are expected to be refinanced using the proceeds
of the Merger Financings. The adjustments to the Company's interest
expense, net, to reflect the refinancing of this debt as of January 1,
1997 are as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Elimination of the historical
interest expense related to the
existing revolving credit facility
and the historical amortization of
debt issuance costs related to the
Company's debt and synthetic lease
arrangements to be retired in
connection with the Merger.......... $ (420) $ (324)
Interest resulting from $3.9 million
of borrowings under the $250.0
million new senior secured credit
facility at an assumed interest rate
of LIBOR (5.65%) plus 2.25% (7.90%)
(1)................................. 1,538 385
Interest resulting from $100 million
of debt securities to be issued in
connection with the Merger
Financings, at an assumed interest
rate of 10.25% (2).................. 10,513 2,832
Amortization of debt issuance costs
of $12.0 million associated with the
debt securities and the new senior
secured credit facility over the
respective terms of indebtedness.... 1,533 383
------- ------
$13,164 $3,276
======= ======
</TABLE>
--------
(1) Interest expense is calculated assuming an outstanding balance under
the new senior secured credit facility of $3.9 million plus a 0.5% fee
on the unused portion.
(2) A 25 basis point increase or decrease in the assumed average interest
rate on the subordinated debt would change the pro forma annual
interest expense by approximately $ 0.3 million and the pro forma net
income by approximately $0.2 million.
98
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(J) Reflects the adjustment to the provision for the federal and state income
taxes which the Company would have recorded (based on the Company's
historical effective tax rate of 39%) had the matters described in notes
(E) through (I) occurred on January 1, 1997.
(K) Dividends on the exchangeable preferred stock are calculated based on an
assumed annual rate of 12.00%.
(L) Represents the unaudited consolidated statement of operations of the
Company for the three months ended March 31, 1998.
(M) During 1998, the Company acquired the Briarfield and Rhode Island
Facilities through synthetic lease financing. To reflect the pro forma
effect of those acquisitions on Harborside's operations, the schedule
below presents the unaudited historical statements of operations of the
Briarfield Facilities and the Rhode Island Facilities, which were acquired
on April 1, 1998 and May 8, 1998, respectively, for the period from
January 1, 1998 through March 31, 1998.
<TABLE>
<CAPTION>
COMPLETED
RHODE ISLAND 1998
BRIARFIELD FACILITIES PRO FORMA ACQUISITIONS
FACILITIES (1) (2) ADJUSTMENTS COMBINED
-------------- ------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Total net revenues...... $2,296 $2,432 $ 120 (3) $4,848
Expenses:
Facility operating.... 1,786 2,045 -- 3,831
Management fees....... 166 205 -- 371
Depreciation and amor-
tization............. 87 41 (128)(4) --
Synthetic lease rent.. -- -- 650 (4) 650
------ ------ ----- ------
Total expenses...... 2,039 2,291 522 4,852
------ ------ ----- ------
Income from operations.. 257 141 (402) (4)
Other:
Interest expense,
net.................. (166) (20) 186 (4) --
------ ------ ----- ------
Income before income
taxes.................. 91 121 (216) (4)
Income taxes............ -- -- 2 (5) 2
------ ------ ----- ------
Net income.............. $ 91 $ 121 $(214) $ (2)
====== ====== ===== ======
</TABLE>
--------
(1) Reflects the unaudited historical statements of operations of the
Briarfield Facilities for the three months ended March 31, 1998.
(2) Reflects the unaudited historical statements of operations of the Rhode
Island Facilities for the three months ended March 31, 1998.
(3) In Ohio and Rhode Island, a portion of a facility's Medicaid
reimbursement rate is related to the capital costs incurred to finance
the facility. As facility financing changes as a result of an
acquisition, the reimbursement of such capital costs (and accordingly,
a facility's net revenues) is affected as well. This adjustment
represents the aggregate increase in revenue that is directly
attributable to the Company's acquisition of the Briarfield and Rhode
Island Facilities and the related financings. The adjustment, which can
occur upon a change of facility ownership, is computed in accordance
with the state Medicaid program cost reporting rules and regulations by
substituting the effects of the Company's financing for the amounts
included in the historical Medicaid cost reports.
(4) Reflects the following adjustments related to the financing of these
acquisitions through synthetic leases rather than through asset
acquisitions: (a) the elimination of historical combined amounts
recorded by the Briarfield and Rhode Island Facilities for depreciation
and amortization expense which had been recorded as a result of the
ownership of the underlying assets; (b) the elimination of historical
combined amounts recorded by the Briarfield and Rhode Island Facilities
for interest expense as the
99
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Company did not assume the related indebtedness; and (c) the synthetic
lease rent expense that the Company would have incurred had the
Completed 1998 Acquisitions occurred on January 1, 1997. Specifically,
the current synthetic lease terms for the Briarfield and Rhode Island
Facilities, based on executed agreements, are as follows:
<TABLE>
<CAPTION>
COMPLETED
1998
SYNTHETIC LEASE ACQUISITIONS
RENT PER MONTH COMBINED
--------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Briarfield Facilities (i)................... $106 $319
Rhode Island Facilities (ii)................ 110 331
----
$650
====
</TABLE>
--------
(i) Based on a $17.5 million purchase price financed at 7.3%.
(ii) Based on an $18.15 million purchase price financed at 7.3%.
(5) Reflects the adjustment to the provision for federal and state income
taxes which the Company would have recorded (based on the Company's
historical effective tax rate of 39%) had the Completed 1998
Acquisitions occurred on January 1, 1997.
(N) The pro forma financial results exclude the effects of the elimination of
certain contracts terminated as a condition to closing certain of the
Completed 1997 Acquisitions and the Completed 1998 Acquisitions. On a pro
forma basis, the Company would have realized net cost reductions of $2,384
and $371 for the year ended December 31, 1997 and the three months ended
March 31, 1998, respectively, as a result of the elimination of these
historical contracts. On a pro forma basis, assuming the elimination of
these contracts in connection with such acquisitions on January 1, 1997,
the facility operating, management fees and general and administrative
expenses would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1997 1998
------------ ---------------
<S> <C> <C>
Facility operating (1)...................... $242,704 $61,212
Management fees (2)......................... -- --
General and administrative (3).............. 12,245 3,365
</TABLE>
(1) Reflects the $160 effect for the year ended December 31, 1997 of the
elimination of a consulting contract terminated as a condition to
closing the Company's acquisition of Access Rehabilitation, assuming
such acquisition had occurred on January 1, 1997.
(2) Reflects the $3,137 and $371 effects for the year ended December 31,
1997 and the three months ended March 31, 1998, respectively, of the
elimination of historical management fees paid under contracts with
related parties that were terminated as a condition to closing the
Company's acquisition of the Dayton, Connecticut, Briarfield and Rhode
Island Facilities, assuming such acquisitions had occurred on January
1, 1997. Subsequent to the dates of such acquisitions, no services were
provided to the Company by these related parties.
(3) Reflects the $913 effect for the year ended December 31, 1997 of the
addition of general and administrative expenses that the Company
expects it would have incurred had the Company's acquisition of the
Dayton, Connecticut, Briarfield and Rhode Island Facilities occurred on
January 1, 1997.
100
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
HARBORSIDE COMPLETED PRO
HEALTHCARE 1998 FORMA
CORPORATION ACQUISITIONS BEFORE MERGER
(A) COMBINED (B) MERGER ADJUSTMENTS PRO FORMA
----------- ------------ -------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash
equivalents........... $ 2,180 $-- $ 2,180 $ -- (C) $ 2,180
Accounts receivable,
net................... 39,286 -- 39,286 -- 39,286
Prepaid expenses and
other................. 6,590 -- 6,590 (336)(D) 6,254
Prepaid income taxes... 757 -- 757 -- 757
Deferred income
taxes................. 2,150 -- 2,150 -- 2,150
-------- ---- -------- -------- --------
Total current
assets.............. 50,963 -- 50,963 (336) 50,627
Restricted cash......... 5,782 -- 5,782 -- 5,782
Investment in limited
partnership............ 36 -- 36 -- 36
Property and equipment,
net.................... 99,361 -- 99,361 59,250 (E) 158,611
Intangible assets, net.. 8,741 -- 8,741 17,603 (F) 26,344
Note receivable......... 7,487 -- 7,487 -- 7,487
Deferred income taxes... 71 -- 71 -- 71
-------- ---- -------- -------- --------
Total assets......... $172,441 $-- $172,441 $ 76,517 $248,958
======== ==== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term debt........ $ 199 $-- $ 199 -- $ 199
Current portion of
capital lease
obligation............ 4,123 -- 4,123 -- 4,123
Accounts payable....... 5,868 -- 5,868 -- 5,868
Employee compensation
and benefits.......... 14,231 -- 14,231 -- 14,231
Other accrued
liabilities........... 4,510 -- 4,510 -- 4,510
Accrued interest....... 246 -- 246 -- 246
Current portion of
deferred income....... 609 -- 609 -- 609
-------- ---- -------- -------- --------
Total current
liabilities......... 29,786 -- 29,786 -- 29,786
Long-term portion of de-
ferred income.......... 3,431 -- 3,431 -- 3,431
Long-term debt.......... 33,396 -- 33,396 88,294 (G) 121,690
Long-term portion of
capital lease obliga-
tion................... 52,147 -- 52,147 -- 52,147
-------- ---- -------- -------- --------
Total liabilities.... 118,760 -- 118,760 88,294 207,054
-------- ---- -------- -------- --------
Exchangeable preferred
stock, redeemable...... -- -- -- 40,000 (H) 40,000
Stockholders' Equity:
Common stock........... 80 -- 80 64 (I) 144
Additional paid-in
capital............... 48,463 -- 48,463 159,441 (I) 207,904
Treasury stock, at
cost.................. -- -- -- (184,232)(I) (184,232)
Retained earnings...... 5,138 -- 5,138 (27,050)(I) (21,912)
-------- ---- -------- -------- --------
Total stockholders'
equity.............. 53,681 -- 53,681 (51,777) 1,904
-------- ---- -------- -------- --------
Total liabilities and
stockholders'
equity.............. $172,441 $-- $172,441 $ 76,517 $248,958
======== ==== ======== ======== ========
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet
101
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Represents the historical audited consolidated balance sheet of the
Company as of March 31, 1998.
(B) The schedule below presents the historical unaudited balance sheets of the
combined Briarfield Facilities and the combined Rhode Island Facilities as
of March 31, 1998 and gives pro forma effect to the acquisitions of the
Briarfield Facilities and the Rhode Island Facilities, which were
consummated on April 1, 1998 and May 8, 1998, respectively, as if such
acquisitions had occurred on March 31, 1998.
<TABLE>
<CAPTION>
COMPLETED
1998
BRIARFIELD RHODE ISLAND PRO FORMA ACQUISITIONS
FACILITIES (1) FACILITIES (2) ADJUSTMENTS (3) COMBINED
-------------- -------------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash
equivalents.......... $ 27 $ 288 $ (315) $--
Accounts receivable,
net.................. 334 2,446 (2,780) --
Prepaid expenses and
other................ (37) 28 9 --
------ ------ -------- ----
Total current
assets............. 324 2,762 (3,086) --
Property and equipment,
net.................... 8,046 1,648 (9,694) --
Intangible assets, net.. 209 6 (215) --
Note receivable......... 73 -- (73) --
Other assets............ -- 1,252 (1,252) --
------ ------ -------- ----
Total assets........ $8,652 $5,668 $(14,320) $--
====== ====== ======== ====
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term debt....... $ 328 $ -- $ (328) $--
Current portion of
capital lease
obligation........... 21 -- (21) --
Accounts payable...... 33 325 (358) --
Employee compensation
and benefits......... 216 203 (419) --
Other accrued
liabilities.......... 64 232 (296) --
Accrued interest...... 40 -- (40) --
------ ------ -------- ----
Total current
liabilities........ 702 760 (1,462) --
Long-term debt.......... 8,640 -- (8,640) --
Long-term portion of
capital lease
obligation............. 40 -- (40) --
Mortgage payable........ -- 944 (944) --
------ ------ -------- ----
Total liabilities... 9,382 1,704 (11,086) --
------ ------ -------- ----
Stockholders' Equity
(Deficit):
Common stock.......... 11 91 (102) --
Additional paid-in
capital.............. 356 -- (356) --
Retained earnings
(deficit)............ (1,097) 3,873 (2,776) --
------ ------ -------- ----
Total stockholders'
equity (deficit)... (730) 3,964 (3,234) --
------ ------ -------- ----
Total liabilities
and stockholders'
equity............. $8,652 $5,668 $(14,320) $--
====== ====== ======== ====
</TABLE>
--------
(1) Reflects the historical unaudited balance sheets of the Briarfield
Facilities as of March 31, 1998.
(2) Reflects the historical unaudited balance sheets of the Rhode Island
Facilities as of March 31, 1998.
(3) The adjustments give effect to the elimination of all assets and
liabilities of the Briarfield and Rhode Island Facilities. The Company
has recorded the acquisitions as synthetic leases and, in connection
with such acquisitions, did not acquire any of the operating assets or
liabilities of the respective facilities.
102
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(C)Reflects the following sources and uses of funds in connection with the
Merger and the Merger Financings:
<TABLE>
<S> <C>
Total sources:
Proceeds of the debt securities............................. $ 100,000
Proceeds from the issuance of 6,380,215 shares of common
stock at $25 per share(1).................................. 159,505
Borrowings under the new senior secured credit facility..... 3,894
Proceeds from the issuance of exchangeable preferred stock.. 40,000
---------
$ 303,399
=========
Total uses:
Redemption of existing 7,369,275 shares of Harborside Common
Stock at $25 per share..................................... $ 184,232
Conversion to cash of 648,923 options at a weighted average
exercise price of $12.87................................... 7,871
Exercise of existing purchase options for leased facilities. 59,250
Refinancing of existing revolving credit facility........... 15,600
Estimated transaction fees and expenses of the Merger(2).... 36,446
---------
$ 303,399
=========
(D)Reflects forgiveness of loans associated with the change of control.
(E)Reflects the exercise of existing purchase options of the Dayton Facilities,
the Briarfield Facilities and the Rhode Island Facilities
(F)Reflects the following:
Estimated debt issuance costs related to the debt securities
and the new senior secured credit facility which will be
amortized over the respective terms of indebtedness........ $ 12,000
Management fees prepaid to Investcorp International Inc. in
connection with the Merger................................. 6,000
Payments related to the Non-Compete Agreements which will be
amortized over the one-year term........................... 500
Elimination of debt issuance costs related to retired debt.. (897)
---------
$ 17,603
=========
(G)Reflects the following:
Refinancing of revolving credit facility.................... $ (15,600)
Borrowings under new senior secured credit facility......... 3,894
Proceeds of debt securities (assumed interest rate of
10.50%).................................................... 100,000
---------
$ 88,294
=========
(H)Reflects the issuance of exchangeable preferred stock.
(I) Reflects the following:
Issuance of 6,380,215 shares of common stock par value
$.01(1).................................................... $ 64
Issuance of 6,380,215 shares of common stock at $25 per
share, additional paid-in-capital(1)....................... 159,441
Redemption of existing 7,369,275 shares of Harborside Common
Stock at $25 per share..................................... (184,232)
Conversion to cash of 648,923 options at an average exercise
price of $12.87............................................ (7,871)
Estimated fees and expenses to be paid by the Company in
connection with the Merger and the Merger Financings(3).... (24,472)
Tax benefit of management transaction bonuses, standby
commitment fees, conversion of options, and writeoff of
deferred issuance costs associated with retired debt....... 5,293
---------
$ (51,777)
=========
</TABLE>
103
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
- --------
(1) These shares consist of 5,720,215 shares of Harborside Class B Common
Stock, 640,000 shares of Harborside Class C Common Stock and 20,000
shares of Harborside Class D Common Stock to be exchanged on a one-for-
one basis in the Merger for shares of Class B Stock, Class C Stock, and
Class D Stock, respectively, of MergerCo. The numbers of shares are based
on the assumption that the amount of the common equity contribution to
MergerCo in exchange for its Class B Stock, Class C Stock and Class D
Stock will be $159.5 million. The actual amount of the equity
contribution, and therefore the respective numbers of shares, will not be
known until shortly before the Effective Time. The price is fixed at
$25.00 per share. See "DESCRIPTION OF HARBORSIDE CAPITAL STOCK--
Harborside's Capital Stock Following the Merger" and "THE MERGER--Merger
Financings." Shares of Harborside Class B Common Stock and Harborside
Class C Common Stock will be non-voting, while the shares of Harborside
Class D Common Stock will have 319 votes per share.
(2) The $36.4 million of estimated fees and expenses includes $12.0 million
of estimated debt issuance costs for the Merger Financings, $6.0 million
of management fees prepaid to III in connection with the Merger, a $0.5
million payment related to the Non-Compete Agreements and $23.2 million
of estimated fees and expenses to be paid in connection with the Merger,
less $5.3 million related to the income tax benefits related to certain
of such fees and expenses, conversion of options, and the write-off of
deferred issuance costs associated with retired debt. The $23.2 million
of estimated fees and expenses to be paid in connection with the Merger
includes standby commitment fees, legal and accounting fees, and
compensation and other charges associated with the Merger.
(3) Represents $23.2 million in estimated fees and expenses to be incurred in
connection with the Merger, $0.4 million non-cash charge related to the
forgiveness of loans, and $0.9 million associated with the elimination of
deferred financing costs related to retired debt.
104
<PAGE>
DESCRIPTION OF HARBORSIDE CAPITAL STOCK
HARBORSIDE'S EXISTING CAPITAL STOCK
General. Harborside is authorized by its existing Certificate of
Incorporation to issue an aggregate of 30,000,000 shares of Harborside Common
Stock and 1,000,000 shares of preferred stock, par value $.01 per share. There
are no shares of Harborside preferred stock issued or outstanding. The
following is a summary of certain of the current rights and privileges
pertaining to Harborside Common Stock. For a full description of Harborside
Common Stock, reference is made to the Company's existing Certificate of
Incorporation and By-Laws, as amended, as currently in effect, copies of which
are on file with the Commission.
Voting Rights of Common Stock. Holders of Harborside Common Stock are
entitled to one vote per share on all matters submitted to a vote of
stockholders. Approval of matters brought before the stockholders requires the
affirmative vote of a majority of shares present and voting, except as
otherwise required by law. Director nominations may be made by stockholders in
accordance with the Company's By-Laws, as amended.
Dividend Rights of Common Stock. Holders of Harborside Common Stock are
entitled to participate in dividends as and when declared by the Board out of
funds legally available therefor. The Company's ability to pay cash dividends
is subject to certain restrictions.
Liquidation Rights of Common Stock. Subject to the rights of creditors and
holders of preferred stock, if any, holders of Harborside Common Stock are
entitled to share ratably in a distribution of assets of the Company upon any
liquidation, dissolution or winding-up of the Company.
Preferred Stock. The Board of Directors of the Company is authorized to
issue, by resolution and without any action by stockholders, up to 1,000,000
shares of Harborside preferred stock and may establish the designations,
dividend rights, dividend rate, conversion rights, voting rights, terms of
redemption, liquidation preference, sinking fund terms and all other
preferences and rights of any series of Harborside preferred stock, including
rights that could adversely affect the voting power of the holders of
Harborside Common Stock. No shares of Harborside preferred stock are currently
outstanding.
HARBORSIDE'S CAPITAL STOCK FOLLOWING THE MERGER
Introduction. Assuming the Merger and the Amendment Proposal are approved by
the requisite vote of the stockholders of Company Common Stock at the Special
Meeting, at the Effective Time the current Certificate of Incorporation of
MergerCo will be replaced by the Restated Certificate of Incorporation
substantially in the form of Annex V attached hereto, which will then become
the certificate of incorporation of the Company following the Merger. The
Restated Certificate will authorize various classes of common stock and
establish the rights and privileges of such classes in accordance with the
terms of the Merger Agreement. In addition, the Restated Certificate will not
contain certain provisions of the Company's existing Certificate of
Incorporation that are not typically included in a charter of a substantially
privately-held company, which the Company is expected to become upon
consummation of the Merger.
The following is a summary of certain of the rights and privileges
pertaining to Harborside's capital stock as it is expected to exist
immediately after giving effect to the Merger, as set forth in the Restated
Certificate of Incorporation. For a full description of such capital stock,
reference is made to Annex V attached hereto.
General. Harborside will be authorized to issue an aggregate of 19,500,000
shares of capital stock, consisting of 500,000 shares of preferred stock with
a par value of $0.01 per share (the "Harborside Preferred Stock") and
19,000,000 shares comprised of the five classes of common stock described
below, each with a par value of $0.01 (these five classes are sometimes
referred to collectively as the "Harborside Stock").
Harborside Preferred Stock. For a description of the terms of the series of
Harborside Preferred Stock expected to be authorized in connection with the
Merger, see "THE MERGER--Merger Financings." The expected number of shares of
such series of Harborside Preferred Stock to be outstanding immediately
following
105
<PAGE>
the Effective Time is 40,000. The Board of Directors of the Company will be
authorized, without further action by the stockholders, but subject to the
limitations set forth in the certificate of designation of such series of
Harborside Preferred Stock, to provide for the issue of additional shares of
Harborside Preferred Stock, in one or more additional series, and to fix for
each such additional series such voting powers, full or limited, and such
designations, preferences and relative, participating, optional or other
special rights and such qualifications, limitations or restrictions thereof as
shall be stated and expressed in the resolution or resolutions adopted by the
Board of Directors of the Company providing for the issue of such series and
as may be permitted by the DGCL.
Harborside Stock. The Harborside Stock will consist of Class A Common Stock
("Harborside Class A Common Stock"), Class B Common Stock ("Harborside Class B
Common Stock"), Class C Common Stock ("Harborside Class C Common Stock"),
Class D Common Stock ("Harborside Class D Common Stock") and Common Stock
("Common Stock"). The number of authorized shares of Harborside Class A Common
Stock, Harborside Class B Common Stock, Harborside Class C Common Stock,
Harborside Class D Common Stock and Common Stock will be 1,200,000, 6,700,000,
1,580,000, 20,000 and 9,500,000, respectively.
The precise numbers of shares of the various classes of Harborside Stock to
be outstanding immediately following the Effective Time will not be known
until shortly before the Effective Time, because the total amount of the
common equity contribution to MergerCo in exchange for its Class B Stock,
Class C Stock and Class D Stock (which will be converted on a one-for-one
basis into Harborside Class B Common Stock, Harborside Class C Common Stock
and Harborside Class D Common Stock, respectively, at the Effective Time) will
not be known until shortly before the Effective Time (See "THE MERGER--Merger
Financings), but the purchase price per share of Class B Stock, Class C Stock
and Class D Stock of MergerCo is fixed at $25.00 to correspond to the cash
consideration per share of Harborside Common Stock being paid in the Merger.
Since the aggregate number of shares of Harborside Class A Common Stock is
derived from the Non-Cash Election Number, which in turn is derived from the
aggregate number of shares of Class B Stock, Class C Stock and Class D Stock
of MergerCo, the fact that the equity contribution to MergerCo will not be
known until shortly before the Effective Time also results in the number of
shares of Harborside Class A Common Stock to be outstanding immediately
following the Effective Time not being known until shortly before the
Effective Time.
As discussed above under the caption "THE MERGER--Merger Financings," the
expected aggregate common equity contribution to MergerCo in exchange for its
Class B Stock, Class C Stock and Class D Stock is approximately $160 million.
The following discussion of the Harborside Stock assumes for purposes of
illustration that the amount of this equity contribution will be $159.5
million, which results in a Non-Cash Election Number of 421,651. Based on this
assumption, the number of shares to be outstanding immediately following the
Effective Time for each of the five classes of Harborside Stock would be as
follows:
<TABLE>
<CAPTION>
AUTHORIZED OUTSTANDING
TITLE SHARES SHARES
----- ---------- -----------
<S> <C> <C>
Harborside Class A Common Stock(1).................... 1,200,000 647,302
Harborside Class B Common Stock....................... 6,700,000 5,720,215
Harborside Class C Common Stock....................... 1,580,000 640,000
Harborside Class D Common Stock....................... 20,000 20,000
Common Stock.......................................... 9,500,000 --
---------- ---------
Total............................................... 19,000,000 7,027,517
========== =========
</TABLE>
- --------
(1) The payment of cash in lieu of fractional shares pursuant to the terms of
the Merger Agreement, as described under "THE MERGER--Fractional Shares,"
could result in the number of shares of Harborside Class A Common Stock
outstanding as of the Effective Time being slightly different than
647,302.
Harborside may, by an amendment to the Restated Certificate of Incorporation
duly adopted, increase or decrease at any time, and from time to time (but not
below the number of shares of Harborside Class A Common Stock, Harborside
Class B Common Stock, Harborside Class C Common Stock, Harborside Class D
Common Stock or Common Stock then outstanding), the number of authorized
shares of Harborside Class A Common Stock, Harborside Class B Common Stock,
Harborside Class C Common Stock, Harborside Class D Common Stock or Common
Stock, as the case may be.
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Voting. Holders of shares of Harborside Class A Common Stock and Common
Stock shall be entitled to one vote per share on all matters as to which
stockholders may be entitled to vote pursuant to the DGCL. Holders of
Harborside Class D Common Stock as of the Effective Time shall be entitled in
the aggregate to a number of votes equal to the total number of outstanding
shares of Harborside Class B Common Stock, Harborside Class C Common Stock and
Harborside Class D Common Stock as of the Effective Time. Using the numbers of
shares expected to be outstanding as of the Effective Time shown in the table
above, which numbers are based on the assumption that the aggregate common
equity contribution to MergerCo in exchange for its Class B Stock, Class C
Stock and Class D Stock will be $159.5 million as discussed above, holders of
shares of Harborside Class D Common Stock would be entitled to 319 votes per
share on all matters as to which stockholders may be entitled to vote pursuant
to the DGCL.
Holders of Harborside Class B Common Stock or Harborside Class C Common
Stock shall not have any voting rights, except that the holders of the
Harborside Class B Common Stock and Harborside Class C Common Stock shall have
the right to vote as a class to the extent required under the laws of the
State of Delaware.
Any amendment, alteration or repeal of any provision of the Restated
Certificate of Incorporation of Harborside, whether by merger, consolidation
or otherwise, that would alter or change the relative powers, preferences, or
special rights of any class of capital stock so as to affect the holders of
Harborside Class A Common Stock materially and adversely, will require, in
addition to any other approvals required by the DGCL and the Restated
Certificate of Incorporation, the approval by the holders of a majority of the
then outstanding shares of Harborside Class A Stock.
Liquidation; Dividends; Certain Adjustments; Merger. Subject to the rights
of the holders of any shares of then outstanding Harborside Preferred Stock,
any distribution made upon the liquidation, dissolution or winding up of the
affairs of Harborside, whether voluntary or involuntary, shall be allocated
pro rata based upon the number of shares of Harborside Stock held by each
stockholder.
Subject to the rights of the holders of any shares of then outstanding
Preferred Stock, holders of Harborside Class A Common Stock, Harborside Class
B Common Stock, Harborside Class C Common Stock, Harborside Class D Common
Stock and Common Stock shall be entitled to share ratably as a single class in
all dividends and other distributions of cash or any other right or property
as may be declared thereon by the Company's Board of Directors from time to
time out of assets or funds of the Company legally available therefor.
Whenever, during the period that shares of Harborside Class A Common Stock
shall be outstanding, the Company shall (i) declare a dividend on shares of
any class of Harborside Stock in shares of such class of Harborside Stock or
in securities convertible into or exchangeable for shares of such class of
Harborside Stock, (ii) subdivide the outstanding shares of any class of
Harborside Stock, (iii) combine the outstanding shares of any class of
Harborside Stock into a smaller number of shares, or (iv) issue any shares of
any class of Harborside Stock upon reclassification of such shares, a
corresponding dividend, subdivision, combination or other adjustment shall be
made with respect to the shares of the other class or classes of Harborside
Stock if and to the extent necessary to prevent the interests of the holders
of Harborside Class A Common Stock from being materially and adversely
affected.
In the event of a merger or consolidation of the Company with or into
another entity (whether or not the Company is the surviving entity), the
holders of each share of Harborside Class A Common Stock shall be entitled to
receive not less than the same per share consideration as the per share
consideration, if any, received by the holders of Harborside Class B Common
Stock, Harborside Class C Common Stock and Harborside Class D Common Stock in
such merger or consolidation (unless, in addition to such other approvals, if
any, as may be required by the DGCL and the Restated Certificate of
Incorporation, a different treatment is approved by holders of a majority of
the then outstanding shares of the Harborside Class A Common Stock).
Tag-along Rights; Mandatory Redemption. If, other than in connection with an
initial public offering of the Company, any Harborside Class D Common
Stockholder or Stockholders (for purposes of this provision,
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singularly or collectively, the "Proposed Transferor"), at any time or from
time to time in one transaction or in a series of transactions, desires to
enter into an agreement (whether oral or written) to Transfer its shares of
Harborside Class D Common Stock or any part thereof in a transaction which is
a sale to any Person (as defined) other than a Permitted Transferee (the
"Proposed Transferee"), such proposed Transfer shall be deemed a "Tag-Along
Transfer" and each of the Harborside Class A Stockholders, Harborside Class B
Common Stockholders and Harborside Class C Common Stockholders (collectively,
the "Other Harborside Stockholders") shall have the right, but not the
obligation, as a condition to such Tag-Along Transfer, to sell to the Proposed
Transferee up to the same percentage of its shares (the "Tag-Along Pro Rata
Amount") of Harborside Class A Common Stock, Harborside Class B Common Stock
or Harborside Class C Common Stock as the percentage of the total number of
shares of Harborside Class D Common Stock that the Proposed Transferor
proposes to Transfer in the "Tag-Along Transfer" (the "Proposed Purchase
Amount"). All Tag-Along Transfers by Other Harborside Stockholders shall be on
the same terms and conditions as the proposed Tag-Along Transfer by the
Proposed Transferor, provided that no Other Harborside Stockholder may be
required to make any representation or warranty in connection with the Tag-
Along Transfer other than as to its ownership and authority to Transfer the
shares of Harborside Stock to be Transferred by it, free and clear of any and
all liens and encumbrances and in compliance with all applicable laws. Each
Proposed Transferor and each Other Harborside Stockholder whose shares are
sold in a Tag-Along Transfer shall be required to bear its pro rata share,
based on the number of shares included in such Tag-Along Transfer, of the
expenses of the transaction.
The number of shares of Harborside Class A Common Stock, Harborside Class B
Common Stock or Harborside Class C Common Stock equal to the difference
between (i) the number of shares that the Harborside Class A Common
Stockholder, Harborside Class B Common Stockholder or Harborside Class C
Common Stockholder elected to include in the Tag-Along Transfer pursuant to
the foregoing Tag-Along Transfer provisions and (ii) the Tag-Along Pro Rata
Amount (the number of shares such holder was entitled to include in the Tag-
Along Transfer) for each such Harborside Class A Common Stockholder,
Harborside Class B Common Stockholder or Harborside Class C Common Stockholder
shall be redeemed by Harborside, to the extent it is lawfully permitted to do
so, at a redemption price (the "Tag-Along Redemption Price") per share equal
to the per share price paid for the Harborside Class D Common Stock by the
Proposed Transferee less such Other Harborside Stockholder's pro rata share of
the expenses of the Tag-Along Transfer. After such redemption, Harborside
shall issue to the Proposed Transferee shares of Harborside Class A Common
Stock, Harborside Class B Common Stock and Harborside Class C Common Stock in
amounts equal to the respective numbers of shares of such classes of
Harborside Stock so redeemed, and the Proposed Transferee shall pay to
Harborside for each such share a purchase price equal to the Tag-Along
Redemption Price. If the Proposed Transferee does not purchase all of the
shares of Harborside Stock of the Proposed Transferor, all of the shares that
the Other Harborside Stockholders elect to include in such proposed Tag-Along
Transfer, and all of the shares to be issued by Harborside in amounts equal to
the numbers of redeemed shares, then the proposed Tag-Along Transfer to such
Proposed Transferee shall be prohibited and any attempt to consummate the
proposed Tag-Along Transfer shall be null and void and of no force and effect.
Conversion. Upon the occurrence at any future date of a sale of 100% of the
outstanding equity securities or substantially all of the assets of the
Company or a public offering of any equity securities of the Company, each
share of Harborside Class A Common Stock, Harborside Class B Common Stock,
Harborside Class C Common Stock and Harborside Class D Common Stock not
otherwise redeemed by the Company pursuant to the mandatory redemption
provisions described above will convert into one share of Common Stock of the
Company.
CHANGES TO TERMS OF HARBORSIDE COMMON STOCK
General. The Harborside Common Stock will be denominated as Harborside Class
A Common Stock following the Merger. The Harborside Class A Common Stock will
have the rights, powers, privileges and restrictions specified in the Restated
Certificate of Incorporation of Harborside and described above. These rights,
powers, privileges and restrictions will differ in certain respects from those
of the Harborside Common Stock
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prior to the Merger. These differences relate primarily to the rights, powers,
privileges and restrictions of the Harborside Class A Common Stock relative to
the other classes of common stock of Harborside and the Harborside Preferred
Stock authorized in connection with the Merger, including rights, powers,
privileges and restrictions in connection with a merger of Harborside with
another entity (other than the Merger) or a proposed resale of shares of
Harborside Class D Common Stock. The following is a summary of these
differences. This summary is qualified in its entirety by reference to the
information set forth above under "--Harborside's Existing Capital Stock" and
"--Harborside's Capital Stock Following the Merger," and to Harborside's
existing Certificate of Incorporation and By-Laws in the case of the
Harborside Common Stock and the Restated Certificate of Incorporation of
Harborside in the case of the Harborside Class A Common Stock.
Relative Rights Generally. The Harborside Common Stock will no longer be the
only class of capital stock of Harborside following the Merger. It will
instead be one of five classes of common stock, and there will also be a class
of preferred stock outstanding. Immediately following the Merger, the
outstanding shares of Harborside Common Stock will be designated as Harborside
Class A Common Stock and will constitute approximately 9% of the outstanding
voting stock of Harborside. The outstanding shares of Harborside Class D
Common Stock will constitute approximately 91% of the outstanding voting stock
of Harborside following the Merger, and the other outstanding shares of common
stock of Harborside (shares of Harborside Class B Common Stock and Harborside
Class C Common Stock) will generally have no voting rights. The rights of the
holders of Harborside Class A Common Stock to receive dividends and
distributions will be subject to the rights of the holders of the preferred
stock and will be co-equal to the rights of the holders of the other classes
of common stock. In the event of any stock dividend, subdivision, combination
or reclassification of any other class of common stock, a corresponding change
will be made to the Harborside Class A Common Stock so that it is not
adversely affected. In the event of an initial public offering or sale of
Harborside, the outstanding shares of Harborside Class A Common Stock (as well
as the outstanding shares of all other classes of common stock of Harborside)
will automatically convert into shares of "Common Stock" of Harborside upon
the closing of such offering or sale.
Relative Rights Upon Merger or Resale of Class D Common Stock. The
Harborside Class A Common Stock will also have certain rights, powers,
privileges and restrictions in connection with a merger of Harborside with
another entity (other than the Merger) or a proposed resale of shares of
Harborside Class D Common Stock. In the event of the merger of Harborside with
another entity (other than the Merger), the holders of Harborside Class A
Common Stock will be entitled to receive the same per share consideration as
is received by the holders of the other classes of common stock unless the
holders of the Harborside Class A Common Stock agree otherwise. The holders of
Harborside Class A Common Stock will have the right to "tag-along" in
connection with any resale of Harborside Class D Common Stock by selling to
the proposed transferee up to the same percentage of their shares of
Harborside Class A Common Stock as the percentage of the total number of
shares of Harborside Class D Common Stock being sold in the transaction. The
Harborside Class A Common Stock will be subject to mandatory redemption by
Harborside if and to the extent that the holders thereof elect not to "tag-
along" in connection with any such resale of Harborside Class D Common Stock.
The effect of the mandatory redemption provision is that holders of Harborside
Class D Common Stock can cause holders of Harborside Class A Common Stock to
sell their Harborside Class A Common Stock at the time (and upon the same
terms) as holders of Harborside Class D Common Stock propose to sell their
Harborside Class D Common Stock, which may not be at a time or at a price that
such holders of Harborside Class A Common Stock desire to sell their shares.
Other Changes. The Restated Certificate of Incorporation will not contain
certain provisions that are currently in the Company's existing charter (i)
prohibiting the taking of stockholder action by written consent, (ii)
providing for a staggered board and (iii) providing that directors may only be
removed for cause. These provisions are not typically included in a charter of
a substantially privately-held company, which the Company is expected to
become upon consummation of the Merger. In addition, the Restated Certificate
of Incorporation will contain certain modifications to the indemnification
provisions in the Company's existing charter, which will not materially change
such provisions from those in the existing charter.
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MATERIAL PROVISIONS OF THE MERGER AGREEMENT
The following is a summary of the material provisions of the Merger
Agreement, a copy of which appears as Annex I to this Proxy
Statement/Prospectus and is incorporated herein by reference. This summary
does not purport to be complete and is qualified in its entirety by reference
to the Merger Agreement.
THE MERGER
The Merger Agreement provides that, following the approval of the Merger and
the adoption of the Merger Agreement by the vote of a majority of the shares
of Harborside Common Stock entitled to vote thereon and the satisfaction or
waiver of the other conditions to the Merger, MergerCo will be merged with and
into the Company, and the Company will continue as the surviving corporation
in the Merger.
If the conditions to the Merger are satisfied or waived, the parties will
file with the Secretary of State of the State of Delaware a duly executed
Certificate of Merger, and the Merger will become effective upon the filing
and acceptance thereof or at such date thereafter as is provided in the
Certificate of Merger. Each issued and outstanding share of Harborside Common
Stock (other than fractional shares and Dissenting Shares) will be converted,
at the election of the holder thereof, subject to proration, into either (a)
the right to receive the Cash Price or (b) a Non-Cash Election Share, as more
fully described under "THE MERGER--Merger Consideration" and "--Non Cash
Election," except that (i) an aggregate of 225,651 shares of Harborside Common
Stock held by the Senior Management Stockholders will not be subject to the
election described above and instead will be converted into the right to
retain the same number of shares of Harborside Common Stock, which, upon
consummation of the Merger, will be denominated as Harborside Class A Common
Stock, (ii) each other share of Harborside Common Stock held by the Senior
Management Stockholders and each share of Harborside Common Stock held by
certain other specified officers of the Company will not be subject to the
election described above and instead will be converted into the right to
receive $25.00 in cash and (iii) shares of Harborside Common Stock held by
Harborside, its subsidiaries, MergerCo or any of its affiliates will be
canceled and retired. With regard to the treatment of fractional share
interests, see "THE MERGER--Fractional Shares." With regard to the treatment
of Dissenting Shares, see "STOCKHOLDERS' APPRAISAL RIGHTS."
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations and warranties of
the Company relating, with respect to the Company and its subsidiaries, to,
among other things, (a) organization, standing and similar corporate matters;
(b) the Company's capital structure; (c) subsidiaries; (d) the authorization,
execution, delivery and enforceability of the Merger Agreement; (e)
noncontravention of governing documents and material contracts; (f) receipt of
governmental approvals; (g) documents filed by the Company with the Commission
and the accuracy of information contained therein; (h) the accuracy of
information supplied by the Company in connection with this Proxy
Statement/Prospectus; (i) the absence of certain changes or events since the
date of the most recent audited financial statements filed with the
Commission, including material adverse changes with respect to the Company,
and the absence of undisclosed liabilities; (j) the absence of pending or
threatened material litigation; (k) compliance with applicable laws; (l)
benefit plans and other matters relating to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and employment matters; (m) filing
of tax returns and payment of taxes; (n) title to owned real property and
valid leasehold interests in leased real property; (o) insurance matters; (p)
environmental matters; (q) brokers' fees and expenses; (r) receipt of an
opinion of the Company's financial advisor; (s) recommendation of the Board
with respect to the Merger Agreement and the Merger and related transactions;
(t) the absence of material defaults under the Company's contracts and (u) the
required vote of the Company's stockholders.
The Merger Agreement also contains customary representations and warranties
of MergerCo relating to, among other things, (a) organization, standing and
similar corporate matters; (b) the authorization, execution, delivery and
enforceability of the Merger Agreement and related matters; (c)
noncontravention of governing documents and material contracts; (d) receipt of
governmental approvals; (e) ability to finance transaction; (f) the accuracy
of information supplied by MergerCo in connection with this Proxy
Statement/Prospectus; (g) the absence of known impediments to regulatory
approval; and (h) the status of MergerCo under Section 203 of the Delaware
General Corporation Law.
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CERTAIN PRE-CLOSING COVENANTS
The Company has agreed, until the Effective Time (except as contemplated by
the Merger Agreement or the transactions related thereto), that it will, and
will cause its subsidiaries to, conduct their operations according to their
ordinary course of business consistent with past practice, and use their
respective reasonable efforts to preserve intact their business organizations
and maintain satisfactory relationships with their respective customers,
suppliers, governmental agencies having authority over any material aspect of
their respective businesses, and others having business dealings with them. In
addition, and except as contemplated by the Merger Agreement or the
transactions relating thereto, prior to the Effective Time, the Company has
agreed that it will not, and will not permit any of its subsidiaries to,
without the prior consent of MergerCo (which consent is not to be unreasonably
withheld):
(a) amend or propose to amend its certificate of incorporation or by-laws
(or equivalent governing instruments);
(b) authorize for issuance, issue, sell, pledge, deliver or agree or
commit to issue, sell, pledge or deliver (whether through the issuance or
granting of any options, warrants, calls, subscriptions, stock appreciation
rights or other rights or other agreements) or otherwise encumber any
capital stock of any class or any securities convertible into or
exchangeable for shares of capital stock of any class, other than the
issuance of shares of Harborside Common Stock issuable upon exercise of
Company Stock Options in accordance with the terms thereof;
(c) split, combine or reclassify any of its capital stock or declare, pay
or set aside for payment any dividend or other distribution in respect of
or substitution for its capital stock, or redeem, purchase or otherwise
acquire any shares of its capital stock;
(d) increase, modify or establish any compensation or benefit plan,
agreement, policy, practice, program or arrangement that would be an
employee benefit plan (had such plan, agreement, policy, practice, program
or arrangement been adopted prior to the date of the Merger Agreement) or
otherwise increase in any manner the compensation payable or to become
payable by the Company or any of its subsidiaries to any of their
respective directors, officers, former employees, or employees, other than
in the ordinary course of business consistent with past practice or as
required under any existing employment agreement or plan or as contemplated
by the Merger Agreement;
(e) acquire (by purchase, lease or otherwise) any asset, property or
business from any person or dispose of (by sale, lease or otherwise) any of
its assets or properties other than acquisitions and dispositions in the
ordinary course of business the value of which does not exceed $250,000
individually or $1,000,000 in the aggregate, and other than certain
specified acquisitions;
(f) other than in connection with transactions otherwise permitted, (i)
incur or assume any funded debt obligations or issue any debt securities
except for borrowings under existing credit facilities in the ordinary
course of business; (ii) guarantee to otherwise become liable for (whether
directly, contingently or otherwise) any debts or obligations of any person
(other than the Company and its subsidiaries) except in the ordinary course
of business not to exceed $1,000,000 in the aggregate; (iii) make any
loans, advances or capital contributions to, or investments in, any person
(other than the Company and its subsidiaries) except in the ordinary course
of business not to exceed $250,000 individually and $1,000,000 in the
aggregate; (iv) mortgage, pledge or otherwise encumber any of its assets
except in the ordinary course of business with respect to assets having a
value not exceeding $250,000 individually and $1,000,000 in the aggregate;
(g) settle or compromise any claim or litigation which (after insurance
reimbursement) results in liability on the part of the Company or any of
its subsidiaries in excess of $1,000,000;
(h) make or commit to make capital expenditures in excess of $500,000 of
the 1998 budget as disclosed to MergerCo;
(i) enter into any other agreements, commitments or contracts that are
material to the Company and its subsidiaries taken as a whole, other than
in the ordinary course of business consistent with past practice, or
otherwise make any material change that is adverse to the Company in (x)
any existing agreement,
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commitment or arrangement that is material to the Company and its
subsidiaries taken as a whole or (y) the conduct of the business or
operations of the Company and its subsidiaries;
(j) cancel or fail to maintain any insurance policies in effect
immediately following the execution of the Merger Agreement; or
(k) agree, commit or arrange to do any of the foregoing.
The Company has agreed to give prompt notice to MergerCo, and MergerCo has
agreed to give prompt notice to the Company, of (i) the occurrence or non-
occurrence of any event the occurrence or non-occurrence of which will cause
any representation or warranty of either party contained in the Merger
Agreement to be untrue or inaccurate in any material respect and (ii) any
material failure of the Company or MergerCo to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by either
party under the Merger Agreement; provided, that the delivery of any such
notice will not limit or otherwise affect the remedies available under the
Merger Agreement to the party receiving such notice.
Investcorp Bank E.C., an investment bank incorporated in the State of
Bahrain, has agreed to cause MergerCo to perform MergerCo's obligations and
agreements under the Merger Agreement and has expressly agreed to be liable in
the event MergerCo fails to perform any of its obligations or agreements under
the Merger Agreement; provided, that such agreement terminates immediately
following the Effective Time.
NO SOLICITATION OF TRANSACTIONS
The Merger Agreement provides that, except as otherwise provided therein,
the Company shall not, directly or indirectly (through representatives or
otherwise), solicit, knowingly encourage, participate in or initiate
discussions or negotiations with, or provide any information to, any person or
group (other than MergerCo or any affiliate, associate or designee of
MergerCo) concerning any proposal (an "Acquisition Proposal") for an
acquisition of all or any substantial part of the business and properties or
capital stock of the Company and its subsidiaries taken as a whole, directly
or indirectly, whether by merger, consolidation, share exchange, tender offer,
purchase of assets or shares of capital stock or otherwise (an "Acquisition
Transaction"). Notwithstanding the foregoing, (a) the Board may take, and
disclose to the Company's stockholders, a position contemplated by Rules 14d-9
and 14e-2 promulgated under the Exchange Act with respect to any tender offer
for shares of capital stock of the Company; provided, that the Board shall not
recommend that the stockholders of the Company tender their shares in
connection with any such tender offer unless the Board shall have determined
in good faith, after consultation with outside counsel, that failing to take
such action would constitute a breach of the Board's fiduciary duty under
applicable law; and (b) the Company may, directly or indirectly, furnish
information and access, in each case only in response to unsolicited requests
therefor, to any person or group pursuant to customary confidentiality
agreements, and may participate in discussions and negotiate with any such
person or group concerning any Acquisition Proposal not received in violation
of the Merger Agreement, if the Board determines in its good faith judgment,
after consultation with outside counsel, that failing to take such action
would constitute a breach of the Board's fiduciary duty under applicable law.
In addition, the Board is required to promptly (and in no event later than 24
hours after receipt of the relevant Acquisition Proposal) notify (which notice
shall be provided both orally and in writing) MergerCo if any such Acquisition
Proposal is made and shall, in such notice, indicate in reasonable detail the
terms and conditions of such proposal and shall keep MergerCo promptly advised
of any material changes to such terms and conditions. The Company also has
agreed not to release any third party from, or waive any provisions of, any
confidentiality or standstill agreement to which the Company may be a party,
unless the Board shall have determined in good faith that failing to release
such third party or waive such provisions would constitute a breach of the
fiduciary duties of the Board under applicable law.
BOARD OF DIRECTORS AND OFFICERS OF THE COMPANY FOLLOWING THE MERGER
The Merger Agreement provides that the directors of MergerCo at the
Effective Time will be the directors of the Company following the Merger. The
directors of MergerCo at the Effective Time will be Damian N.
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Dell'Anno, Stephen L. Guillard, Christopher J. O'Brien, Charles J. Philippin,
Christopher J. Stadler, William H. Stephan and Savio W. Tung. See
"MANAGEMENT--Directors and Executive Officers of the Company" for more
information on the MergerCo directors. The Board of Directors of the Company
will be subject to change from time to time. The Merger Agreement also
provides that the officers of the Company at the Effective Time will be
officers of the Company following the Merger, subject to change from time to
time.
TREATMENT OF EXISTING COMPANY STOCK OPTIONS
The treatment in the Merger of outstanding Company Stock Options will be as
described in "THE MERGER--Treatment of Existing Company Stock Options."
ACCESS TO INFORMATION
Subject to applicable provisions regarding confidentiality, the Company has
agreed in the Merger Agreement to, and to cause its subsidiaries to, afford
MergerCo and its representatives reasonable access during normal business
hours to all properties, contracts, commitments, personnel, books and records,
and to furnish MergerCo with all financial, operating and other data and
information as MergerCo through its representatives may from time to time
reasonably request.
COOPERATION AND REASONABLE EFFORTS
Pursuant to the Merger Agreement and subject to certain conditions and
limitations described therein, the parties have agreed to cooperate with each
other and to use their respective reasonable efforts to take certain specified
and other actions, including cooperation in the arrangement of financing, so
that the transactions contemplated by the Merger Agreement may be consummated.
The Company and MergerCo have each agreed to use its commercially reasonable
efforts to cause the Merger to be recorded as a recapitalization for financial
reporting purposes.
DELISTING FROM NYSE
Pursuant to the Merger Agreement, the Company and MergerCo have each agreed
to cooperate with each other in taking all actions necessary to delist the
Harborside Common Stock from the NYSE, effective after the Effective Time.
PUBLIC ANNOUNCEMENTS
The Company and MergerCo have agreed not to make any public announcements
with respect to the Merger except as required by law or by mutual agreement.
INDEMNIFICATION AND INSURANCE
Following the Merger, the Certificate of Incorporation and By-Laws of the
Company will contain provisions substantially identical with respect to
elimination of personal liability and indemnification to those set forth in
the Certificate of Incorporation of the Company and the By-laws of the Company
as of the date of the Merger Agreement, respectively, which provisions will
not be amended, repealed or otherwise modified for a period of six years from
the Effective Time in any manner that would adversely affect the rights
thereunder of persons who at the Effective Time were directors, officers,
agents or employees of the Company. In addition, MergerCo has agreed to honor
any existing indemnification agreements with any current or former directors,
officers or employees of the Company as in effect as of the date of the Merger
Agreement. The surviving corporation will cause to be maintained in effect for
not less than six years from the Effective Time, the current policies of the
directors' and officers' liability insurance in effect as of the date of the
Merger Agreement with respect to matters occurring prior to the Effective
Time; provided, that the surviving corporation shall not be obligated to pay
annual premiums for such insurance in excess of 150% of the last annual
premium paid prior to the date of the Merger Agreement.
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MASTER RIGHTS AGREEMENT
The Merger Agreement provides that, at the Effective Time, the Company will
enter into a master rights agreement for the benefit of Investcorp and the
other investors in MergerCo who, as a result of the Merger, will receive
common stock in the Company (collectively, the "New Investors") and the
Berkshire Stockholders, which agreement will provide, among other things, for
the following: (i) the New Investors will receive demand and "piggyback"
registration rights; (ii) the Berkshire Stockholders will receive "piggyback"
registration rights entitling them (subject to certain limitations) to
participate pro rata in Company registration statements filed with the
Commission; (iii) unless otherwise agreed by the New Investors holding voting
common stock and the Berkshire Stockholders, if any new equity securities
(subject to certain exceptions) are to be issued by the Company after the
Merger but prior to an initial public offering by the Company at a price below
fair market value, as determined in good faith by the Board of Directors of
the Company, the Company will give all holders of the then outstanding common
stock (not including stock options) the right to participate pro rata in such
equity financing; and (iv) the Berkshire Stockholders will be entitled to
receive periodic information concerning the Company (subject to certain
limitations). The terms of the master rights agreement may be modified or
terminated by agreement of the Company, the New Investors and the Berkshire
Stockholders.
MINIMUM EQUITY REQUIREMENT
Pursuant to the Merger Agreement, MergerCo is required to have received
contributions of at least $135 million in cash or cash equivalents prior to
the consummation of the Merger and the Merger Financings.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
The respective obligations of the Company and MergerCo to effect the Merger
are subject to various conditions which include, in addition to certain other
customary closing conditions, the following: (a) the Merger Agreement shall
have been approved by the requisite vote of holders of outstanding shares of
Harborside Common Stock; (b) no temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal restraint, requirement or prohibition preventing
the consummation of the Merger shall be in effect; provided that the Company
and MergerCo are required to use their reasonable efforts to have any such
injunction, order, restraint, requirement or prohibition vacated; and (c) the
Registration Statement of which this Proxy Statement/Prospectus is a part
shall have become effective under the Securities Act and shall not be the
subject of any stop order or proceeding seeking a stop order, and all material
state securities laws applicable to the registration and qualification of Non-
Cash Election Shares following the Merger shall have been complied with.
The obligations of MergerCo to effect the Merger are further subject to the
conditions that (i) an Administrative Services Agreement between the Company
and an affiliated entity remains in effect, (ii) no event has occurred that
has had or is reasonably likely to have a material adverse effect with respect
to the Company and (iii) certain regulatory approvals and certain third-party
consents required in connection with the Merger shall have been obtained. See
"REGULATORY APPROVALS."
The obligations of the Company to effect the Merger are further subject to
the condition that the Company shall have received an opinion or certificate
of a reputable expert firm selected by MergerCo and reasonably satisfactory to
the Company confirming the solvency of the Company and its subsidiaries on a
consolidated basis (after giving effect to the Merger and related financings)
addressed to the Board and upon which such Board shall be entitled to rely.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the Merger by the stockholders of
the Company:
(a) by mutual written consent of MergerCo and the Company;
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(b) by either MergerCo or the Company:
(i) if a court of competent jurisdiction or other governmental entity
of the United States shall have issued an order or taken any other
action permanently restraining, enjoining or otherwise prohibiting the
Merger and such order or other action shall have become final and
nonappealable; or
(ii) if the Effective Time shall not have occurred on or prior to
January 10, 1999 (other than due to the failure of the party seeking to
terminate the Merger Agreement to perform any of its obligations under
the Merger Agreement required to be performed thereunder);
(c) By the Company, if the Company receives an Acquisition Proposal in
writing from any person or group as a result of which the Board determines
in good faith, after consultation with outside counsel, that it is
obligated by its fiduciary duty under applicable law to terminate the
Merger Agreement;
(d) By MergerCo in the event of a breach by the Company of any
representation, warranty, covenant or other agreement contained in the
Merger Agreement which has not been cured within 30 days after the giving
of written notice to the Company and which has a material adverse effect
with respect to the Company and its subsidiaries taken as a whole or the
ability of the Company to consummate the transactions contemplated thereby;
(e) By the Company, if MergerCo shall have breached in any material
respect any of their respective representations, warranties, covenants or
other agreements contained in the Merger Agreement, which failure to
perform has not been cured within 30 days after the giving of written
notice to MergerCo and which has a material adverse effect with respect to
MergerCo or the ability of MergerCo to consummate the transactions
contemplated thereby; and
(f) By MergerCo, if the Company shall have (1) withdrawn, modified or
amended in any respect adverse to MergerCo its approval or recommendation
of the Merger Agreement or the Merger, (2) failed to include in this Proxy
Statement/Prospectus such recommendation, (3) recommended any Acquisition
Proposal or Acquisition Transaction from or with a person other than
MergerCo or any of its subsidiaries or affiliates or (4) resolved to do any
of the foregoing.
In the event of termination of the Merger Agreement by either the Company or
MergerCo, the Merger Agreement shall terminate, without any liability or
obligation on the part of the Company or MergerCo, other than specified
provisions in the Merger Agreement relating to (i) payment of fees and
expenses, (ii) certain confidentiality provisions and (iii) liability for any
willful breaches of the Merger Agreement. See "--Expenses and Certain Required
Payments."
AMENDMENT AND WAIVER
The Merger Agreement may be amended by action taken by the Company and
MergerCo at any time before or after approval of the Merger by the
stockholders of the Company, but, after any such approval, no amendment may be
made which changes the form or decreases the amount of the consideration per
share to be paid in the Merger, which changes any term of the Restated
Certificate of Incorporation of the Company or which otherwise adversely
affects the rights of the Company's stockholders under the Merger Agreement.
At any time prior to the Effective Time, MergerCo or the Company may, subject
to the immediately preceding sentence, waive compliance by the other party
with any of the obligations, covenants, agreements or conditions contained in
the Merger Agreement. Any such waiver shall be valid only if set forth in an
instrument in writing signed by the party granting such waiver.
The Company currently does not intend or expect that there will be any need
to amend or waive in any material respect any provision of the Merger
Agreement. In the event the Company waives any condition relating to the
United States federal income tax consequences of the Merger to Harborside
stockholders, or materially changes the terms of the Merger, the Company will
amend and supplement this Proxy Statement/Prospectus accordingly and resolicit
the stockholders of Harborside for their approval of the Merger Agreement and
the Amendment Proposal.
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EXPENSES AND CERTAIN REQUIRED PAYMENTS
If the Merger Agreement is terminated by the Company as described in item
(c) under "--Termination" above or by MergerCo as described in item (f) under
"--Termination" above, then the Company has agreed to reimburse MergerCo for
all actual documented out-of-pocket expenses (other than any expenses payable
as a financing commitment or similar fee) incurred by or on behalf of MergerCo
in connection with the transactions contemplated by the Merger Agreement and
any related financings; provided that such reimbursable expenses shall not
exceed $4,000,000 in the aggregate. In addition, in the event that, within
nine months following any such termination, the Company shall have consummated
an Acquisition Transaction with a person unaffiliated with MergerCo, then, in
addition to reimbursement of MergerCo's expenses as provided above, the
Company has agreed to pay MergerCo a fee of $6,000,000.
Except as otherwise provided above, all costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
shall be paid by the party incurring such expenses.
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<PAGE>
CERTAIN RELATED AGREEMENTS
STOCKHOLDER AGREEMENT
The following is a brief summary of certain provisions of the Stockholder
Agreement among MergerCo and the Subject Stockholders, a copy of which appears
as Annex II to this Proxy Statement/Prospectus and is incorporated herein by
reference. The Subject Stockholders are The Berkshire Companies Limited
Partnership, The Douglas Krupp 1994 Family Trust, The George Krupp 1994 Family
Trust, Krupp Enterprises, L.P. and Messrs. Guillard and Dell'Anno. Such
summary does not purport to be complete and is qualified in its entirety by
reference to the copy attached to the Proxy Statement/Prospectus.
Pursuant to the Stockholder Agreement, the Subject Stockholders, who owned,
as of the Record Date, an aggregate of approximately 54% of the outstanding
shares of Harborside Common Stock, have agreed, among other things and subject
to certain conditions, to vote in favor of the Merger Agreement and the
Merger, and to vote against any competing transactions by a third party. The
Stockholder Agreement also provides that the Berkshire Stockholders will make
Non-Cash Elections with respect to an amount of shares of Harborside Common
Stock equal to the Non-Cash Election Number. If the aggregate number of
Electing Shares (including those of the Berkshire Stockholders) exceeds the
Non-Cash Election Number, the Berkshire Stockholders will be subject to
proration with respect to the number of Non-Cash Election Shares they will
receive in the Merger in the same manner as all other electing stockholders.
In addition, pursuant to the Stockholder Agreement, the Subject Stockholders
may not, directly or indirectly (through representatives or otherwise),
solicit, knowingly encourage, participate in or initiate discussions or
negotiations with, or provide any information to, any person or group (other
than MergerCo or any affiliate, associate or designee of MergerCo) concerning
any proposal for an acquisition of all or any substantial part of the business
and properties or capital stock of the Company and its subsidiaries taken as a
whole, directly or indirectly, whether by merger, consolidation, share
exchange, tender offer, purchase of assets or shares of capital stock or
otherwise; provided, that this prohibition does not restrict any Subject
Stockholder who is a member of the Board of Directors from taking actions in
such person's capacity as a director of the Company to the extent and in the
circumstances permitted by the Merger Agreement. See "MATERIAL PROVISIONS OF
THE MERGER AGREEMENT--No Solicitation of Transactions."
Subject to certain conditions and exceptions, the Subject Stockholders are
also not permitted to dispose of, or enter into any contract, option (other
than the option granted to MergerCo pursuant to the Stockholder Agreement) or
other arrangement or understanding with respect to or consent to the
disposition of, any or all of such Subject Stockholders' Harborside Common
Stock or any interest therein.
The covenants and agreements in the Stockholder Agreement terminate on the
first to occur of (i) the Effective Time and (ii) the termination of the
Merger Agreement in accordance with its terms; provided that certain covenants
will survive the Effective Time of the Merger.
In addition, the Subject Stockholders have granted MergerCo an irrevocable
option to purchase all shares of Harborside Common Stock held by the Subject
Stockholders at a price per share equal to $25.00. The option is exercisable,
in whole or in part, at any time (x) after a person other than MergerCo or its
affiliates takes certain specified actions indicating that it might be
interested in acquiring the Company or (y) if the Company withdraws or
adversely modifies its recommendation of the Merger. The option expires upon
the earliest to occur of (a) the Effective Time, (b) 120 days after the
commencement of the option exercise period and (c) the termination of the
Merger Agreement pursuant to specified termination provisions contained
therein.
NON-COMPETE AGREEMENTS
The Company has entered into a Non-Compete Agreement, dated as of April 15,
1998, with each of Douglas Krupp, a director and beneficial stockholder of the
Company, and George Krupp, a beneficial stockholder of the Company, pursuant
to which each such individual has agreed for a one-year period commencing at
the Effective Time not to engage in certain business activities or to own
certain equity interests in any person or entity that engages in such business
activities. Pursuant to such agreements, the Company has agreed to pay
$250,000 to each of such individuals at the Effective Time.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding the persons who
will be the directors and executive officers of Harborside upon the
consummation of the Merger:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Stephen L. Guillard..... 49 Chairman, President, Chief Executive Officer and Director
Damian N. Dell'Anno..... 39 Executive Vice President of Operations and Director
William H. Stephan...... 41 Senior Vice President and Chief Financial Officer and Director
Bruce J. Beardsley...... 34 Senior Vice President of Acquisitions
Michael E. Gomez,
R.P.T.................. 36 Senior Vice President of Rehabilitation Services
Steven V. Raso.......... 33 Senior Vice President of Reimbursement
Savio W. Tung........... 46 Director
Christopher J. O'Brien.. 40 Director
Charles J. Philippin.... 47 Director
Christopher J. Stadler.. 33 Director
</TABLE>
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 26 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 Mediplex, an operator of skilled nursing facilities. Mr.
Dell'Anno has a total of 16 years of experience in the long-term care
industry.
William H. Stephan has served as Senior Vice President and Chief Financial
Officer of the Company since March 21, 1996 and its predecessors since 1994.
From 1986 to 1994, Mr. Stephan was a Manager in the health care practice of
Coopers & Lybrand L.L.P. In such position, his clients included operators of
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 of
the Company since March 21, 1996 and its predecessors since 1994. From 1992 to
1994, he was Vice President of Planning and Development of the predecessors 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 predecessors of the Company responsible for risk management
and administrative services. From 1988 to 1990, Mr. Beardsley served as
Special Projects Manager of the predecessors of the Company. Prior to joining
the predecessors of the Company in 1988, Mr. Beardsley was a commercial and
residential real estate appraiser.
Michael E. Gomez, R.P.T. has served as Senior Vice President of
Rehabilitation Services of the Company since June 14, 1996 and its
predecessors since 1994. From 1993 to 1994, Mr. Gomez served as Director of
Therapy Services for the predecessors of 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.
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<PAGE>
Steven V. Raso has served as Senior Vice President of Reimbursement since
1997. From 1994 to 1997 he served as Vice President of Reimbursement for the
Company and he served as Director of Reimbursement and Budgets from 1989 to
1994. In these capacities, Mr. Raso has been responsible for the Medicare and
Medicaid reimbursement cost reporting functions, including audits, appeals,
licensing and rate determinations. Mr. Raso also oversees the budgeting,
accounts receivable and compliance departments within the Company.
Savio W. Tung has been an executive of Investcorp, its predecessor or one of
its wholly-owned subsidiaries since September 1984. He is a director of Werner
Holding Co. (DE), Inc., CSK Auto Corporation, Saks Holdings, Inc., Simmons
Holdings, Inc. and Star Markets Holdings, Inc.
Christopher J. O'Brien has been an executive of Investcorp, its predecessor
or one of its wholly-owned subsidiaries since December 1993. Prior to joining
Investcorp, he was a Managing Director of Mancuso & Company, a private New
York-based merchant bank. He is a director of Falcon Building Products, Inc.,
Simmons Holdings, Inc., Star Markets Holdings, Inc., CSK Auto Corporation and
The William Carter Company.
Charles J. Philippin has been an executive of Investcorp, its predecessor or
one or more of its wholly-owned subsidiaries since July 1994. Prior to joining
Investcorp, he was a partner of Coopers & Lybrand L.L.P., an accounting firm.
He is a director of Falcon Building Products, Inc., Werner Holding Co. (DE),
Inc., Saks Holdings, Inc., CSK Auto Corporation, Simmons Holdings, Inc., Star
Markets Holdings, Inc. and The William Carter Company.
Christopher J. Stadler has been an executive of Investcorp, its predecessor
or one or more of its wholly-owned subsidiaries since April 1996. Prior to
joining Investcorp, he was employed by BT Securities Corporation, an
investment banking firm, in various capacities, including Managing Director;
the Davis Companies, a merchant bank, as a Managing Director; and CS First
Boston Corporation, an investment banking firm, as a Director. He is a
director of Falcon Building Products, Inc., Werner Holding Co. (DE), Inc., CSK
Auto Corporation and The William Carter Company.
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EXECUTIVE COMPENSATION
The following tables set forth information about the compensation of the
chief executive officer and the four other most highly compensated executive
officers of the Company (the "Named Executive Officers") for the year ended
December 31, 1997:
EXECUTIVE COMPENSATION SUMMARY TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------------- -----------------------------
AWARDS PAYOUTS
--------------------- -------
OTHER RESTRICTED SECURITIES ALL OTHER
ANNUAL STOCK UNDERLYING LTIP COMPEN-
NAME AND SALARY BONUS COMPEN- AWARD(S) OPTIONS/ PAYOUTS SATION ($)
PRINCIPAL POSITION YEAR ($) ($)(1) SATION ($) ($) SARS(#) ($) (2)
- ------------------ ---- ------- ------- ---------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen L. Guillard,.... 1997 300,300 232,500 -- -- 55,000 -- 16,250
Chairman, President and 1996 310,802 548,000 -- -- 80,000 -- 15,927
Chief Executive Officer 1995 267,800 80,000 -- -- -- -- 4,063
Damian N. Dell'Anno,.... 1997 192,115 117,000 -- -- 27,000 -- 7,578
Executive Vice 1996 176,371 266,000 -- -- 50,000 -- 5,152
President of Operations 1995 159,326 32,000 -- -- -- -- 1,573
Bruce J. Beardsley,..... 1997 151,153 70,000 -- -- 17,000 -- 8,178
Senior Vice President 1996 131,905 237,333 -- -- 40,000 -- 7,385
of Acquisitions 1995 117,192 37,306 -- -- -- -- 3,191
William H. Stephan,..... 1997 146,154 60,000 -- -- 16,000 -- 7,346
Senior Vice President 1996 127,605 180,250 -- -- 40,000 -- 6,423
and Chief Financial 1995 120,000 24,000 -- -- -- -- 5,954
Officer
Kenneth Montgomery,..... 1997 122,019 11,500 -- -- 9,000 -- 6,856
Senior Vice President 1996 106,173 87,000 -- -- 10,000 -- 11,173
of Operations(3) 1995 96,423 18,900 -- -- -- -- 13,279
</TABLE>
- --------
(1) 1996 amounts include special bonuses related to the Company's initial
public offering and other payments paid to Messrs. Guillard, Dell'Anno,
Beardsley, Stephan and Montgomery of $438,000 and $212,000, $185,250,
$150,250 and $67,000, respectively.
(2) Includes matching contributions made by the Company under its Supplemental
Executive Retirement Plan and 401(k) Plan.
(3) Upon consummation of the Merger, Mr. Montgomery will cease to be
considered an executive officer of the Company.
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<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------
NUMBER OF PERCENT OF TOTAL GRANT
SECURITIES OPTIONS/SARS DATE
UNDERLYING GRANTED TO EXERCISE OR PRESENT
OPTION/SARS EMPLOYEES IN BASE PRICE EXPIRATION VALUE
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE ($)(2)
- ---- ----------- ---------------- ----------- ----------------- -------
<S> <C> <C> <C> <C> <C>
Stephen Guillard(1)..... 55,000 25.8 12.00 February 12, 2007 294,250
Damian Dell'Anno(1)..... 27,000 12.7 12.00 February 12, 2007 144,450
Bruce Beardsley(1)...... 17,000 8.0 12.00 February 12, 2007 90,950
William Stephan(1)...... 16,000 7.5 12.00 February 12, 2007 85,600
Kenneth Montgomery(1)... 9,000 4.2 12.00 February 12, 2007 48,150
</TABLE>
- --------
(1) Messrs. Guillard, Dell'Anno, Beardsley, Stephan and Montgomery received
options to purchase shares of Harborside Common Stock on February 12,
1997. One third of these options become exercisable on the first, second
and third anniversary of their date of grant and terminate (with certain
exceptions) on the tenth anniversary of their date of grant.
(2) The fair value of each stock option is estimated on the date of grant
using the Black-Scholes pricing model with the following weighted-average
assumptions: an expected life of five years, expected volatility of 40%,
no dividend yield and a risk-free interest rate of 6.2%.
AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE MONEY
UNEXERCISED OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR END FISCAL YEAR END ($)
SHARES
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ --------------------------- -------------------
<S> <C> <C> <C> <C>
Stephen Guillard........ -- -- 26,667/108,333 213,336/852,914
Damian Dell'Anno........ -- -- 16,667/60,333 133,336/475,914
Bruce Beardsley......... -- -- 13,333/43,667 154,663/441,087
William Stephan......... -- -- 13,333/42,667 154,663/433,337
Kenneth Montgomery...... -- -- 3,333/15,667 26,664/123,086
</TABLE>
COMPENSATION OF DIRECTORS
Independent directors of the Company (Messrs. Barnum, Benson and Bretholtz
and Ms. Crawford) are compensated at the rate of $15,000 per year for their
services plus $1,000 for each meeting of the Board of Directors or committee
of the Board of Directors that they attend and receive reimbursement for their
travel expenses. In addition each independent director initially received an
option to purchase 15,000 shares of common stock, and commencing on January 1,
1997, each independent director as of each January 1 receives an option to
purchase an additional 3,500 shares of common stock. During 1997, each of
Messrs. Barnum, Benson and Bretholtz, and Ms. Crawford received grants under
this plan. Each option grant vests after one year, has a ten year term, and
permits the holder to purchase shares at their fair market value on the date
of grant ($11.69 in the case of options granted in 1997). The Company
currently has in effect a Directors Retainer Fee Plan, pursuant to which
independent directors may elect to receive their retainer and meeting fees
currently in cash or Harborside Common Stock, or may elect to defer payment of
such fees and credit such fees to a Share Unit Account consisting of Share
Units that are equivalent in value to shares of Harborside Common Stock. The
Merger
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<PAGE>
Agreement provides that each Share Unit outstanding immediately prior to the
Effective Time will be canceled in exchange for the right of the holder
thereof to receive an amount in cash equal to the product of (i) the number of
Share Units in such holder's Share Unit Account outstanding immediately prior
to the Effective Time and (ii) $25.00. Based on the total number of Share
Units outstanding, as of June 30, 1998 such cash amount would equal
approximately $62,110, in the case of Robert T. Barnum, approximately $59,110,
in the case of David F. Benson, and approximately $14,110, in the case of
Sally W. Crawford.
Following the merger, the Company does not plan to pay any compensation to
its directors for their service to the Company in such capacity.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company has entered into employment agreements with Messrs. Guillard,
Dell'Anno, Beardsley and Stephan, each of which has an initial term of two
years, subject to automatic renewal for successive one-year periods unless the
Company or the employee gives notice of non-renewal 60 days prior to
expiration. The employment agreements provide for an annual base salary of
$310,000 for Mr. Guillard, $180,000 for Mr. Dell'Anno, $135,000 for Mr.
Beardsley and $130,000 for Mr. Stephan. Such salaries may be increased, but
not decreased, at the discretion of the Compensation Committee. As of March
1997, the annual base salaries of Messrs. Dell'Anno, Beardsley and Stephan
were increased to $190,000, $155,000 and $150,000, respectively. Each employee
is entitled to participate in all benefits generally made available to senior
executives of the Company and to receive annual bonus compensation in such
amounts and upon such conditions as determined by the Compensation Committee,
but not less than 15% of base salary in a given year. If any of the employment
agreements is terminated by the Company other than for cause, the employee is
entitled to receive all accrued but unpaid salary and bonus amounts plus
termination payments equal to the employee's monthly base salary for each of
the greater of (i) the number of months remaining under the term of the
agreement or (ii) 12 months (24 months in the case of Mr. Guillard). In the
event of an employee's termination due to disability or death, the employee
(or his designated beneficiary) will receive monthly payments equal to the
employee's monthly base salary for 12 months, reduced by payments made under
any disability insurance policy or program maintained by the Company for the
employee's benefit. If any of the employment agreements is not renewed by the
Company at the end of its initial or subsequent term, the employee will be
entitled to receive severance payments equal to the employee's monthly base
salary for 12 months (24 months in the case of Mr. Guillard).
Each employment agreement provides that neither the employee nor any
business enterprise in which he has an interest may (i) until the later of the
termination of the employee's employment with the Company and the expiration
of two years from the commencement of such employment, engage in activities
which compete with the Company's business, (ii) at any time during the
employee's employment and one year following his termination (two years in the
case of Mr. Guillard), manage or operate any long-term care facility managed
or operated by the Company and (iii) for a period of one year following
termination (two years in the case of Mr. Guillard), solicit or employ persons
employed or retained as a consultant by the Company.
These employment agreements are expected to be terminated as of the
Effective Time and replaced by new employment agreements to be entered into
between the Company and each of Messrs. Guillard, Dell'Anno, Beardsley and
Stephan. See "THE MERGER--Interests of Certain Persons in the Merger."
As of January 15, 1998, the Company entered into Change in Control
Agreements with each of Messrs. Guillard, Dell'Anno, Beardsley, Stephan and
Raso providing for certain payments to be made to such officers and certain
loans made by the Company to such officers to be forgiven in the event of a
change in control. See "THE MERGER--Interests of Certain Persons in the
Merger." The Agreements further provide that if any executive's employment
with the Company is terminated by the Company for any reason other than cause
within 12 months following a change of control, (i) the employee is entitled
to receive all accrued but unpaid salary and bonus amounts plus a lump-sum
cash payment equal to one times the amount of the executive's base salary (1.5
times the base salary in the case of Mr. Guillard) at the rate in effect
immediately prior to the date of termination or at the rate immediately prior
to the change of control, whichever is higher and (ii) the Company will take
all steps necessary to fully vest the executive in the Supplemental Executive
Retirement Plan dated as of
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<PAGE>
September 15, 1995 and the Company's 401(k) Plan and the Company will
reimburse the Executive for outplacement services up to a maximum
reimbursement of $15,000. The Change in Control Agreements are expected to be
terminated by mutual agreement of the parties as of the Effective Time, except
that the Company will comply with its obligations under the provisions
described in the first sentence of this paragraph. See "THE MERGER--Interests
of Certain Persons in the Merger."
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective September 15, 1995, the Company established a Supplemental
Executive Retirement Plan ("SERP") to provide benefits for key employees of
the Company. Participants may defer up to 25% of their salary and bonus
compensation by making contributions to the SERP. Amounts deferred by the
participant are credited to his or her account and are always fully vested.
The Company matches 50% of amounts contributed until 10% of base salary has
been contributed. Matching contributions made by the Company become vested as
of January 1 of the second year following the end of the plan year for which
contributions were credited, provided the employee is still employed with the
Company on that date. In addition, participants will be fully vested in such
matching contribution amounts in the case of death or permanent disability or
at the discretion of the Company. Participants are eligible to receive
benefits distributions upon retirement or in certain pre-designated years.
Participants may not receive distributions prior to a pre-designated year,
except in the case of termination, death or disability or demonstrated
financial hardship. Only amounts contributed by the employee may be
distributed because of financial hardship. Although amounts deferred and
Company matching contributions are deposited in a "rabbi trust," they are
subject to risk of loss. If the Company becomes insolvent, the rights of
participants in the SERP would be those of an unsecured general creditor of
the Company.
1996 LONG-TERM STOCK INCENTIVE PLAN
The Company has adopted, and the Company's stockholders have approved, the
Harborside Healthcare Corporation 1996 Long-Term Stock Incentive Plan (the
"1996 Stock Plan").
The 1996 Stock Plan is administered by the Stock Plan Committee, which is
comprised of two or more "Non-Employee Directors." Any officer or other key
employee or consultant to the Company or any of its subsidiaries who is not a
member of the Stock Plan Committee may be designated as a participant under
the 1996 Stock Plan. The Stock Plan Committee has the sole and complete
authority to determine the participants to whom awards will be granted under
the 1996 Stock Plan.
Following the Effective Time, the Company does not intend to grant any
additional options under the 1996 Stock Plan. For a discussion of the
treatment in the Merger of any options outstanding under the 1996 Stock Plan,
see "THE MERGER--Treatment of Existing Company Stock Options." Following the
Effective Time, the Company intends to adopt a new stock incentive plan. See
"THE MERGER--Interests of Certain Persons in the Merger."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1995, Mr. Guillard subscribed for equity interests in certain of the
Company's predecessors. The aggregate subscription price of $438,000, equal to
the fair market value of such interests as of December 31, 1995, was paid by
Mr. Guillard in 1996 with the proceeds of a special bonus equal to such
purchase price. To pay taxes due with respect to the purchase of the equity
interests and this bonus, Mr. Guillard received a loan from the Company,
evidenced by a note maturing April 15, 2001, and bearing interest at 7.0% per
annum. In connection with the IPO Reorganization, such equity interests and
Messrs. Guillard's and Dell'Anno's interests in Harborside Healthcare Limited
Partnership were exchanged for an aggregate of 307,724 shares of Harborside
Common Stock. Under his prior employment agreement, Mr. Dell'Anno also
received an additional 18,037 shares of Harborside Common Stock pursuant to a
bonus payment in connection with the Offering (with a value of $212,000). Mr.
Dell'Anno also received a loan from the Company at an interest rate of prime
plus 1% to pay income tax liabilities that resulted from such bonus payment.
As of March 31, 1998, the amount outstanding on the loans made by the Company
to Messrs. Guillard and Dell'Anno was $225,660 and $110,184, respectively.
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Pursuant to the Change in Control Agreements described above, the loans of
Messrs. Guillard and Dell'Anno will be forgiven as of the Effective Time. See
"THE MERGER--Interests of Certain Persons in the Merger."
The Company adopted an Executive Long-Term Incentive Plan (the "Executive
Plan") effective July 1, 1995. Eligible participants, consisting of the
Company's department heads and regional directors, were entitled to receive
payment upon an initial public offering or sale of the Company above a
baseline valuation of $23,000,000 within two years of the effective date of
the plan. The Executive Plan terminated upon completion of the Offering. The
payments to Messrs. Beardsley, Stephan and Montgomery totaled $185,250,
$150,250, and $67,000, respectively.
The Berkshire Companies Limited Partnership ("BCLP") is beneficially owned
by, among others, Douglas Krupp, a director and beneficial stockholder of the
Company, and George Krupp, a beneficial stockholder of the Company. BCLP has
historically had certain relationships with the Company. All such transactions
with George or Douglas Krupp or their affiliates, including BCLP, have been
approved by disinterested directors.
Effective October 1, 1994, the Company entered into an agreement to lease
its Brevard facility from Rockledge T. Limited Partnership ("RTLP"), which is
beneficially owned by Douglas Krupp and George Krupp. The Brevard lease
agreement is for a period of ten years, plus up to two five-year renewals.
Rent was $551,250 for the initial twelve-month period and increases by 2.0%
each year thereafter. At the end of the initial lease term, the Company has
the option to exercise two consecutive five-year lease renewals. The Company
also has the right after the fifth anniversary of the commencement of the
lease to purchase the facility at its fair market value.
The Company's Boston headquarters occupy office space leased from BCLP. The
Company had historically been allocated certain expenses for this office space
and for various services provided by BCLP, including legal, tax, data
processing and other administrative services. The allocation of expenses for
each of the years ended December 31, 1995 and 1996 was approximately $700,000
and $296,000, respectively. BCLP also provided investor relations services to
KYP in 1995, for which the Company paid a total of $118,000.
In June 1996, these expense allocations were replaced by an Administrative
Services Agreement between the Company and BCLP (the "Services Agreement")
pursuant to which BCLP agreed to provide office space, legal, tax, data
processing and other administrative services to the Company in return for a
monthly fee. The initial term of the Services Agreement ended on December 31,
1996 and, pursuant to the terms of the Services Agreement, was automatically
renewable annually thereafter. For the years ended December 31, 1996 and 1997,
fees paid for services provided under the Services Agreement aggregated
approximately $404,000 and $708,000, respectively. For the first quarter of
1998, such fees aggregated $313,000. The Services Agreement provided that the
Company and BCLP each had the ability to terminate the Services Agreement upon
120 days' prior written notice. The Services Agreement also provided that the
Company would indemnify BCLP, including its officers and partners, to the
fullest extent permitted by Delaware law, as if BCLP were an agent of the
Company in connection with the performance of its services under the Services
Agreement. BCLP also agreed to indemnify the Company for losses arising from
BCLP's deliberate dishonesty or gross negligence or willful misconduct.
On April 15, 1998, at the request of the Company, the Services Agreement was
amended and restated (the "Amended Agreement"), effective as of January 1,
1998. Under the terms of the Amended Agreement, provision of certain services
(office space, office administration and investor services) terminates
automatically on December 31, 1998. The other services provided under the
Amended Agreement may be terminated by either party upon prior written notice
given within specified time periods ranging from 60 to 360 days, depending on
the service. In addition, tax and data processing services may not be
terminated before specified dates ranging from March 31, 1999 to December 31,
2001 unless certain conditions are met. Under the Amended Agreement, BCLP
agreed to exercise the same care with respect to rendering services to the
Company as it exercises when it provides services to its affiliates. The
Company agreed that BCLP would in no event be liable for special or
consequential damages. The indemnification provisions otherwise remained
unchanged.
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The Company's current Boston headquarters, which occupy office space leased
from BCLP, is paid for under the terms of the Amended Agreement. The Company
has entered into a lease for new office space with an unaffiliated third party
and expects to relocate its offices during the third or fourth quarter of
1988. In connection with such relocation, the Company is considering
subleasing excess space at its new headquarters to BCLP on a short term basis.
The Company expects that the terms of any such sublease would be on an arms'
length basis. The Company believes that the terms of the Amended Agreement are
as favorable to the Company as could be obtained from an independent third
party.
On December 28, 1995, an affiliate of BCLP advanced $2,000,000 to the
Company at an interest rate of 9.0% per annum. The Company used these funds to
make a purchase deposit on five long-term care facilities which the Company
subsequently determined not to acquire. The advance and all accrued interest
were repaid in full.
In connection with the Offering, the Company entered into a Reorganization
Agreement (the "Reorganization Agreement") with certain individuals, including
Messrs. Krupp, Guillard and Dell'Anno (the "Contributors"), pursuant to which
the Contributors received 4,400,000 shares of Common Stock in exchange for
their ownership interests in the Company's predecessors. The reorganization
contemplated by the Reorganization Agreement was completed immediately prior
to completion of the Offering.
In connection with the acquisition of the Company's Decatur facility, a
subsidiary of the Company assumed a first mortgage note from the facility's
prior owner. Douglas Krupp personally guaranteed the note which at the time
had a remaining balance of $1,775,000. As of March 31, 1998 the remaining
principal balance on the note was $1,571,666. The Company has agreed to
indemnify Mr. Krupp for liability under such guaranty.
The Company has entered into a Non-Compete Agreement, dated as of April 15,
1998, with each of Douglas Krupp, a director and beneficial stockholder of the
Company, and George Krupp, a beneficial stockholder of the Company, pursuant
to which each such individual has agreed for a one-year period commencing at
the Effective Time not to engage in certain business activities or to own
certain equity interests in any person or entity that engages in such business
activities. Pursuant to such agreements, the Company has agreed to pay
$250,000 to each of such individuals at the Effective Time.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The security ownership of directors, the Named Executive Officers, all
directors and officers of the Company as a group and certain beneficial owners
of 5% or more of Harborside Common Stock as of June 30, 1998 is set forth in
the table below. In addition, the table sets forth the beneficial ownership of
all such persons after giving effect to the Merger, based on an assumption
that the Non-Cash Election Number will be 361,500. The determination of the
Non-Cash Election Number is dependent on the actual common equity
capitalization of MergerCo, which will not be determined until the terms of
the Merger-related financings are finalized. See "The MERGER--Merger
Financings." It is expected that the Non-Cash Election Number will be
determined shortly before the Special Meeting.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998 AFTER THE MERGER
-------------------------------------- ---------------------------------------
% OF
% OF COMMON
NAME & ADDRESS(1) OPTIONS COMMON OPTIONS STOCK
OF BENEFICIAL OWNER SHARES (2) TOTAL STOCK SHARES(3) (4) TOTAL (5)
- ------------------- --------- ------- --------- ------ --------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
George Krupp............ 3,382,305(6) -- 3,382,305 42.2% 180,750 -- 180,750 3.0%
Douglas Krupp........... 3,393,605(6) -- 3,393,605 42.4% 180,750 -- 180,750 3.0%
The Berkshire Companies
Limited Partnership.... 2,696,903 -- 2,696,903 33.7% -- -- -- --
The Douglas Krupp 1994
Family Trust........... 622,042(7) -- 622,042 7.8% 180,750 -- 180,750 3.0%
The George Krupp 1994
Family Trust........... 622,042(7) -- 622,042 7.8% 180,750 -- 180,750 3.0%
Brinson Partners, Inc.
209 South Lasalle
Street Chicago, IL
60604.................. 424,800(8) -- 424,800 5.3% -- -- -- --
Nicholas Company, Inc.
700 N. Water Street
Suite 1010 Milwaukee,
WI 53202............... 452,200(9) -- 452,200 5.6% -- -- -- --
T. Rowe Price Associ-
ates, Inc. 100 E. Pratt
Street Baltimore, MD
21202.................. 419,300(10) -- 419,300 5.2% -- -- -- --
Robert T. Barnum........ 15,000 18,500 33,500 * -- -- -- --
David F. Benson......... 2,000 18,500 20,500 * -- -- -- --
Robert M. Bretholtz..... 10,000 18,500 28,500 * -- -- -- --
Sally W. Crawford....... 5,000 18,500 23,500 * -- -- -- --
Michael E. Gomez,
R.P.T. ............... 633 17,666 18,299 * -- -- -- --
Stephen L. Guillard..... 264,211(11) 71,666 335,877 4.2% 177,688 -- 177,688 2.9%
Damian N. Dell'Anno..... 66,598(12) 42,333 108,931 1.4% 47,563 10,560 58,123 1.0%
Bruce J. Beardsley...... 3,080 32,334 35,414 * -- 39,162 39,162 *
William H. Stephan...... 4,355 32,000 36,355 * 400 38,332 38,732 *
Kenneth Montgomery...... 678 9,667 10,345 * -- -- -- --
All Directors and Offi-
cers
(11 persons)........... 3,765,160 279,666 4,044,826 48.8% 406,401(13) 88,054 494,455(13) 8.1%
</TABLE>
- --------
* Percentage of shares beneficially owned does not exceed one percent.
(1) The address of each person, except as noted, is c/o Harborside Healthcare
Corporation, 470 Atlantic Avenue, Boston, Massachusetts 02210.
(2) Includes shares of stock that are subject to options exercisable within
60 days of June 30, 1998.
(3) Assumes that (i) each of The Douglas Krupp 1994 Family Trust ("DKFT") and
The George Krupp 1994 Family Trust ("GKFT") will, pursuant to the
Stockholder Agreement, elect to retain a number of shares of Harborside
Common Stock equal to 50% of the Non-Cash Election Number, (ii) the Non-
Cash Election Number will be 361,500 and (iii) no other existing holder
of Harborside Common Stock will elect to retain shares. If other existing
holders of Harborside Common Stock elect to retain shares in the Merger,
the number of shares of Harborside Common Stock to be retained by DKFT
and GKFT will be subject to proration. Also reflects the fact that
Messrs. Guillard, Dell'Anno and Stephan will, pursuant to the Merger
Agreement, retain the Management Rollover Shares.
(4) Includes shares of stock that are subject to options exercisable within
60 days of the Effective Time. Assumes that (i) Mr. Dell'Anno will,
pursuant to a letter agreement dated April 15, 1998, elect to retain
certain of his Company Stock Options which are exercisable into an
aggregate of 10,560 shares of
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Harborside Common Stock, (ii) Messrs. Beardsley and Stephan will, in order
to satisfy a condition to their receipt of grants of stock options under
the Company's new Stock Option Plan, elect to retain certain of their
Company Stock Options which are exercisable into an aggregate of 39,162 and
38,332 shares of Harborside Common Stock, respectively (see "THE MERGER--
Interests of Certain Persons in the Merger") and (iii) no other holders of
Company Stock Options will elect to retain all or any portion of their
Company Stock Options. The options to be granted upon consummation of the
Merger pursuant to the Company's new Stock Option Plan are not included in
this table. See "THE MERGER--Interests of Certain Persons in the Merger."
(5) Reflects the percentage such shares and options will represent of the
number of outstanding shares of all classes of the Company's common stock
after giving effect to the exercise of options owned by such person or
persons following the Merger, based on the assumption that after giving
effect to the Merger, 6,025,000 shares of all classes of the Company's
common stock will be outstanding and that the Non-Cash Election Number
will accordingly be 361,500. If the number of outstanding shares of common
stock of the Company is greater than 6,025,000, then (i) the Non-Cash
Election Number will be greater than 361,500, (ii) the percentages of
Messrs. Guillard, Dell'Anno, Beardsley and Stephan will be reduced and
(iii) the percentages of George Krupp, Douglas Krupp, The Douglas Krupp
1994 Family Trust and The George Krupp 1994 Family Trust will not be
affected.
(6) Includes 2,696,903 shares of Harborside Common Stock received by The
Berkshire Companies Limited Partnership ("BCLP") and 63,360 shares of
Harborside Common Stock received by Krupp Enterprises Limited Partnership
("Enterprises"), in each case in connection with the IPO Reorganization.
The general partners of BCLP are KGP-1, Inc. ("KGP-1") and KGP-2, Inc.
("KGP-2") and the general partner of Enterprises is KGP-1. KGP-1 and KGP-2
are both 50% owned by each of George Krupp and Douglas Krupp. By virtue of
their interests in the general partners of BCLP and Enterprises, George
Krupp and Douglas Krupp may each be deemed to beneficially own the
2,760,263 shares of Harborside Common Stock held by BCLP and Enterprises.
In addition, George Krupp and Douglas Krupp may each be deemed to
beneficially own the 622,042 shares of Harborside Common Stock held by
their respective family trusts. See Note 7, below. Also, Douglas Krupp
disclaims beneficial ownership of 11,300 shares owned by his wife.
(7) Includes 622,042 shares of Harborside Common Stock received in connection
with the IPO Reorganization by each of The George Krupp 1994 Family Trust
("GKFT") and The Douglas Krupp 1994 Family Trust ("DKFT"). Each of George
Krupp and Douglas Krupp may be deemed to beneficially own the 622,042
shares of Harborside Common Stock held by GKFT and DKFT, respectively. The
trustees of both GKFT and DKFT are Lawrence I. Silverstein, Paul Krupp and
M. Gordon Ehrlich (the "Trustees"). The Trustees share control over the
power to dispose of the assets of GKFT and DKFT and thus each may be
deemed to beneficially own the 622,042 shares of Harborside Common Stock
held by GKFT and DKFT; however, each of the Trustees disclaims beneficial
ownership of all of such shares which are or may be deemed to be
beneficially owned by George Krupp or Douglas Krupp.
(8) According to its filing on Schedule 13G made with the Commission on
February 11, 1998, Brinson Partners, Inc. ("BPI") is an Investment Adviser
registered under Section 203 of the Investment Advisers Act of 1940. BPI
filed a joint Schedule 13G filing with Brinson Holdings, Inc. ("BHI"), SBC
Holding (USA), Inc.("SBCUSA"), and Swiss Bank Corporation ("SBC"). The
filing states that each of BHI, SBCUSA, and SBC is a Parent Holding
Company in accordance with Rule 13d-1(b)(1)(ii)(G) promulgated under the
Exchange Act. The filing further states that accounts managed on a
discretionary basis by BPI have the right to receive or the power to
direct the receipt of dividends from, or the proceeds from the sale of,
the Harborside Common Stock. The filing further states that no account
holds more than 5% of the outstanding Harborside Common Stock and each of
BPI, BHI, SBCUSA, and SBC has shared voting and dispositive power over the
424,800 shares deemed to be beneficially owned.
(9) According to its joint filing with Nicholas Limited Edition, Inc. ("NLE")
and Albert O. Nicholas on Schedule 13G made with the Commission on January
22, 1998, Nicholas Company, Inc. ("NCI") is an investment adviser
registered under the Investment Advisers Act of 1940. NCI states that one
or more of its advisory clients is the legal owner of the Harborside
Common Stock covered by the filing. The filing states that pursuant to
investment advisory agreements with its advisory clients, NCI has the
authority to direct the investments of its advisory clients, and
consequently to authorize the disposition of the
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Harborside Common Stock. According to the filing, NLE is an open-end
management investment company registered under the Investment Act of 1940.
NCI claims that it acts as the investment adviser to NLE and as such
retains dispositive control of the shares in which NLE invests. NLE claims
that it retains the beneficial ownership right to vote shares purchased by
NCI for its account. According to the filing, Albert O. Nicholas is the
president, a director, and majority shareholder of NCI, in which capacity
he exercises dispositive power over the securities reported by NCI and
NLE. The filing states that Mr. Nicholas, therefore, may be deemed to have
indirect beneficial ownership over such securities. The filing states that
except as otherwise indicated, Mr. Nicholas has no interest in dividends
or proceeds from the sale of such securities, owns no such securities for
his own account and disclaims beneficial ownership of all the securities
reported herein by NCI. According to the filing, the beneficial ownership
reported by NCI, NLE, and Albert O. Nicholas relates to the same shares of
the Company in which each such reporting person has a separate beneficial
interest.
(10) According to its filing on Schedule 13G made with the Commission on
February 9, 1998, T. Rowe Price Associates, Inc. ("Price Associates") is
an investment adviser registered under Section 203 of the Investment
Advisers Act of 1940. The filing states that Price Associates does not
serve as custodian of the assets of any of its clients; accordingly each
client or the client's custodian or trustee bank has the right to receive
dividends paid with respect to, and proceeds from the sale of, such
securities. According to the filing, (i) the ultimate power to direct the
receipt of dividends paid with respect to, and the proceeds from the sale
of, such securities, is vested in the individual and institutional
clients for whom Price Associates serves as investment adviser and (ii)
any and all discretionary authority that has been delegated to Price
Associates may be revoked in whole or in part at any time.
(11) Includes 261,561 shares of Harborside Common Stock which are directly
owned by Mr. Guillard, and 2,650 shares of Harborside Common Stock owned
by Mr. Guillard's immediate family for which he disclaims beneficial
ownership.
(12) Includes 66,398 shares of Harborside Common Stock which are directly
owned by Mr. Dell'Anno, and 200 shares owned by Mr. Dell'Anno's spouse
for which he disclaims beneficial ownership.
(13) Includes 180,750 shares deemed to be beneficially owned by Douglas Krupp.
Although Mr. Krupp is currently a director of the Company, Mr. Krupp will
not be a director immediately following the consummation of the Merger.
See "MANAGEMENT--Directors and Executive Officers of the Company."
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<PAGE>
REGULATORY APPROVALS
FEDERAL AND STATE HEALTHCARE REGULATORY AUTHORITIES
The Company provides long-term care, subacute care and other specialty
medical services in five principal regions: the Midwest (Ohio and Indiana),
New England (Massachusetts and New Hampshire), the Northeast (Connecticut and
Rhode Island), the Southeast (Florida) and the Mid-Atlantic (New Jersey and
Maryland). The regulatory requirements of these jurisdictions may require
notice of and/or approval prior to any direct or indirect change in ownership,
control or management of any of the facilities or services. These regulatory
requirements include, without limitation, those providing for licensure,
dispensing pharmaceuticals and related medical supplies, certificate of need
or similar laws restricting development and/or expansion activities ("CON
laws" or "CON"), and participation in the Medicaid program. There are also
federal laws regarding participation in the Medicare and the Medicaid programs
and dispensing pharmaceuticals. To the extent that the consummation of the
Merger is determined to constitute any such change in ownership, control or
management of facilities or services under the applicable regulatory
requirements, consummation of the Merger would be subject to compliance with
the regulatory requirements of the applicable state, as well as any applicable
federal laws and receipt, to the extent applicable, of any required approvals
or other authorizations. The state and federal requirements are subject to
interpretation by various governmental agencies and may, in certain instances,
be subject to waiver.
Medicare. Pursuant to federal Medicare program standards, providers must
notify the Medicare program as promptly as possible upon initiating
negotiations for a change of ownership, but in no event later than 15 working
days after the transaction causing the change in ownership occurs. When a
provider undergoes a change of ownership, the provider must also file a final
cost report no later than 45 days following the change in ownership. According
to Medicare program standards, a transfer of corporate stock or the merger of
another corporation into the provider corporation does not constitute a change
of ownership. Accordingly, no Medicare filing requirement is anticipated with
respect to the Merger.
Connecticut. The Connecticut regulatory requirements require the filing of a
Notice of Intent with the Connecticut Department of Public Health ("CT DPH")
at least 90 days prior to the effective date of certain transactions which
result in the change of ownership of a long term care facility, including a
change of 10% or more of the beneficial ownership of a long term care facility
licensee. The Notice of Intent filing triggers a suitability review process
pursuant to which the CT DPH will review the applicant's prior operating
history and experience. After receipt of the Notice of Intent, the CT DPH will
forward change of ownership forms to the applicant which must be completed and
filed with the CT DPH. Documents evidencing the closing of the transaction
must be filed with the CT DPH within two weeks after the closing.
Florida. The Florida CON requirements provide that an entity seeking to
acquire an existing healthcare facility must notify the Agency for Health Care
Administration ("AHCA") in writing at least 30 days prior to the closing of
the acquisition. In addition, under Florida's licensure requirements, if a
long term care facility is sold or ownership of the facility is transferred,
the transferee is required to file a licensure application with AHCA at least
90 days prior to the date of transfer of ownership. If a transaction will not
result in a change in (i) the entity which holds the facility license, (ii)
the facility's provider identification numbers, or (iii) the name under which
the facility conducts business, AHCA may determine that the transaction does
not constitute a transfer of ownership, in which case no licensure filing will
be required.
Indiana. The Indiana regulatory requirements provide that any change in the
direct or indirect corporate ownership of 5% or more of a long term care
facility licensee which occurs during the licensure period must be reported to
the Indiana Department of Health ("IDOH"), in writing, at the time of the
change, together with written notice of any change in the officers, directors,
agents or managing employees, or the company responsible for the management of
the facility. A Disclosure of Ownership form must also be filed with IDOH.
Maryland. Maryland CON requirements exempt a change of ownership of a
healthcare facility from CON review if written notice of the proposed change
in ownership is given to the Health Resources Planning
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<PAGE>
Commission ("HRPC") and the local health planning agency not less than 30 days
prior to the closing of the transaction, and the HRPC does not find within 30
days that the health services or bed capacity of the facility will be changed
by the acquisition. Maryland licensure requirements require Licensing and
Certification Administration ("LCA") approval pursuant to a sale or transfer
of a long term care facility which results in a change in the person or
persons who control or operate the facility, including certain transfers of
stock which result in a change of the person or persons who control the
facility. LCA will determine whether a particular stock transfer transaction
triggers any notice or licensing requirements. If LCA determines that
licensure approval is required, the facilities will be required to conform
with all licensure regulations applicable at the time of the stock transfer.
Updated ownership and control information must be disclosed in any event. The
Maryland Medical Assistance Program ("MAP") requires a new owner to provide 30
days notice to MAP of the intent to purchase an existing facility or
controlling interest in it and the desire to enroll in the MAP, and must enter
into a provider agreement. The current owner must provide 30 days advance
notice of the transaction, and provide assurance satisfactory to the MAP that
the purchaser will assume and be responsible for all financial obligations of
the current owner. Updated ownership and control information must be
disclosed.
Massachusetts. The Massachusetts regulatory requirements provide that a
completed Notice of Intent form must be submitted to the Massachusetts
Department of Public Health ("MDPH") at least 90 days in advance of any
transfer of ownership (including a transfer of a majority of stock) of any
long term care facility. The Notice of Intent filing triggers a suitability
review process pursuant to which MDPH will review the applicant's prior
operating history and experience. Additionally, the applicant must apply for a
new license to operate the facility within 48 hours of the transfer. The
acquisition of an existing long term care facility will not be subject to CON
review provided a Notice of Intent to acquire the facility is filed with MDPH
at least 90 days prior to closing and there will be no change in the services
or bed capacity of the facility to be acquired. A facility which participates
in the Massachusetts Medicaid program must notify the Division of Medical
Assistance prior to a change of direct or indirect ownership of the facility.
Upon receipt of such notice, the Division of Medical Assistance will determine
whether an application for a new Medicaid provider number needs to be filed.
New Hampshire. The New Hampshire CON regulations exempt from CON Board
review the transfer of ownership of a health care facility if the facility is
Medicare or Medicaid certified. Confirmations of such CON exemption is
obtained by filing a request for a Determination Letter with the State's
Health Services Planning and Review Board. Under New Hampshire's licensure
requirements, the Bureau of Health Facilities Administration of the New
Hampshire Department of Health and Human Services ("NHDHHS") will determine
whether a particular transaction constitutes a change of ownership for
licensure purposes following receipt of a request for a Determination Letter.
If NHDHHS determines that the transaction will result in a change of
ownership, the "new" facility operator must file a license application for the
facility. NHDHHS may conduct an inspection of the facility as part of its
review of each license application. However, this inspection will be waived if
the facility is in good standing under the State's licensing laws. The
transaction may not be closed until either the Department has determined that
the transaction does not represent a change of ownership, or the licensure
applications are approved. Documents evidencing the closing of the transaction
must be filed with NHDHHS within two weeks after the closing.
New Jersey. The New Jersey CON requirements concerning long-term care
facilities require review of the prospective owner's prior operating
experience and compliance with laws in accordance with the general CON
regulations. The general CON regulations exempt from CON review a transfer of
ownership interest in a long-term care facility in which the prospective owner
satisfies the New Jersey Department of Health and Senior Services ("NJDOH")
review of the prospective owner's prior operating experience and compliance
with other laws. Regardless of whether CON review is required, under New
Jersey nursing home licensure regulations, NJDOH may require the prospective
owner to apply for a new license and receive approval from NJDOH prior to the
transfer of ownership of a long-term care facility. The licensure review
process will include a review of the prospective owner's operations in New
Jersey and other jurisdictions.
Ohio. The Ohio CON requirements provide that health care facilities must
provide written notice of changes in ownership to the Ohio Department of
Health ("ODOH") and the health service agency designated
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for the health service area in which the facility is located at least 60 days
prior to the effective date of the change. CON approval is not needed for the
acquisition or merger of an existing health care facility that does not
involve a change in the number of beds, by service or in the number or type of
health services. The Ohio licensure requirements applicable to long term care
facilities generally do not treat transfers of stock as a change of ownership.
Accordingly, no licensure filing is contemplated in Ohio with respect to the
Merger. The Ohio Medical Assistance regulations require long term care
providers which participate in the Ohio Medicaid program to notify the Ohio
Department of Human Services at least 45 days prior to the effective date of
certain changes of ownership.
Rhode Island. The Rhode Island regulatory requirements provide that any
change in owner (including in the case of a partnership, the removal of,
addition or substitution of a partner which results in a new partner acquiring
a controlling interest in the partnership), operator (including a change in
the person or entity responsible for certain management functions), or lessee
of a licensed health care facility, including a long term care facility,
requires prior review by the Health Services Council and approval of the Rhode
Island Department of Health ("RIDOH") as a condition precedent to the
transfer, assignment or issuance of a new license. Notice of a change in the
owner or operator of a long term care facility must be provided to RIDOH at
least six weeks prior to the date of the proposed change. The approval process
includes notice to the public and the opportunity for public comment, as well
as consideration of the applicant's record of providing services.
Status of Regulatory Approvals. The Company has made all filings with, and
as of July 17, 1998 has obtained all approvals from, governmental authorities
that are required to be made or obtained on or before the Effective Time under
applicable healthcare laws with respect to the consummation of the Merger,
except that the Company is awaiting suitability approval from the MDPH, which
it expects to receive shortly. The Company has fulfilled the requirement of
CON notification in Florida, Massachusetts, Maryland, New Hampshire and Ohio.
No separate CON notifications are required in Connecticut, Indiana, New Jersey
or Rhode Island. The Company has filed notification letters with the licensing
authorities in Florida, Indiana, New Hampshire, Maryland and Ohio. The Company
has filed and received approval of a "Health Care Facility License
Application" as required in New Jersey. The Company has filed and received
approval of a "Change in Effective Control Application" as required in Rhode
Island. The Company has filed a "Notice of Intent to Acquire Form" as required
in Massachusetts. The Company intends to file the requisite facility licensure
applications within 48 hours after the Effective Time as required under
Massachusetts licensure regulations. The Company has filed and received
approval of a beneficial change of ownership as required in Connecticut. The
Company has fulfilled the notification requirements for Medicaid in
Connecticut, Florida, Indiana, Maryland and Ohio. The Company has filed
"Medicaid Provider Enrollment Applications" as required in Massachusetts. The
Company has filed a notification letter with Medicaid in New Hampshire. The
Company intends to file the requisite notices to the New Jersey and Rhode
Island Medicaid programs after the Effective Time as required under New Jersey
and Rhode Island Medicaid regulations.
OTHER REGULATORY APPROVALS
Certain aspects of the Merger may require notification to, and filings with,
certain authorities in certain states, including jurisdictions where the
Company currently operates. The obligations of MergerCo under the Merger
Agreement may also be subject to the receipt of all necessary licenses,
permits, consents, approvals, authorizations, qualifications and orders of
governmental authorities and other third parties, as are necessary in
connection with the transactions contemplated by the Merger.
131
<PAGE>
HH ACQUISITION CORP.
HH Acquisition Corp. ("MergerCo") is a Delaware corporation organized on
behalf of Investcorp, certain affiliates of Investcorp and other international
investors to effect the Merger and has not carried on any activities to date
other than those incident to its formation and the transactions contemplated
by the Merger Agreement. At the Effective Time, MergerCo will be merged into
Company and the separate corporate existence of MergerCo will terminate. The
name, business, address, principal occupation or employment, and five year
employment history of each of the persons who will be directors of MergerCo at
the Effective Time and will, therefore, become directors of Harborside upon
consummation of the Merger, and certain other information, are set forth in
"MANAGEMENT--Directors and Executive Officers of the Company."
At the Effective Time, MergerCo expects to have received approximately $160
million of capital provided by certain affiliates of Investcorp and other
international investors. An affiliate of Investcorp will be paid by the
Company a fee of $6.5 million for services rendered outside of the United
States in connection with the raising of the equity capital from the
international investors.
In connection with the Merger, the Company will pay Investcorp
International, Inc. ("III"), an affiliate of Investcorp, a loan finance
advisory fee of $4.0 million and Invifin S.A., an affiliate of Investcorp,
will receive a fee of $1.5 million for providing a standby commitment to fund
the $100 million of senior subordinated debt expected to be issued by the
Company at the Effective Time. In connection with the closing of the Merger,
the Company will enter into an agreement for management advisory and
consulting services (the "Management Agreement") for a five-year term with
III, pursuant to which the Company has agreed to prepay III $6.0 million upon
such closing.
Prior to the Effective Time, MergerCo's Class D Stock, par value $0.01 per
share, will be the only Class of MergerCo's outstanding stock that possesses
voting rights. Immediately prior to the Effective Time there are expected to
be 20,000 shares of MergerCo's Class D Stock issued and outstanding. The
following table sets forth the beneficial ownership of MergerCo's Class D
Stock, as of immediately prior to the Effective Time, by each person who is
expected to beneficially own more than 5% of the outstanding shares of such
class at such time. None of MergerCo's directors or officers own any shares of
MergerCo's Class D Stock (nor will any of them own any such shares immediately
prior to the Effective Time).
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME SHARES(1) CLASS(1)
---- --------- ----------
<S> <C> <C>
INVESTCORP S.A.(2)(3)................................... 20,000 100.0%
SIPCO Limited(4)........................................ 20,000 100.0
CIP Limited(5)(6)....................................... 18,400 92.0
Ballet Limited(5)(6).................................... 1,840 9.2
Denary Limited(5)(6).................................... 1,840 9.2
Gleam Limited(5)(6)..................................... 1,840 9.2
Highlands Limited(5)(6)................................. 1,840 9.2
Nobel Limited(5)(6)..................................... 1,840 9.2
Outrigger Limited(5)(6)................................. 1,840 9.2
Quill Limited(5)(6)..................................... 1,840 9.2
Radial Limited(5)(6).................................... 1,840 9.2
Shoreline Limited(5)(6)................................. 1,840 9.2
Zinnia Limited(5)(6).................................... 1,840 9.2
INVESTCORP Investment Equity Limited(3)................. 1,600 8.0
</TABLE>
- --------
(1) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of a security, or the sole or shared
power to dispose, or direct the disposition of, a security.
(2) Investcorp does not directly own any stock in MergerCo. The number of
shares shown as owned by Investcorp includes all of the shares owned by
INVESTCORP Investment Equity Limited (see (3) below). Investcorp owns no
stock in Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited,
Noble
132
<PAGE>
Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline
Limited, Zinnia Limited, or in the beneficial owners of these entities (see
(6) below). Investcorp may be deemed to share beneficial ownership of the
shares of voting stock held by these entities because the entities have
entered into revocable management services or similar agreements with an
affiliate of Investcorp, pursuant to which each of such entities has
granted such affiliate the authority to direct the voting and disposition
of the MergerCo voting stock owned by such entity for so long as such
agreement is in effect. Investcorp is a Luxembourg corporation with its
address at 37 rue Notre-Dame, Luxembourg.
(3) INVESTCORP Investment Equity Limited is a Cayman Islands corporation, and
a wholly-owned subsidiary of Investcorp, with its address at P.O. Box
1111, West Wind Building, George Town, Grand Cayman, Cayman Islands.
(4) SIPCO Limited may be deemed to control Investcorp through its ownership of
a majority of a company's stock that indirectly owns a majority of
Investcorp's shares. SIPCO Limited's address is P.O. Box 1111, West Wind
Building, George Town, Grand Cayman, Cayman Islands.
(5) CIP Limited ("CIP") owns no stock in MergerCo. CIP indirectly owns less
than 0.1% of the stock in each of Ballet Limited, Denary Limited, Gleam
Limited, Highlands Limited, Noble Limited, Outrigger Limited, Quill
Limited, Radial Limited, Shoreline Limited and Zinnia Limited (see (6)
below). CIP may be deemed to share beneficial ownership of the shares of
voting stock of MergerCo held by such entities because CIP acts as a
director of such entities and the ultimate beneficial stockholders of each
of those entities have granted to CIP revocable proxies in companies that
own those entities' stock. None of the ultimate beneficial owners of such
entities beneficially owns individually more than 5% of MergerCo's voting
stock.
(6) Each of CIP Limited, Ballet Limited, Denary Limited, Gleam Limited,
Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial
Limited, Shoreline Limited and Zinna Limited is a Cayman Islands
corporation with its address at P.O. Box 2197, West Wind Building, George
Town, Grand Cayman, Cayman Islands.
STOCKHOLDERS' APPRAISAL RIGHTS
Record holders of shares of Harborside Common Stock who follow the
appropriate procedures are entitled to appraisal rights under Section 262 of
the DGCL in connection with the Merger. The following discussion is not a
complete statement of the law pertaining to appraisal rights under the DGCL
and is qualified in its entirety by the full text of Section 262 which is
reprinted in its entirety as Annex IV to this Proxy Statement/Prospectus.
Except as set forth herein, stockholders of the Company will not be entitled
to appraisal rights in connection with the Merger.
Under the DGCL, record holders of shares of Harborside Common Stock who
follow the procedures set forth in Section 262 and who have not voted in favor
of the Merger will be entitled to have their shares of Harborside Common Stock
("Dissenting Shares") appraised by the Delaware Court of Chancery and to
receive payment of the "fair value" of such shares, exclusive of any element
of value arising from the accomplishment or expectation of the Merger,
together with a fair rate of interest, as determined by such court.
Under Section 262, where a merger agreement is to be submitted for approval
and adoption at a meeting of stockholders, as in the case of the Special
Meeting, not less than 20 days prior to the meeting, the Company must notify
each of the holders of shares of Harborside Common Stock at the close of
business on the Record Date that such appraisal rights are available and
include in each such notice a copy of Section 262. This Proxy
Statement/Prospectus constitutes such notice. Any such stockholder who wishes
to exercise appraisal rights should review the following discussion and Annex
IV carefully because failure to timely and properly comply with the procedures
specified in Section 262 will result in the loss of appraisal rights under the
DGCL.
A holder of shares of Harborside Common Stock wishing to exercise appraisal
rights must deliver to the Company, before the vote on the approval and
adoption of the Merger Agreement at the Special Meeting, a written demand for
appraisal of such holder's shares of Harborside Common Stock. A mere vote
against the Merger by a holder of Harborside Common Stock is not sufficient
under the DGCL to satisfy this notice
133
<PAGE>
requirement. In addition, a holder of shares of Harborside Common Stock
wishing to exercise appraisal rights must not vote in favor of the Merger,
must hold of record such shares on the date the written demand for appraisal
is made and must continue to hold such shares through the Effective Time.
Only a holder of record of shares of Harborside Common Stock is entitled to
assert appraisal rights for the shares of Harborside Common Stock registered
in that holder's name. A demand for appraisal should be executed by or on
behalf of the holder of record fully and correctly, as the holder's name
appears on the stock certificates.
If the shares of Harborside Common Stock are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, execution of the demand
should be made in that capacity, and if the shares of Harborside Common Stock
are owned of record by more than one person, as in a joint tenancy or tenancy
in common, the demand should be executed by or on behalf of all joint owners.
An authorized agent, including one or more joint owners, may execute a demand
for appraisal on behalf of a holder of record; however, the agent must
identify the record owner or owners and expressly disclose the fact that, in
executing the demand, the agent is agent for such owner or owners. A record
holder such as a broker who holds shares of Harborside Common Stock as nominee
for several beneficial owners may exercise appraisal rights with respect to
the shares of Harborside Common Stock held for one or more beneficial owners
while not exercising such rights with respect to the shares of Harborside
Common Stock held for other beneficial owners; in such case, the written
demand should set forth the number of shares as to which appraisal is sought
and where no number of shares is expressly mentioned the demand will be
presumed to cover all shares of Harborside Common Stock held in the name of
the record owner. Holders of shares of Harborside Common Stock who hold their
shares in brokerage accounts or other nominee forms and who wish to exercise
appraisal rights are urged to consult with their brokers to determine the
appropriate procedures for the making of a demand for appraisal by such
nominee. All written demands for appraisal of shares of Harborside Common
Stock should be mailed or delivered to Scott D. Spelfogel, Secretary,
Harborside Healthcare Corporation, 470 Atlantic Avenue, Boston, Massachusetts
02210, so as to be received before the vote on the approval and adoption of
the Merger Agreement at the Special Meeting.
Within ten days after the Effective Time, the Company, as the surviving
corporation in the Merger, must send a notice as to the effectiveness of the
Merger to each person who has satisfied the appropriate provisions of Section
262. Within 120 days after the Effective Time, but not thereafter, the
Company, or any holder of shares of Harborside Common Stock entitled to
appraisal rights under Section 262 and who has complied with the foregoing
procedures, may file a petition in the Delaware Court of Chancery demanding a
determination of the fair value of such shares. The Company is not under any
obligation, and has no present intention, to file a petition with respect to
the appraisal of the fair value of the shares of Harborside Common Stock.
Accordingly, it is the obligation of the stockholders to initiate all
necessary action to perfect their appraisal rights within the time prescribed
in Section 262.
Within 120 days after the Effective Time, any record holder of shares of
Harborside Common Stock who has complied with the requirements for exercise of
appraisal rights will be entitled, upon written request, to receive from the
Company a statement setting forth the aggregate number of shares of Harborside
Common Stock with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such statements must be
mailed within 10 days after a written request therefor has been received by
the Company.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine the holders of shares
of Harborside Common Stock entitled to appraisal rights and will appraise the
"fair value" of the shares of Harborside Common Stock, exclusive of any
element of value arising from the accomplishment or expectation of the Merger,
together with a fair rate of interest, if any, to be paid upon the amount
determined to be the fair value. Holders considering seeking appraisal should
be aware that the fair value of their shares of Harborside Common Stock as
determined under Section 262 could be more than, the same as or less than the
value of the consideration that they would otherwise receive in the Merger if
they did not seek appraisal of their shares of Harborside Common Stock. The
Delaware Supreme Court has stated that "proof of value by any techniques or
methods which are generally considered acceptable in the financial community
and otherwise admissible in court" should be considered in the appraisal
proceedings. More specifically, the
134
<PAGE>
Delaware Supreme Court has stated that: "Fair value, in an appraisal context,
measures "that which has been taken from the shareholder, viz., his
proportionate interest in a going concern.' In the appraisal process the
corporation is valued "as an entity,' not merely as a collection of assets or
by the sum of the market price of each share of its stock. Moreover, the
corporation must be viewed as an on-going enterprise, occupying a particular
market position in the light of future prospects." In addition, Delaware
courts have decided that the statutory appraisal remedy, depending on factual
circumstances, may or may not be a stockholder's exclusive remedy. The Court
will also determine the amount of interest, if any, to be paid upon the
amounts to be received by persons whose shares of Harborside Common Stock have
been appraised. The costs of the action may be determined by the Court and
taxed upon the parties as the Court deems equitable. The Court may also order
that all or a portion of the expenses incurred by any holder of shares of
Harborside Common Stock in connection with an appraisal, including, without
limitation, reasonable attorneys' fees and the fees and expenses of experts
utilized in the appraisal proceeding, be charged pro rata against the value of
all of the shares of Harborside Common Stock entitled to appraisal.
Any holder of shares of Harborside Common Stock who has duly demanded an
appraisal in compliance with Section 262 will not, after the Effective Time,
be entitled to vote the shares of Harborside Common Stock subject to such
demand for any purpose or be entitled to the payment of dividends or other
distributions on those shares (except dividends or other distributions payable
to holders of record of shares of Harborside Common Stock as of a date prior
to the Effective Time).
If any holder of shares of Harborside Common Stock who demands appraisal of
shares under Section 262 fails to perfect, or effectively withdraws or loses,
the right to appraisal, as provided in the DGCL, the shares of Harborside
Common Stock of such holder will be converted into the right to receive $25.00
per share. A holder of shares of Harborside Common Stock will fail to perfect,
or will effectively lose, the right to appraisal if no petition for appraisal
is filed within 120 days after the Effective Time. A holder may withdraw a
demand for appraisal by delivering to the Company a written withdrawal of the
demand for appraisal and acceptance of the Merger, except that any such
attempt to withdraw made more than 60 days after the Effective Time will
require the written approval of the Company.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DGCL FOR
PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS.
The foregoing is a summary of certain of the provisions of Section 262 of
the DGCL and is qualified in its entirety by reference to the full text of
such Section, a copy of which is attached hereto as Annex IV to this Proxy
Statement/Prospectus.
THE AMENDMENT PROPOSAL
At the Special Meeting, stockholders will be asked to consider and vote on
the Amendment Proposal. See "DESCRIPTION OF HARBORSIDE CAPITAL STOCK--
Harborside's Capital Stock Following the Merger" and "--Changes to Terms of
Harborside Common Stock" for a description of the amendments to the Company's
Certificate of Incorporation to be effected by the Amendment Proposal. The
Merger will not be effected unless the Amendment Proposal is approved, and the
Amendment Proposal will not be effected unless the Merger is approved. The
approval of the Amendment Proposal will require the affirmative vote of the
holders of a majority of the shares of Harborside Common Stock entitled to
vote at the Special Meeting. The Board of Directors recommends that
stockholders vote FOR the approval of the Amendment Proposal.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and December 31, 1997 and for each of the three years in the period ended
December 31, 1997 included in this Proxy Statement/Prospectus have been
audited by PricewaterhouseCoopers LLP, independent accountants, as indicated
in their report with respect thereto included herein.
135
<PAGE>
Representatives of PricewaterhouseCoopers LLP are expected to be present at
the Special Meeting, where they will have the opportunity to make a statement
if they desire to do so and will be available to respond to appropriate
questions.
The combined financial statements of Cushman Management Associates, Inc. and
Affiliates as of December 31, 1995 and 1996 and for each of the two years in
the period ended December 31, 1996 included in this Proxy
Statement/Prospectus, have been audited by Landa & Altsher, P.C., independent
accountants, as indicated in their report with respect thereto included
herein.
The financial statements of Canterbury Care Center, Inc. and Related
Companies as of December 31, 1995 and December 31, 1996 and for each of the
two years in the period ended December 31, 1996 included in this Proxy
Statement/Prospectus have been audited by Cummins, Krasik & Hohl Co.,
independent accountants, as indicated in their report with respect thereto
included herein.
LEGAL OPINIONS
The legality of Harborside Common Stock being retained in the Merger is
being passed on by Paul, Weiss, Rifkind, Wharton & Garrison, New York, New
York, special counsel to the Company. Paul, Weiss, Rifkind, Wharton & Garrison
has delivered an opinion concerning the material United States federal income
tax consequences of the Merger. See "THE MERGER--Material Federal Income Tax
Consequences."
OTHER INFORMATION
Management of the Company knows of no other matters that may properly be, or
which are likely to be, brought before the Special Meeting. However, if any
other matters are properly brought before such Special Meeting, the persons
named in the enclosed Proxy or their substitutes intend to vote the Proxies in
accordance with their judgment with respect to such matters, unless authority
to do so is withheld in the Proxy.
Any requests for assistance in filling out or delivering Proxy Cards or
requests for additional copies of this Proxy Statement/Prospectus or the Proxy
Card may be directed to Harborside Investor Relations (888) 742-7267.
THE EXCHANGE AGENT FOR THE MERGER IS THE BANK OF NEW YORK:
BY MAIL: BY HAND OR OVERNIGHT COURIER:
The Bank of New York The Bank of New York
Tender & Exchange Department Tender & Exchange Department
P.O. Box 11248 101 Barclay Street
Church Street Station Receive and Deliver Window
New York, NY 10286-1248 New York, NY 10286
BY FACSIMILE (For Eligible Financial Institutions Only):
(212) 815-6213
Any questions or requests for assistance in filling out or delivery of Non-
Cash Election Forms or share certificates or requests for additional copies of
the Non-Cash Election Form may be directed to the Exchange Agent by calling
(800) 662-5200.
136
<PAGE>
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the 1999 Annual Meeting of
Stockholders must have been received by the Company not later than December 1,
1998 for inclusion in the proxy materials for such meeting. Such proposals
should be sent by certified mail, return receipt requested, to Scott D.
Spelfogel, Secretary, Harborside Healthcare Corporation, 470 Atlantic Avenue,
Boston, Massachusetts 02210.
BY ORDER OF THE BOARD OF DIRECTORS
Scott D. Spelfogel
Secretary
137
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES:
Report of Independent Accountants....................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997............ F-3
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997.................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1995, 1996 and 1997................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Consolidated Balance Sheet as of March 31, 1998 (unaudited)............. F-25
Consolidated Statements of Operations for the three months ended March
31, 1997 and 1998 (unaudited).......................................... F-26
Consolidated Statement of Changes in Stockholders' Equity for the three
months ended March 31, 1998 (unaudited)................................ F-27
Consolidated Statements of Cash Flows for the three months ended March
31, 1997 and 1998 (unaudited).......................................... F-28
Notes to Consolidated Financial Statements (unaudited).................. F-29
THE MASSACHUSETTS FACILITIES:
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES:
Independent Auditors' Report............................................ F-31
Combined Balance Sheet at December 31, 1995 and 1996.................... F-32
Combined Statements of Operations and Owners' Equity for the years ended
December 31, 1995 and 1996............................................. F-33
Combined Statement of Cash Flows for the years ended December 31, 1995
and 1996............................................................... F-34
Notes to Combined Financial Statements.................................. F-35
THE DAYTON FACILITIES:
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES:
Independent Auditors' Report............................................ F-40
Combined Balance Sheets at December 31, 1995 and 1996................... F-41
Combined Statements of Operations and Accumulated Deficit for the years
ended December 31, 1995 and 1996....................................... F-43
Combined Statements of Cash Flows for the years ended December 31, 1995
and 1996............................................................... F-44
Notes to Combined Financial Statements.................................. F-45
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Harborside Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of Harborside
Healthcare Corporation and its subsidiaries (the "Company") as of December 31,
1996 and 1997 and the related consolidated statements of operations, changes
in stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Harborside
Healthcare Corporation and subsidiaries as of December 31, 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 L.L.P.
Boston, Massachusetts
February 13, 1998
F-2
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
AS OF DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 9,722 $ 8,747
Accounts receivable, net of allowances for doubtful ac-
counts 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
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<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 extraordi-
nary 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.
F-4
<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 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.
F-5
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<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 obli-
gation...................................... -- 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 bene-
fits........................................ 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 partner-
ship.......................................... -- -- 1,369
Issuance of Demand note from limited partner-
ship.......................................... (1,255) -- --
Payment of costs related to sale of facilities. (884) -- --
Proceeds from sale of facilities............... 47,000 -- --
-------- -------- --------
Net cash provided (used) by investing activi-
ties.......................................... 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 contri-
butions....................................... 30 803 --
Exercise of stock options...................... -- -- 100
Proceeds from sale of common stock............. -- 37,160 --
-------- -------- --------
Net cash provided (used) by financing activi-
ties.......................................... (12,560) (27,790) 12,891
-------- -------- --------
Net increase (decrease) in cash and cash equiva-
lents.......................................... 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.
F-6
<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).
F-7
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net patient service revenues payable by patients at the Company's facilities
are recorded at established billing rates. Net patient service revenues to be
reimbursed by contracts with third-party payors, primarily the Medicare and
Medicaid programs, are recorded at the amount estimated to be realized under
these contractual arrangements. Revenues from Medicare and Medicaid are
generally based on reimbursement of the reasonable direct and indirect costs
of providing services to program participants or a prospective payment system.
The Company separately estimates revenues due from each third party with which
it has a contractual arrangement and records anticipated settlements with
these parties in the contractual period during which services were rendered.
The amounts actually reimbursable under Medicare and Medicaid are determined
by filing cost reports which are then audited and generally retroactively
adjusted by the payor. Legislative changes to state or Federal reimbursement
systems may also retroactively affect recorded revenues. Changes in estimated
revenues due in connection with Medicare and Medicaid may be recorded by the
Company subsequent to the year of origination and prior to final settlement
based on improved estimates. Such adjustments and final settlements with third
party payors, which could materially and adversely affect the Company, are
reflected in operations at the time of the adjustment or settlement. Accounts
receivable, net, at December 31, 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 has recorded
approximately $8,229,000 in accounts receivable, as of December 31, 1997,
related to these exception requests. 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.
F-8
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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
F-9
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-10
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. The 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:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
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)
</TABLE>
The financial position of Bowie L.P. was as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------
1996 1997
---------- ----------
<S> <C> <C>
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
</TABLE>
F-11
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
E. PROPERTY AND EQUIPMENT:
The Company's property and equipment are stated at cost and consist of the
following as of December 31:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
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:
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
G. NOTE RECEIVABLE:
In connection with the acquisition of the five Connecticut facilities on
December 1, 1997, the Company received a note receivable from the owner 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,
F-12
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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
F-13
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 lease the Dayton, Ohio
facilities from a master trust in September 1997. The master trust, which was
capitalized by investors with a 3% equity interest and 97% debt, acquired the
Dayton, Ohio facilities from their previous owner and leases the facilities to
the Company. The equity contributions to the master trust remains at risk for
the duration of the lease term. Acquisitions made through the Leasing Facility
are accounted for financial reporting purposes as operating leases with an
initial lease term, which expires at the expiration date of the Leasing
Facility in August 2002. The Company's rental payments to the Master Trust are
determined based on the purchase price and an interest rate factor which is
based on LIBOR (or at the Company's option, the agent bank's prime rate) and
which varies with the Company's leverage ratio (as defined). As of December
31, 1997 the interest rate for amounts outstanding under this facility was
approximately 7.5%. 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.
F-14
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum rent commitments under the Company's non-cancelable operating
leases as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
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
============
</TABLE>
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 Credit
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, impose certain limitations or prohibitions on the
F-15
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $9,400,000 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:
<TABLE>
<S> <C>
1998.......................................................... $ 186,000
1999.......................................................... 205,000
2000.......................................................... 226,000
2001.......................................................... 248,000
2002.......................................................... 15,874,000
Thereafter.................................................... 16,903,000
-----------
$33,642,000
===========
</TABLE>
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,
including the amount of the purchase option, required by this lease together
with the present value of the minimum lease payments:
<TABLE>
<S> <C>
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
============
</TABLE>
F-16
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
Significant components of the provision for income taxes for the years ended
December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- ----------
<S> <C> <C>
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
=========== ==========
</TABLE>
F-17
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
F-18
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF EXERCISE PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
--------- -------------- --------------
<S> <C> <C> <C>
Balance at December 31, 1995
Granted............................... 523,000 $ 8.15-11.75 $11.16
Cancelled............................. (24,000) $ 11.75 $11.75
------- ------------
Balance at December 31, 1996............ 499,000 $ 8.15-11.75 $11.14
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
======= ============
</TABLE>
F-19
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
1996
1996 PRO FORMA 1997
PRO FORMA NET INCOME 1997 NET INCOME
NET INCOME PER SHARE DILUTED NET INCOME PER SHARE DILUTED
---------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C>
As reported $2,712,000 $0.42 $6,803,000 $0.84
Pro forma $2,372,000 $0.37 $5,733,000 $0.70
</TABLE>
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:
<TABLE>
<S> <C>
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-aver-
age shares and assumed conversions.................................. 8,138,793
Basic net income per common share.................................... $ 0.85
Diluted net income per common share.................................. $ 0.84
</TABLE>
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 initial 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.
F-20
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Beginning in 1994, the Company self-insures for health benefits provided to
a majority of its employees. The Company maintains stop-loss insurance such
that the Company's liability for losses is limited. The Company recognizes an
expense for estimated health benefit claims incurred but not reported at the
end of each year.
Beginning in 1995, the Company self-insures for most workers' compensation
claims. The Company maintains stop-loss insurance such that the Company's
liability for losses is limited. The Company accrues for estimated workers'
compensation claims incurred but not reported at the end of each year.
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,
F-21
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 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.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1996 1997
------------ ------------
<S> <C> <C>
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, re-
spectively.......................................... $ 0.45 $ 0.90
</TABLE>
F-22
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total net revenues........ $34,931,000 $36,872,000 $45,903,000 $47,706,000
Income from operations.... 1,307,000 846,000(1) 3,655,000 3,918,000
Income (loss) before in-
come taxes and extraordi-
nary loss................ 205,000 (229,000) 2,312,000 2,541,000
Income taxes (benefit).... -- (400,000) 902,000 307,000
Income before extraordi-
nary 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--di-
luted.................... -- -- $ 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>
<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 (bene-
fit)......................... (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).
F-23
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
F-24
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
1998
----------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 2,180
Accounts receivable, net of allowances for doubtful accounts of
$2,903.......................................................... 39,286
Prepaid expenses and other....................................... 6,590
Prepaid income taxes............................................. 757
Deferred income taxes............................................ 2,150
--------
Total current assets........................................... 50,963
Restricted cash.................................................... 5,782
Investment in limited partnership.................................. 36
Property and equipment, net........................................ 99,361
Intangible assets, net............................................. 8,741
Note receivable.................................................... 7,487
Deferred income taxes.............................................. 71
--------
Total assets................................................... $172,441
========
LIABILITIES
Current liabilities:
Current maturities of long-term debt............................. $ 199
Current portion of capital lease obligation...................... 4,123
Accounts payable................................................. 5,868
Employee compensation and benefits............................... 14,231
Other accrued liabilities........................................ 4,510
Accrued interest................................................. 246
Current portion of deferred income............................... 609
--------
Total current liabilities...................................... 29,786
Long-term portion of deferred income............................... 3,431
Long-term debt..................................................... 33,396
Long-term portion of capital lease obligation...................... 52,147
--------
Total liabilities.............................................. 118,760
--------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 30,000,000 shares authorized,
8,010,664 shares issued and outstanding........................... 80
Additional paid-in capital......................................... 48,463
Retained earnings.................................................. 5,138
--------
Total stockholders' equity..................................... 53,681
--------
Total liabilities and stockholders' equity................... $172,441
========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-25
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
Total net revenues............................... $ 47,384 $ 72,454
------------- -------------
Expenses:
Facility operating............................. 37,452 57,381
General and administrative..................... 2,389 3,365
Service charges paid to affiliate.............. 177 313
Depreciation and amortization.................. 922 1,085
Facility rent.................................. 2,622 5,556
------------- -------------
Total expenses............................... 43,562 67,700
------------- -------------
Income from operations........................... 3,822 4,754
Other:
Interest expense, net.......................... 1,392 1,650
Loss (income) on investment in limited partner-
ship.......................................... (31) 31
------------- -------------
Income before income taxes....................... 2,461 3,073
Income taxes..................................... 959 1,198
------------- -------------
Net income....................................... $ 1,502 1,875
============= =============
Net income per share--basic...................... $ 0.19 $ 0.23
============= =============
Net income per share--diluted.................... $ 0.19 $ 0.23
============= =============
Weighted average number of common shares used in
per share computations:
Basic.......................................... 8,025,000 8,059,000
Diluted........................................ 8,028,000 8,304,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-26
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
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................... -- 23 -- 23
Net income for the three months ended March
31, 1998................................... -- -- 1,875 1,875
--- ------- ------ -------
Stockholders' equity, March 31, 1998........ $80 $48,463 $5,138 $53,681
=== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-27
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
Operating activities:
Net income...................................... $ 1,502 $ 1,875
Adjustments to reconcile net income
to net cash (used) by operating activities:
Depreciation of property and equipment.......... 839 930
Amortization of intangible assets............... 83 155
Amortization of deferred income................. (92) (128)
Loss from investment in limited partnership..... (31) 31
Amortization of loan costs and fees............. 17 71
Accretion of interest on capital lease obliga-
tion........................................... 709 766
Other........................................... 3 --
------------- -------------
3,030 3,700
Changes in operating assets and liabilities:
(Increase) in accounts receivable............... (1,738) (6,870)
(Increase) decrease in prepaid expenses and oth-
er............................................. (4,231) 54
(Decrease) in accounts payable.................. (420) (1,407)
Increase in employee compensation and benefits.. 1,238 3,490
(Decrease) in accrued interest.................. -- (5)
Increase in other accrued liabilities........... 1,142 93
Increase (decrease) in income taxes payable..... 499 (757)
------------- -------------
Net cash (used) by operating activities......... (480) (1,702)
------------- -------------
Investing activities:
Additions to property and equipment............. (848) (3,419)
Additions to intangibles........................ (1,186) (404)
Transfers to restricted cash, net............... 128 (237)
Repayment of demand note........................ 1,369 --
------------- -------------
Net cash (used) by investing activities......... (537) (4,060)
------------- -------------
Financing activities:
Payment of long-term debt....................... (41) (47)
Principal payments of capital lease obligation.. (909) (781)
Redemption of options........................... -- 23
------------- -------------
Net cash (used) by financing activities.......... (950) (805)
------------- -------------
Net (decrease) in cash and cash equivalents...... (1,967) (6,567)
Cash and cash equivalents, beginning of period... 9,722 8,747
------------- -------------
Cash and cash equivalents, end of period......... $ 7,755 $ 2,180
============= =============
Supplemental Disclosure:
Interest paid................................... $ 888 $ 1,040
============= =============
Income taxes paid............................... $ -- $ 1,776
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-28
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. GENERAL
The accompanying unaudited consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report or Form 10-K for the year ended
December 31, 1997. In the opinion of management, the accompanying unaudited
financial statements reflect all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the Company's financial
position as of March 31, 1998, the results of its operations for the three-
month periods ended March 31, 1997 and 1998 and its cash flows for the three-
month periods ended March 31, 1997 and 1998. The results of operations for the
three-month periods ended March 31, 1997 and 1998 are not necessarily
indicative of the results which may be expected for the full year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.
B. BASIS OF PRESENTATION
The Company was incorporated as a Delaware corporation on March 19, 1996 and
was formed as a holding company, in anticipation of an initial public offering
(the "Offering"), to combine under the control of a single corporation the
operations of various business entities (the "Predecessor Entities") which
were all under the majority control of several related stockholders.
Immediately prior to the Offering, the Company executed an agreement (the
"Reorganization Agreement") which resulted in the transfer of ownership of the
Predecessor Entities to the Company prior to completion of the Offering in
exchange for 4,400,000 shares of the Company's common stock. The Company's
financial statements for periods prior to the Offering have been prepared by
combining the historical financial statements of the Predecessor Entities,
similar to a pooling of interests presentation. On June 14, 1996, the Company
completed the issuance of 3,600,000 shares of common stock through the
Offering resulting in net proceeds to the Company (after deducting
underwriters' commissions and other offering expenses) of $37,160,000. The
consolidated financial statements include the accounts of Harborside
Healthcare Corporation and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
C. INVESTMENT IN LIMITED PARTNERSHIP
The Company holds a 75% partnership interest in Bowie Center Limited
Partnership (the "Partnership") which the Company accounts for using the
equity method. Although the Company owns a majority interest in the
Partnership, the Company only holds a 50% voting interest in the Partnership
and accordingly, it does not exercise control over the operations of the
Partnership.
The results of operations of the Partnership are summarized below:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
1997 1998
------------- -------------
<S> <C> <C>
Net operating revenues...................... $ 2,092,000 $ 2,104,000
Net operating expenses...................... 1,900,000 2,034,000
Net income (loss)........................... 42,000 (42,000)
</TABLE>
The financial position of the Partnership is as follows:
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------
<S> <C>
Current assets....................................... $2,382,000
Non-current assets................................... 4,644,000
Current liabilities.................................. 856,000
Non-current liabilities.............................. 6,122,000
Partners' equity..................................... 48,000
</TABLE>
F-29
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
D. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net
income per share for the period ended March 31, 1998:
<TABLE>
<S> <C>
Numerator:
Numerator for basic and diluted net income per share........ $1,875,000
==========
Denominator:
Denominator for basic net income per share weighted average
shares..................................................... 8,058,548
Effect of dilutive securities employee stock options........ 245,155
----------
Denominator for diluted net income per share--adjusted
weighted-average shares and assumed conversions............ 8,303,703
==========
Basic net income per common share............................ $ 0.23
Diluted net income per common share.......................... $ 0.23
</TABLE>
The denominator for basic net income per share includes 24,746 and 48,759
shares for the periods ended March 31, 1997 and 1998, respectively, resulting
from stock options issued within one year of the Company's public offering.
E. SUBSEQUENT EVENTS
The Company recently completed two acquisitions through which it acquired
two long-term care facilities (248 licensed beds) in Toledo, Ohio and two
long-term care facilities (267 licensed beds) in Warwick, Rhode Island. The
aggregate purchase price of these two acquisitions was approximately
$33,700,000, and the Company financed them through an expansion of funds
committed to its existing synthetic leasing facility (the "Leasing Facility").
The Ohio acquisition was completed on April 1 and the Rhode Island acquisition
on May 1. In connection with these acquisitions, the Company increased funds
committed by a bank group through its Leasing Facility to $59,250,000. In May
1998, the Company also increased funds committed by the bank group through its
revolving credit facility to $40,000,000.
On April 16, 1998, the Company announced that it had accepted a buyout offer
of $25 per share from Investcorp S.A., an international investment firm.
Pursuant to the terms of the definitive agreement signed on April 15, 1998,
upon consummation of the transaction, Investcorp, its affiliates and certain
other international investors will acquire approximately 91% of the common
stock of the Company then outstanding. Management of the Company will retain
approximately 225,000 shares, or approximately 3% of the Company's then
outstanding common stock. Other stockholders of the Company may elect to
receive either $25 per share in cash or retain their shares on a pro-rated
basis up to a maximum aggregate amount equal to 6% of the common stock of the
Company then outstanding. Following the transaction, which is expected to
close in the third quarter of 1998, the Company expects to de-list its common
stock from the New York Stock Exchange. The transaction has been unanimously
approved by the Company's Board of Directors. In addition, holders of
approximately 54% of the Company's currently outstanding common stock have
agreed, subject to certain conditions, to vote their shares in favor of the
transaction and have granted an affiliate of Investcorp an irrevocable option
to purchase such shares for $25 per share, subject to certain conditions. The
transaction is subject to, among other things, stockholder approval,
regulatory approvals and other customary closing conditions.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Cushman Management Associates, Inc. and Affiliates
Topsfield, Massachusetts
We have audited the accompanying combined balance sheets of Cushman
Management Associates, Inc. and Affiliates as of December 31, 1995 and 1996,
and the related combined statements of income and owners' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Companies' 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Cushman
Management Associates, Inc. and Affiliates as of December 31, 1995 and 1996,
and the combined results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ Landa & Altsher
Randolph, MA
October 22, 1997
F-31
<PAGE>
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
COMBINED BALANCE SHEET AS OF DECEMBER 31,
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C> <C>
ASSETS
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Current assets:
Cash......................................................... $1,026 $1,607
Accounts receivable--net of allowance for doubtful accounts
of $75...................................................... 2,189 2,004
Prepaid expenses and other................................... 107 159
------ ------
Total current assets....................................... 3,322 3,770
Property, plant and equipment, net............................. 3,732 3,490
Intangible assets, net......................................... 19 6
------ ------
Total assets................................................... $7,073 $7,266
====== ======
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Current maturities on long-term debt......................... $ 61 $ 61
Accounts payable............................................. 396 443
Employee compensation and benefits........................... 709 755
Other accrued liabilities.................................... 67 136
Accrued interest............................................. 49 72
Due to related parties....................................... 209 35
Income taxes payable......................................... 3 244
------ ------
Total current liabilities.................................. 1,494 1,746
Long-term debt, net of current maturities...................... 1,379 1,320
------ ------
Total liabilities.............................................. 2,873 3,066
------ ------
Owners' equity:
Common stock, 17,500 shares authorized without par value,
2,000 shares issued and 1,970 outstanding with 30 held in
treasury.................................................... 310 310
Additional paid-in capital................................... 172 172
Retained earnings and partners' capital...................... 3,738 3,738
------ ------
4,220 4,220
Less--treasury stock, at cost................................ (20) (20)
------ ------
Total owners' equity....................................... 4,200 4,200
------ ------
Total liabilities and owners' equity........................... $7,073 $7,266
====== ======
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
COMBINED STATEMENT OF OPERATIONS AND OWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Total net revenue............................................. $17,993 $19,368
------- -------
Expenses:
Facility operating.......................................... 14,100 14,313
General and administrative.................................. 2,111 2,250
Depreciation and amortization............................... 323 322
------- -------
Total expenses............................................ 16,534 16,885
------- -------
Income from operations........................................ 1,459 2,483
Other:
Interest expense, net....................................... 109 92
------- -------
Income before income taxes.................................... 1,350 2,391
Income taxes.................................................. -- 241
------- -------
Net income.................................................... 1,350 2,150
Owners' equity--beginning of year............................. 4,300 4,200
Less--distributions to owners................................. (1,450) (2,150)
------- -------
Owners' equity--end of year................................... $ 4,200 $ 4,200
======= =======
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 1,350 $ 2,150
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation and amortization............................ 323 322
Provisions for losses on accounts receivable............. 47 116
Changes in assets and liabilities:
Accounts receivable...................................... (210) 69
Prepaid expenses and other............................... (13) (52)
Accounts payable and accrued liabilities................. (62) 185
Income taxes payable..................................... -- 241
------- -------
Net cash provided by operating activities.................... 1,435 3,031
------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment............... 8 --
Purchases of property and equipment........................ (94) (68)
------- -------
Net cash used by investing activities........................ (86) (68)
------- -------
Cash flows from financing activities:
Repayment of debt.......................................... (55) (59)
Distributions to owners.................................... (1,450) (2,150)
Repayment of related party debt............................ (192) (173)
------- -------
Net cash used by financing activities........................ (1,697) (2,382)
------- -------
Net increase (decrease) in cash.............................. (348) 581
Cash at beginning of year.................................... 1,374 1,026
------- -------
Cash at end of year.......................................... $ 1,026 $ 1,607
======= =======
Supplementary disclosure:
Interest paid.............................................. $ 121 $ 118
======= =======
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
The financial statements presented are the combined financial statements of
Cushman Management Associates, Inc. (the management company), Cedar Glen
Nursing Home, Danvers Twin Oaks Nursing Home, Inc., Saugus Nursing Home, Inc.,
d/b/a Louise Caroline Rehabilitation and Nursing Center, and Evtan Nursing
Home, Inc., d/b/a Maplewood Manor Nursing Home, (collectively, the
"Companies"). The majority stockholders of Cushman Management Associates, Inc.
own a majority interest in the above nursing homes. Cushman Management
Associates, Inc. is a Subchapter S Corporation and operates a management
company in Topsfield, Massachusetts. Cushman Management Associates, Inc.
provides various services to nursing homes including administration,
bookkeeping, and other patient related services. Danvers Twin Oaks Nursing
Home, Inc.; Saugus Nursing Home, Inc., and Evtan Nursing Home, Inc. are
Subchapter S Corporations and operate nursing homes of 101, 80 and 120 beds,
respectively. Cedar Glen Nursing Home is a limited partnership and operates a
100-bed nursing home.
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Companies' significant accounting policies follows:
a) BASIS ON COMBINATION: The combined financial statements include all
the accounts of the above-named entities. All significant intercompany
balances and transactions have been eliminated.
b) PATIENT SERVICE REVENUE: Private patient service revenue is reported
at the estimated net realizable amounts. Third-party payor revenues are
recorded as indicated in Note 2.
c) PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost.
Depreciation of building and improvements is calculated using the straight-
line and accelerated methods over the estimated useful lives that range
from five to forty years. Depreciation of equipment and motor vehicles is
calculated using the straight-line and accelerated methods over the
estimated useful lives that range from three to ten years. Depreciation
charged to operations amounted to $309 and $310 for 1995 and 1996,
respectively.
d) CASH AND CASH EQUIVALENTS: The Companies consider all short-term debt
securities purchased with an original maturity of three months or less to
be cash equivalents.
e) INCOME TAXES: Cushman Management Associates, Inc.; Danvers Twin Oaks
Nursing Home, Inc.; Saugus Nursing Home, Inc.; and Evtan Nursing Home,
Inc.; have elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, the Companies do not pay
federal income taxes on their taxable income. Instead, the stockholders are
liable for individual income taxes on their respective share of the
Companies' taxable income.
As a result of an audit by the Massachusetts Department of Revenue in
1996, the Companies are considered to be engaged in a unitary business and
have exceeded certain gross income limitations for state income tax
purposes. Consequently, the Companies are liable for state corporate income
taxes on its taxable income and were assessed additional state income taxes
for the years 1993 through 1995 which have been recorded in 1996.
No income taxes are payable by or provided for Cedar Glen Nursing Home, a
Limited Partnership. Partners are liable for individual federal and state
income taxes on their respective share of the Partnership's taxable income.
f) INTANGIBLE ASSETS: Intangible assets are stated on the basis of cost
and are amortized on a straight-line basis, over the estimated future
periods to be benefited, ranging from 3 to 5 years. Amortization charged to
operations amounted to $14 and $12 for 1995 and 1996, respectively.
g) 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 disclosure of contingent assets and liabilities at the date
of the reporting period. Actual costs could differ from those estimates.
F-35
<PAGE>
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
h) PROMOTIONAL ADVERTISING: Promotional advertising costs are expensed as
incurred. Promotional advertising costs charged to operations amounted to
$104 and $72 for 1995 and 1996, respectively.
NOTE 2--PATIENT SERVICE REVENUES FROM THIRD PARTY PAYORS
SUMMARY OF THE PAYMENT ARRANGEMENTS WITH THIRD PARTY PAYORS
MEDICAID--PROSPECTIVE RATE SYSTEM--The Companies receive reimbursement from
the Commonwealth of Massachusetts under the prospective rate of payment system
for the care and services rendered to publicly-aided patients in long-term
care facilities pursuant to regulations promulgated by the Division of Health
Care Finance and Policy (the Division). Under the regulations, the current
year rates are calculated utilizing base year costs adjusted for inflation.
The base year costs are subject to audit which could result in a retroactive
rate adjustment for the current year.
As a result of the audit of prior years' cost reports by the Division, the
Companies have received amended prospective rates for the years 1991 and 1992.
The amended rates resulted in a retroactive adjustment due the Companies of
$133 and $150 for 1991 and 1992, respectively. These settlements have been
received in 1996 and such settlements have been reflected under the caption
"Total Net Revenue" on Exhibit B to the extent not previously reflected.
Management estimates that the Companies have underspent the OBRA component
of the prospective rate during 1991, 1992 and 1993, resulting in a retroactive
adjustment due the Commonwealth of $15, $11 and $14 for 1991, 1992 and 1993,
respectively. These retroactive adjustments have been settled in 1996 and such
settlements have been reflected under the caption "Total Net Revenue" on
Exhibit B to the extent not previously recorded.
MEDICARE--The Companies receive reimbursement for patient care under the
federally sponsored Medicare program through an insurance intermediary. During
the year, an interim rate is assigned based upon the cost experience of a
prior year modified by its current regulations, and the facilities are paid at
this rate during the year. A cost report is filed with, and audited by, the
insurance intermediary. A final rate which may be subject to cost limitations
is then established and final settlement of the difference is called for under
the regulations.
Final settlements have been received through 1994 and such settlements have
been included in the caption "Total Net Revenue" on Exhibit B, to the extent
that they had not been reflected in prior years.
In as much as the final settlement rates for 1995 and 1996 cannot be
determined with sufficient accuracy for proper recording in these financial
statements, the income for these years has been recorded at the interim rate
of payment. The actual amounts will be accrued in the year of settlement.
NOTE 3--ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
BALANCE AT
DECEMBER 31,
--------------
1995 1996
------ ------
<S> <C> <C>
Private patients................................................ $ 133 $ 103
Prepaid room and board.......................................... (12) (11)
Medicare patients............................................... 304 334
Publicly aided patients......................................... 1,834 1,648
Managed facilities.............................................. 34 5
Allowance for uncollectibles.................................... (104) (75)
------ ------
Accounts receivable, net........................................ $2,189 $2,004
====== ======
</TABLE>
Bad debts expense charged to operations amounted to $47 and $116 for 1995
and 1996, respectively.
F-36
<PAGE>
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
NOTE 4--RELATED PARTY TRANSACTIONS
The Companies have entered into the following transactions with related
parties:
(a) MANAGEMENT FEES--Danvers Twin Oaks Nursing Home, Inc. recorded
management fees of $47 to an officer and stockholder of Cushman Management
Associates, Inc. for 1996.
(b) Related party loans which have no fixed repayment terms, are as
follows:
<TABLE>
<CAPTION>
BALANCE AT
DECEMBER 31,
--------------------
INTEREST
RATE 1995 1996
---------- ---- ----
<S> <C> <C> <C>
Due from related parties:
Federal
Officers and stockholders................................. Funds Rate $108 $124
---- ----
Due to related parties:
Officers and stockholders............................... 9% 141 88
Partners................................................ 9% 81 27
Other related parties................................... 9% 95 44
---- ----
Total due to related parties.......................... 317 159
---- ----
Net due to related parties................................ $209 $ 35
==== ====
</TABLE>
Net interest expense incurred on the above related party loans amounted to
$36 and $21 for 1995 and 1996, respectively.
NOTE 5--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following at December 31,
1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Land.......................................................... $ 195 $ 195
Building and improvements..................................... 5,490 5,528
Equipment..................................................... 2,658 2,688
Motor vehicles................................................ 39 39
Construction in process....................................... 5 5
------- -------
8,387 8,455
Less: Accumulated Depreciation................................ (4,655) (4,965)
------- -------
Property, plant and equipment, net............................ $ 3,732 $ 3,490
======= =======
</TABLE>
The Companies have incurred and capitalized $5 of engineering costs related
to the replacement of two HVAC systems. As of December 31, 1996, no date has
been set for the start of the work on the HVAC systems.
F-37
<PAGE>
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
NOTE 6--LONG-TERM DEBT
The Companies are obligated under long-term debt at December 31, 1995 and
1996 as follows:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
9% first mortgage to Salem Five, secured by real estate and
guaranteed by a majority of the shareholders, payable in
monthly payments of $8, including interest with a balloon
payment of all unpaid principal and interest due on October 8,
1999........................................................... $ 811 $ 791
9% 3-year mortgage to Salem Five, due November 17, 1999, secured
by real estate and guaranteed by a majority of the
shareholders, payable in monthly installments of $6 including
interest with a balloon payment due November 17, 1999.......... 387 352
9% 25-year first mortgage to Ipswich Savings Bank, due October
1, 2017, secured by land and buildings of Cushman Management
Associates, Inc., payable in monthly installments of $2
including interest............................................. 242 238
------ ------
Total........................................................... 1,440 1,381
Current maturities.............................................. 61 61
------ ------
Long-term debt, net............................................. $1,379 $1,320
====== ======
</TABLE>
Interest incurred on the above long-term debt amounted to $121 and $119 for
1995 and 1996, respectively.
Following are maturities of long-term debt for each of the next five years:
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
1997..................................................................... $ 61
1998..................................................................... 69
1999..................................................................... 1,027
2000..................................................................... 5
2001..................................................................... 6
</TABLE>
NOTE 7--CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Companies to
concentrations of credit risk consist principally of the following:
a.) CASH: The Companies maintain cash balances in several federally
insured financial institutions in the same geographic area. The cash
exceeding federally insured limits totaled $995 at December 31, 1996. There
may be times during the year when uninsured cash is significantly higher.
b.) ACCOUNTS RECEIVABLE: The Companies extend unsecured credit to their
private patients and patients covered under third-party payor arrangements.
Accounts receivable from private patients and third-party payors totaled
$2,015 at December 31, 1996. See Note (2) and Note (3) for details of
third-party payor arrangements and receivable balances, respectively.
c.) DUE FROM RELATED PARTIES: The Companies extend unsecured credit to
their affiliates and owners. The balance due from related parties totaled
$124 at December 31, 1996. See Note (4) for further details.
NOTE 8--COMMITMENTS AND CONTINGENCIES
a) Pursuant to the Commonwealth of Massachusetts Medical Assistance Program
regulations, the Companies are members of a group of related nursing homes
(the Group) which are considered to be under common ownership. Consequently,
all members of the Group are contingently liable for the recoupments of
liabilities of other members of the Group.
F-38
<PAGE>
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
NOTE 8--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
b) A significant portion of the Companies' revenues are derived from
services reimbursable under the Medicaid program, (See Note 2). The base year
costs utilized in calculating the Medicaid prospective rates are subject to
audit which could result in a retroactive rate adjustment for all years in
which that base year's costs are utilized in calculating the prospective rate.
It is not possible at this time to determine whether the Companies will be
audited or if a retroactive rate adjustment would result.
c.) A portion of the Companies' revenues are derived from services under the
Medicare program, (see Note 2). Under this program all cost report years are
subject to audit which could result in a retroactive rate adjustment. It is
not possible at this time to determine whether the Companies will be audited
or if a retroactive rate adjustment will result.
If the Companies' Medicare Fiscal Intermediary were to issue prudent buyer
adjustments for 1996 using the same methodology as applied to 1995, as
detailed in Note 9 (b), this would result in a payable to the Medicare program
of approximately $280. The Companies would vigorously contest any adjustments
made by the fiscal intermediary. In addition, the Companies contract with
outside suppliers of therapy services provides for indemnification to the
Companies in the event that Medicare limits reimbursement to less then cost.
Consequently, no provision has been made to the accompanying financial
statements.
NOTE 9--SUBSEQUENT EVENTS
a.) SALE OF THE NURSING HOMES: In August 1997, the Companies sold their
nursing home property, equipment and operating licenses for $16,450 resulting
in a gain of 11,447. The nursing home companies retained all assets, other
than property and equipment, and all liabilities. In addition, the Management
Company sold for $100 its contracts with outside nursing facilities.
b.) MEDICARE SETTLEMENTS: In 1997, the Companies' Medicare Fiscal
Intermediary issued settlements for 1995, which include a limitation of the
ancillary therapy services to less than cost. These settlements result in a
payable to the Medicare program of approximately $130. The Companies strongly
disagree with these settlements and will vigorously contest these settlements
through the appeal process.
The Companies contract with outside suppliers of therapy services provides
for indemnification to the Companies in the event that Medicare limits
reimbursement to less than the providers cost, consequently, no provision has
been made in the accompanying financial statement for this retroactive
adjustment.
F-39
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Canterbury Care Center, Inc. and Related Companies
We have audited the accompanying combined balance sheets of Canterbury Care
Center, Inc. and Related Companies (all Ohio corporations) as of December 31,
1995 and 1996, and the related combined statements of operations and
accumulated deficit, and cash flows for the years then ended. These combined
financial statements are the responsibility of management. Our responsibility
is to express an opinion on these combined 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 audits 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 combined financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
combined financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Canterbury Care
Center, Inc. and Related Companies at December 31, 1995 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/S/ Cummins, Krasik & Hohl Co.
Columbus, Ohio
February 13, 1997
F-40
<PAGE>
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
COMBINED BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Assets whose use is limited (note C)................. $ 147,499 $ 153,989
Accounts receivable, less allowance for doubtful
accounts
(notes B2 and B3)................................... 1,137,395 1,180,625
Cost settlements (note I)............................ 21,158 208,371
Inventories (note B4)................................ 13,303 13,303
Prepaid expenses..................................... 74,888 70,397
----------- -----------
Total current assets............................... 1,394,243 1,626,685
----------- -----------
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization (notes B5, D, F, and G).............. 12,696,087 12,279,304
OTHER ASSETS
Related-party receivable (note H).................... -- 78,661
Deferred costs, less accumulated amortization of
$168,999 in 1995 and $286,290 in 1996 (note B6)..... 417,327 300,036
Deposits............................................. 3,115 3,115
----------- -----------
420,442 381,812
----------- -----------
$14,510,772 $14,287,801
=========== ===========
</TABLE>
See accompanying notes and independent auditors' report.
F-41
<PAGE>
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
COMBINED BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Note payable--bank (note F).......................... $ 4,678,426 $ 2,145,466
Current portion of long-term debt.................... 415,000 415,000
Cash overdraft (notes B1 and G)...................... 1,774,669 118,411
Accounts payable
Trade.............................................. 231,987 238,993
Other (note K)..................................... 531,853 531,853
Accrued liabilities (note E)......................... 990,858 948,503
Resident deposits (note C)........................... 30,334 34,894
Note payable--shareholder (note H)................... 42,923 --
Unearned rentals..................................... 8,564 83,733
----------- -----------
Total current liabilities........................ 8,704,614 4,516,853
----------- -----------
LONG-TERM OBLIGATIONS--net of current portion
Related-party advances (note H)...................... 963,581 3,763,581
Related-party loan (note H).......................... -- 1,200,000
Long-term debt (note G).............................. 5,134,819 4,719,800
Resident security deposits........................... 92,868 97,891
----------- -----------
6,191,268 9,781,272
----------- -----------
CONTINGENCIES (notes I and K)........................ -- --
DEFICIT IN STOCKHOLDERS' EQUITY
Common stock, authorized, 2,250 shares without par
value; issued and outstanding, 300 shares......... 1,500 1,500
Additional paid-in capital......................... 528,290 528,290
Accumulated deficit................................ (914,900) (540,114)
----------- -----------
(385,110) (10,324)
----------- -----------
$14,510,772 $14,287,801
=========== ===========
</TABLE>
See accompanying notes and independent auditors' report.
F-42
<PAGE>
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
REVENUES (notes B2 and I)
Resident services (including ancillaries)............
Private............................................. $ 1,083,014 $ 1,370,475
Medicaid............................................ 4,398,685 6,346,204
Medicare............................................ 3,534,951 4,147,267
Assisted living..................................... 1,664,044 2,859,949
Veterans............................................ 26,447 60,856
Hospice............................................. 2,190 99,864
Rentals..............................................
Commercial.......................................... 101,565 90,392
Other services...................................... 70,112 85,795
----------- -----------
10,881,008 15,060,802
Provision for contractual adjustments................ (1,963,054) (2,319,988)
----------- -----------
8,917,954 12,740,814
----------- -----------
COSTS AND EXPENSES
Routine services
Nursing and habilitation............................ 4,011,176 5,605,053
Resident services................................... 581,052 877,698
Dietary............................................. 1,035,811 1,414,273
Property and bed taxes.............................. 158,582 172,503
Utilities........................................... 343,463 380,477
General and administrative........................... 1,881,814 2,418,086
Depreciation and amortization (notes B5 and B6)...... 678,190 677,574
Interest............................................. 957,901 862,739
----------- -----------
9,647,989 12,408,403
----------- -----------
(Loss) earnings from operations................... (730,035) 332,411
NON-OPERATING REVENUES................................ 32,132 42,375
----------- -----------
NET (LOSS) EARNINGS............................... (697,903) 374,786
ACCUMULATED DEFICIT
Beginning of year................................... (216,997) (914,900)
----------- -----------
End of year......................................... $ (914,900) $ (540,114)
=========== ===========
</TABLE>
See accompanying notes and independent auditors' report.
F-43
<PAGE>
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from:
Residents and third-party payors.................... $ 6,373,809 $ 9,736,885
Rentals............................................. 1,702,540 2,762,860
Other............................................... 102,244 125,903
----------- -----------
8,178,593 12,625,648
Cash paid for:
Salaries............................................ 2,916,108 5,324,584
Payroll taxes and fringe benefits................... 665,018 984,344
Property and income taxes........................... 44,073 197,230
Interest expense.................................... 989,501 824,278
Operating expenses.................................. 4,075,998 4,501,384
----------- -----------
8,690,698 11,831,820
----------- -----------
Net cash (used) provided by operating activities.... (512,105) 793,828
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment additions.................... (253,485) (143,498)
Assets whose use is limited......................... -- (3,170)
----------- -----------
Net cash used by investing activities............... (253,485) (146,668)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of note payable--bank..................... (231,111) (2,532,960)
Repayment of long-term debt......................... (391,521) (415,019)
Repayment of related-party loan..................... -- (42,923)
Proceeds from related-party loan.................... 8,093 4,000,000
----------- -----------
Net cash (used) provided by financing activities.... (614,539) 1,009,098
----------- -----------
(DECREASE) INCREASE IN CASH....................... (1,380,129) 1,656,258
CASH OVERDRAFT
Beginning of year................................... (394,540) (1,774,669)
----------- -----------
End of year......................................... $(1,774,669) $ (118,411)
=========== ===========
RECONCILIATION OF NET (LOSS) EARNINGS TO NET CASH
(USED) PROVIDED BY OPERATIONS
Net (loss) earnings ................................ $ (697,903) $ 374,786
Adjustments to reconcile net (loss) earnings to net
cash (used) provided by operating activities
Depreciation and amortization....................... 678,190 677,574
(Increase) decrease in operating assets
Assets whose use is limited........................ (51,572) (2,979)
Accounts receivable................................ (765,573) (43,230)
Cost settlements................................... 15,067 (187,213)
Prepaid expenses................................... (28,662) 4,150
Related-party receivable........................... (10,146) (78,661)
Increase (decrease) in operating liabilities
Accounts payable--trade............................ 39,500 7,004
Accrued liabilities................................ 238,844 (42,355)
Unearned rentals................................... (20,987) 75,169
Resident deposits.................................. 91,137 9,583
----------- -----------
$ (512,105) $ 793,828
=========== ===========
</TABLE>
See accompanying notes and independent auditors' report.
F-44
<PAGE>
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
NOTE A--DESCRIPTION OF BUSINESS
The combined financial statements present the financial position, results of
operations, and cash flows of Canterbury Care Center, and Related Companies
(the Company). The combined financial statements include the accounts of the
following:
1. Canterbury Care Center Inc. (Canterbury), an Ohio S Corporation, acquired
in 1993 and began operating a licensed 100-bed nursing facility (NF).
Canterbury acquired and began operating 20 additional NF beds in 1995, as
well as a 6-bed assisted living unit.
2. GNWT III, Inc., DBA Forest View Nursing Center (Forest View), an Ohio S
Corporation, acquired and renovated an existing building in 1993. Operating
rights for 100 NF beds were acquired and relocated. Operations began in
1994.
3. GNWT, Inc. II, DBA The Laurelwood (Laurelwood), an Ohio S Corporation,
acquired real property in 1992 to develop and operate a 115-unit assisted
living facility. The building also contains 5,016 square feet of commercial
rental space.
Canterbury and Forest View provide services to private residents and have
provider agreements with the Health Care Financing Administration (HCFA) and
the Ohio Department of Human Services (ODHS), to provide care for Medicare and
Medicaid residents, respectively.
All significant intercompany balances and transactions have been eliminated.
The financial statements have been prepared on a combined basis since the
entities are commonly owned and managed.
NOTE B--SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
preparation of the accompanying financial statements follows:
1. Cash
For purposes of the statements of cash flows, cash includes all of the
Company's checking and savings accounts. Bank accounts are insured by the
Federal Deposit Insurance Corporation up to $100,000. Cash balances
periodically exceed the insured limit.
2. Resident Accounts Receivable and Revenues
Resident accounts receivable and revenues are recorded when services are
provided. The Company provides services to certain of its residents under
contractual arrangements with the Medicare and Medicaid programs. Amounts paid
under these contractual arrangements are subject to review and final
determination by the appropriate government authority or its agent. In the
opinion of management, adequate provision has been made in the combined
financial statements for any adjustments resulting from the respective
government authority's review (see note I).
Contractual adjustments for the Medicare and Medicaid programs are
recognized when the related revenues are reported in the financial statements.
These contractual adjustments represent the difference between established
rates and the amounts estimated to be reimbursable by Medicare and Medicaid.
Differences between these estimates and amounts subsequently determined are
recorded as additions to or deductions from contractual adjustments in the
period such determination is made. Accounts receivable are unsecured.
F-45
<PAGE>
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
3. Allowance for Doubtful Accounts
Bad debts are provided for on the reserve method based on management's
evaluation of accounts receivable at year end. Following is a summary of the
allowance for doubtful accounts at December 31,:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Canterbury................................................... $40,000 $60,000
Forest View.................................................. 12,000 30,000
Laurelwood................................................... -- --
------- -------
$52,000 $90,000
======= =======
</TABLE>
4. Inventories
Inventories are stated at lower of cost (determined by the first-in, first-
out method) or market. Inventories consist of nonperishable food and kitchen
supplies, nursing supplies, a base stock of linens, and other miscellaneous
supplies.
5. Property and equipment
Property and equipment is stated at cost. Depreciation is provided for using
the straight-line and the double-declining balance methods over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Building.......................................................... 40 years
Furniture and equipment........................................... 7-10 years
Land improvements................................................. 15 years
Capitalized interest.............................................. 28 years
Motor vehicle..................................................... 3 years
</TABLE>
6. Deferred costs and expenses
Costs of obtaining long-term financing are deferred and amortized over the
term of the related debt on the straight-line method.
7. Income taxes
The federal and state taxable income of Canterbury, Forest View, and
Laurelwood, all of which are S Corporations, is includable in the
shareholders' income tax returns. Accordingly, no provision for income taxes
has been reflected in the combined financial statements.
8. Use of Management's 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,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expense during the
reporting period. Actual results could differ from these estimates.
9. Reclassification
Certain 1995 amounts have been reclassified to conform to the 1996
presentation.
F-46
<PAGE>
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
NOTE C--ASSETS WHOSE USE IS LIMITED
Assets whose use is limited consists of cash held in debt service funds
established under terms of financing agreements (see note G). Canterbury and
Forest View also maintain checking accounts for the purpose of holding patient
fund deposits. Canterbury and Forest View are restricted from using this cash
for operations. A corresponding liability is recorded in current liabilities.
NOTE D--PROPERTY AND EQUIPMENT
Following is a summary of property and equipment--at cost, less accumulated
depreciation and amortization at December 31:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Land and improvements.............................. $ 946,813 $ 946,813
Building and improvements.......................... 10,949,532 10,961,056
Capitalized interest............................... 254,381 254,381
Furniture and equipment............................ 1,347,265 1,479,238
Motor vehicle...................................... 15,750 15,750
----------- -----------
13,513,741 13,657,238
Less: accumulated depreciation and amortization.... (817,654) (1,377,934)
----------- -----------
$12,696,087 $12,279,304
=========== ===========
</TABLE>
NOTE E--ACCRUED LIABILITIES
Following is a summary of accrued liabilities at December 31:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Salaries and wages........................................ $294,432 $355,714
Management fees (note G).................................. 250,620 46,350
Payroll taxes and fringes................................. 149,524 189,037
Property taxes............................................ 220,267 199,123
Other..................................................... 76,015 158,279
-------- --------
$990,858 $948,503
======== ========
</TABLE>
NOTE F--NOTE PAYABLE--BANK
Note payable--bank consists of a construction note, payable in monthly
installments of $15,000, plus interest at 8.70% through December 1997. The
note is secured by an Open-End Mortgage, Assignments of Leases and Rents, and
a security interest in all assets of Laurelwood and Forest View (see note G).
NOTE G--LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
CANTERBURY
Variable Rate Taxable Demand Notes, Series 1993..... $3,030,019 $2,795,000
FOREST VIEW
Variable Rate Taxable Demand Notes, Series 1994..... 2,519,800 2,339,800
---------- ----------
5,549,819 5,134,800
Less: current portion................................. (415,000) (415,000)
---------- ----------
$5,134,819 $4,719,800
========== ==========
</TABLE>
F-47
<PAGE>
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
Following are the principal maturities of long-term debt at December 31,
1996:
<TABLE>
<S> <C>
1997........................................................... $ 415,000
1998........................................................... 415,000
1999........................................................... 415,000
2000........................................................... 415,000
2001........................................................... 415,000
Thereafter..................................................... 3,059,800
----------
$5,134,800
==========
</TABLE>
The Variable Rate Taxable Demand Notes, Series 1993 (the Canterbury notes)
and the Variable Rate Taxable Demand Notes, Series 1994 (the Forest View
notes) are secured by irrevocable letters-of-credit from a bank. To obtain the
letters-of-credit, Canterbury and Forest View each granted the bank Open-End
Mortgages, Assignments of Leases and Rents, and security interests in their
personal property. In addition, Centurion Management Group, Inc. pledged its
accounts receivable and equipment. The shareholders of Canterbury and Forest
View are personal guarantors of the letters-of-credit and have pledged their
stock as additional collateral.
The notes are subject to annual redemptions pursuant to mandatory sinking
fund provisions. In addition, the notes are subject to early redemption at the
option of Canterbury or Forest View. Certain of the early redemption options
require payment of redemption premiums over and above the face values of the
notes.
The Canterbury and Forest View letters-of-credit expire on September 30,
1998, and November 30, 1999, respectively. The notes are subject to mandatory
redemption, at face value, if an extension or alternative letters-of-credit
are not in place at that time.
The notes bear interest initially at a variable rate based on the fair
market value of similar issues as determined by the remarketing agent. The
notes can be converted to a fixed rate at the option of Canterbury or Forest
View. The interest rates on the Canterbury notes were 6.10% and 6.03%, and on
the Forest View notes were 6.10% and 6.00%, at December 31, 1995 and 1996,
respectively. Additionally, Canterbury and Forest View pay the bank annual
line-of-credit fees in the amount of 1.5% and 1.25%, respectively.
The letter-of-credit agreements relating to these notes contain various
covenants pertaining to tangible net worth, cash flow coverage, and fixed
charge coverage ratios. Canterbury and Forest View were in compliance with
these covenants at December 31, 1996.
F-48
<PAGE>
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
NOTE H--RELATED-PARTY TRANSACTIONS
The following summarizes related-party transactions as of December 31, 1995
and 1996:
1. Certain of the Company's operating cash accounts are combined with the
cash of other related companies in a cash concentration account. The
purpose of the concentration account is to invest the combined excess
cash in overnight repurchase agreements with a bank. Following is a
summary of the reconciled balances (overdrafts) of the participating
companies and in total at December 31,:
<TABLE>
<CAPTION>
1995 1996
--------- -----------
<S> <C> <C>
GNWT, Inc., DBA Wood Glen Care Center.............. $ 314,667 $(1,527,164)
Laurelwood......................................... (299,450) 168,097
Forest View........................................ (761,984) 484,625
Centurion Management Group, Inc.................... (297,583) 269,723
Health Care Strategies, Inc., DBA The Riverside.... 818,896 2,044,228
Nursing Professionals, Inc......................... 316,588 369,222
GAN Enterprises.................................... (209,387) (264,349)
Centurion Medical Supplies, Inc.................... 196,762 199,655
Canterbury......................................... (755,119) (822,911)
Four Winds......................................... -- 140,513
GNWT Enterprises................................... -- (91)
The Colonnades..................................... -- (1,104,306)
--------- -----------
$(676,610) $ (42,758)
========= ===========
</TABLE>
The participating companies receive or pay interest on their share of
the concentration account balance. Canterbury, Forest View, and
Laurelwood have other cash accounts as follows at December 31,:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Canterbury................................................. $ 1,591 $11,000
Forest View................................................ 39,393 40,278
Laurelwood................................................. 900 500
------- -------
$41,884 $51,778
======= =======
</TABLE>
The combined balance sheets reflect the totals of the concentration
account and other cash account balances.
2. The Company is managed by Centurion Management Group (Centurion). The
principal shareholder of the Company is the principal shareholder of
Centurion. Management fees were $448,009 and $643,024, for 1995 and
1996, respectively.
3. The Company leases employees from Nursing Professionals, Inc. (NPI). The
principal shareholder of the Company owns NPI. There is no intercompany
or related-party profit as a result of this arrangement. Total leased
employee expense for 1995 and 1996, was $1,471,689 and $2,033,127,
respectively.
4. Canterbury purchases enteral and urological supplies from Centurion
Medical Supplies, Inc. (CMS), which is wholly-owned by the Company's
principal shareholder. Enteral and urological supplies purchased from
CMS for 1995 and 1996, were $4,256 and $0, respectively. At December 31,
1996, Canterbury had a long-term receivable from CMS of $78,661.
F-49
<PAGE>
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
5. Note payable--shareholder represents the cost incurred personally by one
of the shareholders to obtain the operating rights for Forest View. The
note was repaid in 1996. The note had no stated interest rate and none
was paid and charged to operations.
6. Related-party advances totaling $963,581 and $3,763,581, at December 31,
1995 and 1996, respectively, represent amounts advanced by GNWT, Inc.,
DBA Wood Glen Nursing Center (Wood Glen) to Forest View and Laurelwood.
These advances are related to the cost of financing and constructing
each of the facilities plus ongoing working capital needs. These
advances have no repayment terms and management does not anticipate any
repayment within the next year. When repayment begins, Laurelwood will
pay interest at 8.7%.
7. Wood Glen also loaned Forest View $1,200,000 in 1996 to be used to fund
operating activities. Terms of the loan included monthly payments of
interest only at 8.7%. No principal payments were made in 1996 and none
are anticipated within the next year.
NOTE I--THIRD-PARTY REIMBURSEMENT
1.Medicare
Under the Medicare program, Canterbury and Forest View (beginning in 1994)
are entitled to reimbursement which approximates the lower of cost (as
defined by the program) or charges for caring for its Medicare residents.
Following is a summary by year of Canterbury's and Forest View's Medicare
reimbursement settlement status:
a.1993
Canterbury received a 1993 Notice of Provider Reimbursement (NPR) and
corresponding audit report from the fiscal intermediary (FI) in 1995.
The NPR reflected a final settlement amount due to the Medicare program
of $7,103 which the FI recovered in 1995. Management contested the
final settlement amount and recorded $7,103 as a cost settlement
receivable at December 31, 1995. During 1996, management was precluded
from pursuing this issue by Medicare rules. The $7,103 is included in
the 1996 provision for contractual adjustments.
b.1994
Canterbury's 1994 Medicare Cost Report reflected a balance due from the
program of $38,901. A tentative settlement of $33,000 was received in
1995. Management estimated an additional $1,000 was due from the
program and was recorded as a cost settlement receivable at December
31, 1995. The tentative settlement plus the estimated receivable
(totaling $34,000) was included in the 1995 provision for contractual
adjustments. During 1996, the FI issued a 1995 NPR with a final
settlement amount of $2,754 due to the Medicare program. The total
settlement impact of $3,754 is included in the 1996 provision for
contractual adjustments.
Forest View filed a 1994 Medicare Cost Report during 1995. There was no
material amount due to or from the program.
c.1995
For Canterbury, management estimated that $5,900 was due from the
program and was recorded as a cost settlement receivable at December
31, 1995. During 1996, the FI issued a 1995 NPR which
F-50
<PAGE>
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
indicated a final settlement amount of $15,894 due to the program.
Management filed a Routine Cost Limitation (RCL) Exception Request in
1996. Management anticipates approval of the RCL Exception Request in
1997, and estimates that $76,825 is due from the program. A cost
settlement receivable of $60,931, the net of the $15,894 due to the
program, and the $76,825 due from the program is recorded at December
31, 1996, and included in the 1996 provision for contractual
adjustments.
For Forest View, management estimated that $7,482 was due from the
program at December 31, 1995, and was recorded as a cost settlement
receivable and included in the 1995 provision for contractual
adjustments. Before the cost report was filed, Forest View received
payments for 1995 Medicare days at a higher per diem rate which reduced
the cost settlement to zero. Forest View filed a 1995 Medicare Cost
Report which reflected an amount due to the Medicare program of
$39,426. This amount was repaid during 1996 and is included in the 1996
provision for contractual adjustments. Management estimates no material
amount due to or from the Medicare program at final settlement for this
period.
d.1996
Canterbury will file a 1996 Medicare Cost Report in 1997. Management
anticipates filing an RCL Exception Request in 1997, and estimates that
the Medicare program owes Canterbury $138,461. This amount is recorded
as a cost settlement receivable at December 31, 1996, and is included
in the 1996 provision for contractual adjustments.
Forest View will file a 1996 Medicare Cost Report in 1997. Management
estimates that $34,049 is due from the Medicare program. This amount is
recorded as a cost settlement receivable at December 31, 1996, and is
included in the 1996 provision for contractual adjustments.
The FI has the opportunity to audit the 1996 cost report and propose
adjustments to the amount of reimbursable cost. Management believes that there
will not be a significant impact on the financial statements as a result of
the intermediary's audit of the 1996 Medicare Cost Reports.
2.Medicaid
Since July 1, 1993, Medicaid payments are calculated and paid under a
prospective reimbursement system. Payment rates are based on actual cost
limited by certain ceilings, adjusted by a resident acuity factor, and
updated for inflation. While interim rates are subject to reconsideration
and appeal, once this process is completed, they are not subject to
subsequent retroactive adjustment. The direct care portion of the rate can
be adjusted prospectively for changes in acuity. Accordingly, there are no
cost settlements for rate adjustments under this system.
a.Fiscal Year 1994
In 1996, The Ohio Department of Human Services (ODHS) issued a fiscal
year 1994 (FY94) Rate Recalculation final settlement for Canterbury
which reflected no amount due to or from the Medicaid program.
Management executed a waiver and this period was adjudicated by the
ODHS.
b.Fiscal Year 1995
In 1996, the ODHS issued a fiscal year 1995 (FY95) Rate Recalculation
final settlement for Canterbury which reflected no amount due to or
from the Medicaid program. Management executed a waiver and this period
was adjudicated by the ODHS.
F-51
<PAGE>
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
Forest View began participating in the Ohio Medicaid program in
December 1994. Payments covering this date through June 30, 1995, were
used in the final settlement rate calculation issued in December 1996.
The final settlement reflected no amount due to or from the Medicaid
program. Management executed a waiver and this period was adjudicated
by the ODHS.
c.Fiscal Year 1996
In 1996, the ODHS paid Forest View for an individual who was no longer
a resident at the facility. At December 31, 1996, Forest View recorded
a liability to the ODHS of $25,070.
Following is a summary of the net cost settlement receivables at December 31,:
<TABLE>
<CAPTION>
RECEIVABLE (PAYABLE)
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Medicare............................................
1993.............................................. $ 7,103 $ --
1994.............................................. 1,000 --
1995.............................................. 13,382 60,931
1996.............................................. -- 172,510
--------- ----------
Total Medicare.................................. 21,485 233,441
Medicaid
FY97.............................................. -- (25,070)
Prior 1995........................................ (327) --
--------- ----------
Total Medicaid.................................. (327) (25,070)
--------- ----------
Total cost settlements.......................... $ 21,158 $ 208,371
========= ==========
</TABLE>
NOTE J--RETIREMENT PLAN
The Company sponsors a defined contribution pension plan under Section
401(k) of the Internal Revenue Code. The plan covers all employees who meet
certain eligibility requirements. Matching contributions are established each
year and are allocated based on employee contributions. During 1995 and 1996,
contributions of $6,000 and $23,841 respectively, were charged to operations.
NOTE K--LOSS CONTINGENCY
Laurelwood filed a lawsuit against Wilcon Corporation (Wilcon) and certain
of its principals in connection with construction of the facility. The suit
alleges breach of contract and various other torts and seeks damages in excess
of $1,000,000.
Wilcon has countersued and is seeking $1,000,000 in compensatory damages and
a claim for punitive damages. Laurelwood has withheld payment of certain
construction draws pending outcome of the litigation. In addition, the bank
has postponed conversion of the construction financing to a permanent note
until the litigation is resolved. The amount recorded is management's estimate
of the amount due Wilcon.
NOTE L--EVENT SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT AUDITORS
On August 1, 1997, the Company's assets were sold to an unrelated entity.
There was no loss incurred on these sales.
F-52
<PAGE>
SCHEDULE I
CERTAIN OFFICERS
<TABLE>
<CAPTION>
NAME OF OFFICER TITLE
- --------------- -----
<S> <C>
Bruce Beardsley.................. Senior Vice President, Acquisitions
Mary Anne Cherundolo............. Senior Vice President, Professional Services
Michael Gomez.................... Senior Vice President, Rehabilitation Services
Robert Ogle...................... Senior Vice President, Managed Care/Marketing
Steven Raso...................... Senior Vice President, Reimbursement
Lisa Vachet-Miller............... Vice President, Marketing
Janice Zdanis.................... Senior Vice President, Human Resources
</TABLE>
<PAGE>
ANNEX I
EXECUTION COPY
================================================================================
AGREEMENT AND PLAN OF MERGER
by and between
HH ACQUISITION CORP.
and
HARBORSIDE HEALTHCARE CORPORATION
__________________
April 15, 1998
__________________
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1
THE MERGER..........................................................2
Section 1.1 The Merger............................................2
Section 1.2 Closing; Effective Time...............................2
Section 1.3 Certificate of Incorporation..........................2
Section 1.4 By-laws...............................................2
Section 1.5 Directors and Officers................................3
ARTICLE 2
CONVERSION OF SHARES; STOCKHOLDER APPROVAL..........................3
Section 2.1 Effect on Capital Stock. ............................3
Section 2.2 Common Stock Elections................................5
Section 2.3 Proration.............................................6
Section 2.4 Treatment of Options; Directors Retainer
Fee Plan............................................8
Section 2.5 Payment for Common Stock..............................9
Section 2.6 Stockholders' Meeting; Proxy Statement...............12
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY......................13
Section 3.1 Organization.........................................13
Section 3.2 Capitalization.......................................13
Section 3.3 Subsidiaries.........................................14
Section 3.4 Authorization; Binding Agreement.....................14
Section 3.5 Noncontravention.....................................15
Section 3.6 Governmental Approvals...............................15
Section 3.7 SEC Filings; Financial Statements....................16
Section 3.8 Information Supplied.................................17
Section 3.9 Absence of Certain Changes or Events.................17
Section 3.10 Finders and Investment Bankers.......................18
Section 3.11 Voting Requirement...................................18
Section 3.12 Litigation...........................................18
Section 3.13 Taxes................................................19
Section 3.14 Compliance with Laws.................................19
Section 3.15 Title to Properties..................................21
Section 3.16 Other Agreements.....................................22
Section 3.17 Employee Benefit Plans...............................22
i
<PAGE>
Page
----
Section 3.18 Insurance............................................24
Section 3.19 Environmental Matters................................24
Section 3.20 Board Recommendation.................................25
ARTICLE 4
REPRESENTATIONS AND WARRANTIESOF MERGERCO..........................25
Section 4.1 Organization.........................................25
Section 4.2 Authorization; Binding Agreement.....................25
Section 4.3 Noncontravention.....................................26
Section 4.4 Governmental Approvals...............................26
Section 4.5 Information Supplied.................................27
Section 4.6 Financing............................................27
Section 4.7 Regulatory Approval..................................27
Section 4.8 Delaware Law.........................................27
ARTICLE 5
COVENANTS..........................................................27
Section 5.1 Conduct of Business of the Company...................27
Section 5.2 Access and Information...............................29
Section 5.3 No Solicitation......................................30
Section 5.4 Reasonable Efforts; Additional Actions...............31
Section 5.5 Notification of Certain Matters......................32
Section 5.6 Public Announcements.................................32
Section 5.7 Indemnification and Insurance........................33
Section 5.8 New York Stock Exchange Delisting....................34
Section 5.9 Affiliates...........................................34
Section 5.10 Resignation of Directors.............................34
Section 5.11 Cooperation With Proposed Financings.................34
Section 5.12 Stockholder Rights...................................35
Section 5.13 Minimum Equity of the Surviving Corporation..........35
ARTICLE 6
CONDITIONS.........................................................35
Section 6.1 Conditions to Each Party's Obligations...............35
Section 6.2 Conditions to Obligation of MergerCo to Effect
the Merger.........................................36
Section 6.3 Conditions to Obligation of the Company to
Effect the Merger..................................37
ii
<PAGE>
Page
----
ARTICLE 7
TERMINATION........................................................38
Section 7.1 Termination..........................................38
Section 7.2 Fees and Expenses....................................39
Section 7.3 Procedure for and Effect of Termination..............39
ARTICLE 8
MISCELLANEOUS......................................................39
Section 8.1 Certain Definitions..................................39
Section 8.2 Amendment and Modification...........................40
Section 8.3 Waiver of Compliance; Consents.......................41
Section 8.4 Survival.............................................41
Section 8.5 Notices..............................................41
Section 8.6 Assignment...........................................42
Section 8.7 Expenses.............................................42
Section 8.8 GOVERNING LAW........................................42
Section 8.9 Counterparts.........................................42
Section 8.10 Interpretation.......................................42
Section 8.11 Entire Agreement.....................................43
Section 8.12 No Third Party Beneficiaries.........................43
Section 8.13 Confidentiality Agreement............................43
SCHEDULE 8.1(b) - List of Facilities
EXHIBIT A - Form of Charter
EXHIBIT B - Form of Affiliate Letter
EXHIBIT C - Master Rights Agreement
EXHIBIT D - Third Party Consents
EXHIBIT E - List of Executive Officers
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of April 15, 1998, by and between
HH ACQUISITION CORP., a Delaware corporation ("MergerCo"), and HARBORSIDE
--------
HEALTHCARE CORPORATION, a Delaware corporation (the "Company"). MergerCo and
-------
the Company are sometimes collectively referred to herein as the "Constituent
-----------
Corporations."
- ------------
WHEREAS, the respective Boards of Directors of MergerCo and the Company
have approved the merger of MergerCo with and into the Company on the terms and
subject to the conditions set forth in this Agreement (the "Merger"), pursuant
------
to which each share of Common Stock, par value $.01 per share, of the Company
(the "Common Stock") issued and outstanding immediately prior to the Effective
------------
Time (as defined in Section 1.2) will be converted into either (A) the right to
receive cash or (B) subject to the terms hereof and other than as set forth
herein, the right to retain at the election of the holder thereof one share of
Common Stock;
WHEREAS, the Board of Directors of the Company has, in light of and
subject to the terms and conditions set forth herein, (i) determined that the
consideration to be paid for each share of Common Stock in the Merger is fair to
the stockholders of the Company, and the Merger is otherwise in the best
interests of the Company and its stockholders and (ii) resolved to approve and
adopt this Agreement and the transactions contemplated hereby and to recommend
approval and adoption by the stockholders of the Company of this Agreement;
WHEREAS, MergerCo is unwilling to enter into this Agreement unless,
contemporaneously with the execution and delivery of this Agreement, certain
stockholders of the Company enter into agreements (the "Stockholders
------------
Agreements") providing for certain actions relating to the shares of Common
Stock owned by them, and such stockholders have agreed to enter into the
Stockholders Agreements;
WHEREAS, concurrently with the execution of this Agreement, the Company
intends to enter into a Non-Compete Agreement with each of Douglas Krupp and
George Krupp, which Agreement shall become effective as of the Effective Time;
WHEREAS, it is intended that the Merger be recorded as a recapitalization
for financial reporting purposes; and
WHEREAS, MergerCo and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the Merger.
<PAGE>
2
NOW THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained herein, and intending to be legally bound
hereby, the parties hereto agree as follows:
ARTICLE 1
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions
----------
of this Agreement, at the Effective Time (as defined in Section 1.2) and in
accordance with the General Corporation Law of the State of Delaware (the
"DGCL"), MergerCo shall be merged with and into the Company, which shall be the
----
surviving corporation in the Merger (the "Surviving Corporation"). At the
---------------------
Effective Time, the separate existence of MergerCo shall cease and the other
effects of the Merger shall be as set forth in Section 259 of the DGCL.
Section 1.2 Closing; Effective Time. Subject to the provisions of
-----------------------
Article 6, the closing of the Merger (the "Closing") shall take place in New
-------
York City at the offices of Gibson, Dunn & Crutcher LLP, 200 Park Avenue, New
York, New York 10166, as soon as practicable but in no event later than 10:00
a.m. New York City time on the first business day after the date on which each
of the conditions set forth in Article 6 have been satisfied or waived by the
party or parties entitled to the benefit of such conditions, or at such other
place, at such other time or on such other date as MergerCo and the Company may
mutually agree. The date on which the Closing actually occurs is hereinafter
referred to as the "Closing Date." At the Closing, MergerCo and the Company
------------
shall cause a certificate of merger (the "Certificate of Merger") to be executed
---------------------
and filed with the Secretary of State of the State of Delaware in accordance
with the DGCL. The Merger shall become effective as of the date and time of
such filing, or such other time within 24 hours after such filing as MergerCo
and the Company shall agree to be set forth in the Certificate of Merger (the
"Effective Time").
- ---------------
Section 1.3 Certificate of Incorporation. At the Effective Time, and
----------------------------
without any further action on the part of the Company or MergerCo, the
certificate of incorporation of the Company, as in effect immediately prior to
the Effective Time, shall be amended so as to read in its entirety substantially
in the form set forth as Exhibit A hereto, and, as so amended, until thereafter
further amended as provided therein and under applicable law, it shall be the
certificate of incorporation of the Surviving Corporation.
Section 1.4 By-laws. The by-laws of MergerCo, as in effect
-------
immediately prior to the Effective Time, shall become, from and after the
Effective
<PAGE>
3
Time, the by-laws of the Surviving Corporation, until thereafter altered,
amended or repealed as provided therein and in accordance with applicable law.
Section 1.5 Directors and Officers. The directors of MergerCo and
----------------------
officers of the Company, respectively, immediately prior to the Effective Time
shall become, from and after the Effective Time, the directors and officers of
the Surviving Corporation, until their respective successors are duly elected or
appointed and shall qualify or their earlier resignation or removal.
ARTICLE 2
CONVERSION OF SHARES; STOCKHOLDER APPROVAL
Section 2.1 Effect on Capital Stock. As of the Effective Time, by
-----------------------
virtue of the Merger and without any action on the part of the holder of any
shares of Common Stock or any shares of capital stock of MergerCo:
(a) Capital Stock of MergerCo. Each share of capital stock of
-------------------------
MergerCo issued and outstanding immediately prior to the Effective Time shall be
converted into and become one share of the same class of capital stock of the
Surviving Corporation (as described in Exhibit A).
(b) Treasury Stock and MergerCo-Owned Stock. Each share of Common
---------------------------------------
Stock that is owned by the Company or any subsidiary of the Company and each
share of Common Stock that is owned by MergerCo or any affiliate of MergerCo
shall automatically be canceled and retired and shall cease to exist, and no
consideration shall be delivered in exchange therefor.
(c) Conversion (Or Retention) of Common Stock. Except as otherwise
-----------------------------------------
provided herein and subject to Sections 2.2 and 2.3, each issued and outstanding
share of Common Stock (each, a "Share") shall be converted into the following
-----
(the consideration set forth in clauses (i), (ii) and (iii) below being
collectively referred to as the "Merger Consideration"):
--------------------
(i) for each such Share with respect to which an election to
retain such Share has been effectively made pursuant to Section 2.2 and not
revoked or lost ("Electing Shares"), the right to retain one fully paid and
---------------
nonassessable Share (a "Non-Cash Election Share");
-----------------------
(ii) for an aggregate of 177,688 Shares held by Stephen L.
Guillard, the Chief Executive Officer of the Company, 47,563 Shares held by
Damian Dell'Anno, the Chief Operating Officer of the Company, and 400
Shares held by William H. Stephan, the Chief Financial
<PAGE>
4
Officer of the Company, the right to retain the same number of fully paid
and nonassessable Shares (the "Management Rollover Shares"), and for each
--------------------------
other Share held by such persons and each of the other executive officers
of the Company listed on Exhibit E hereto (the "Other Management Shares"),
-----------------------
the right to receive from the Company following the Merger the Cash
Election Price (defined below); and
(iii) for each such Share, other than Dissenting Shares (as
defined in Section 2.1(d)), Electing Shares, Management Rollover Shares and
Other Management Shares, the right to receive in cash, without interest,
from the Company following the Merger an amount equal to $25.00 (the "Cash
----
Election Price").
--------------
(d) Dissenting Shares. Notwithstanding anything in this Agreement to
-----------------
the contrary, each share of Common Stock that is issued and outstanding
immediately prior to the Effective Time and that is held by a stockholder who
has properly exercised and perfected appraisal rights under Section 262 of the
DGCL (the "Dissenting Shares"), shall not be converted into or exchangeable for
-----------------
the right to receive the Merger Consideration, but shall be entitled to receive
such consideration as shall be determined pursuant to Section 262 of the DGCL;
provided, however, that if such holder shall have failed to perfect or shall
- -------- -------
have effectively withdrawn or lost the right to appraisal and payment under the
DGCL, each share of Common Stock of such holder shall thereupon be deemed to
have been converted into and to have become exchangeable for, as of the
Effective Time, the right to receive the Merger Consideration consisting of the
Cash Election Price, without any interest thereon, in accordance with Section
2.1(c)(iii), and such shares shall no longer be Dissenting Shares. The Company
shall give reasonably prompt notice to MergerCo of any demands received by the
Company for appraisal of shares of Common Stock, and MergerCo shall have the
right to participate in all negotiations and proceedings with respect to such
demands. The Company shall not, except with the prior written consent of
MergerCo, make any payment with respect to, or settle or offer to settle, any
such demands.
(e) Cancellation and Retirement of Common Stock. Each Share converted
-------------------------------------------
into the right to receive the Cash Election Price pursuant to Section 2.1(c)
shall no longer be outstanding and shall automatically be canceled and retired
and shall cease to exist, and each holder of a certificate representing any such
Shares shall, to the extent such certificate represents such Shares, cease to
have any rights with respect thereto, except the right to receive the cash
applicable thereto, upon surrender of such certificate in accordance with
Section 2.5.
(f) Denomination of Shares. Each Share to be retained as part of the
----------------------
Merger Consideration shall be denominated as a share of Class A Common Stock as
of the Effective Time. As of the Effective Time, each share of Class B
<PAGE>
5
Stock, Class C Stock and Class D Stock of MergerCo issued and outstanding
immediately prior to the Effective Time shall be converted into Class B Common
Stock, Class C Common Stock and Class D Common Stock, as the case may be, of the
Surviving Corporation.
Section 2.2 Common Stock Elections.
----------------------
(a) Each person who, on or prior to the Election Date referred to in
clause (b) below, is a record holder of Shares will be entitled, with respect to
all or any portion of such holder's Shares, to make an unconditional election (a
"Non-Cash Election") on or prior to such Election Date to retain such Shares, on
-----------------
the basis hereinafter set forth below, subject to Section 2.3.
(b) MergerCo shall prepare and mail a form of election, which form
shall be subject to the reasonable approval of the Company (the "Form of
-------
Election"), to be mailed by the Company with the Proxy Statement (as defined in
- --------
Section 2.6) to the record holders of Shares as of the record date for the
Stockholders Meeting (as defined in Section 2.6), which Form of Election shall
be used by each record holder of Shares who wishes to elect to retain, subject
to the provisions of Section 2.3, any or all Shares held by such holder. The
Company will use its reasonable efforts to make the Form of Election and the
Proxy Statement available to all persons who become holders of Shares during the
period between such record date and the Election Date. Any such holder's
election to retain Shares shall have been properly made only if the Exchange
Agent (as defined in Section 2.5) shall have received at its designated office,
by 5:00 p.m., New York City time on the second business day next preceding the
date of the Stockholders Meeting (the "Election Date"), a Form of Election
-------------
properly completed and signed and accompanied by certificates for the Shares to
which such Form of Election relates, duly endorsed in blank or otherwise in form
acceptable for transfer on the books of the Company (or by an appropriate
guarantee of delivery of such certification as set forth in such Form of
Election from a firm which is a member of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or correspondent in the United
States, provided such certificates are in fact delivered to the Exchange Agent
within three New York Stock Exchange trading days after the date of execution of
such guarantee of delivery).
(c) Any Form of Election may be revoked by the holder submitting it to
the Exchange Agent only by written notice received by the Exchange Agent prior
to 5:00 p.m., New York City time, on the Election Date (unless MergerCo and the
Company determine not less than two business days prior to the Election Date
that the Effective Time is not likely to occur within five business days
following the date of the Stockholders Meeting, in which case the Form of
Election will remain revocable until a subsequent date which shall be a date
prior to the Effective Time determined by MergerCo and the Company). In
addition, all Forms
<PAGE>
6
of Election shall automatically be revoked if the Exchange Agent is notified in
writing by MergerCo and the Company that the Merger has been abandoned. If a
Form of Election is revoked, the certificate or certificates (or guarantees of
delivery, as appropriate) for the Shares to which such Form of Election relates
shall be promptly returned to the stockholder submitting the same to the
Exchange Agent.
(d) The determination of the Exchange Agent shall be binding as to
whether or not elections to retain Shares have been properly made or revoked
pursuant to this Section 2.2 and when elections and revocations were received by
it. If the Exchange Agent determines that any election to retain Shares was not
properly made, such Shares shall be treated by the Exchange Agent as Shares for
which no election was received, and such Shares shall be converted in accordance
with Sections 2.1(c)(iii). The Exchange Agent shall also make all computations
as to the allocation and the proration contemplated by Section 2.3, and any such
computation shall be conclusive and binding on the holders of Shares. The
Exchange Agent may, with the mutual agreement of MergerCo and the Company, make
such rules as are consistent with this Section 2.2 for the implementation of the
elections provided for herein as shall be necessary or desirable fully to effect
such elections.
Section 2.3 Proration.
---------
(a) Notwithstanding anything in this Agreement to the contrary, the
aggregate number of Shares (other than Management Rollover Shares) to be
converted into the right to retain Shares at the Effective Time (the "Non-Cash
--------
Election Number") shall be equal to the product (rounded to the nearest whole
- ---------------
number) of (i) the sum of (A) the total number of shares of Common Stock (if
any), Class A Stock (if any), Class B Stock, Class C Stock and Class D Stock of
MergerCo outstanding immediately prior to the Effective Time (the "Non-Preferred
-------------
MergerCo Shares") plus (B) the Management Rollover Shares, multiplied by (ii)
- ---------------
0.06383; provided that the Non-Cash Election Number shall not be less than
--------
361,500, nor more than 500,600.
(b) If the number of Electing Shares exceeds the Non-Cash Election
Number, then each Electing Share shall be converted into the right to retain
Non-Cash Election Shares or receive cash in accordance with the terms of Section
2.1(c) in the following manner:
(i) a proration factor (the "Non-Cash Proration Factor") shall be
-------------------------
determined by dividing the Non-Cash Election Number by the total number of
Electing Shares;
(ii) the number of Electing Shares covered by each Non-Cash
Election to be converted into the right to retain Non-Cash Election Shares
shall be determined by multiplying the Non-Cash Proration Factor by
<PAGE>
7
the total number of Electing Shares covered by such Non-Cash Election,
rounded down to the nearest whole number; and
(iii) all Electing Shares, other than those shares converted
into the right to receive Non-Cash Election Shares in accordance with
Section 2.3(b)(ii) shall be converted into cash (on a consistent basis
among stockholders who made the election referred to in Section 2.1(c)(i),
pro rata to the number of Shares as to which they made such election) as if
such Shares were not Electing Shares in accordance with the terms of
Section 2.1(c)(iii).
(c) If the number of Electing Shares is less than the Non-Cash
Election Number, then:
(i) all Electing Shares shall be converted into the right to
retain Shares in accordance with the terms of Section 2.1(c)(i);
(ii) additional Shares (other than Electing Shares, Dissenting
Shares and Management Rollover Shares) shall be converted into the right to
retain Non-Cash Election Shares in accordance with the terms of 2.1(c) in
the following manner:
(1) a proration factor (the "Cash Proration Factor") shall be
---------------------
determined by dividing (x) the difference between the Non-Cash Election
Number and the number of Electing Shares, by (y) the total number of
Shares (other than Electing Shares, Dissenting Shares and Management
Rollover Shares); and
(2) the number of Shares in addition to Electing Shares to be
converted into the right to retain Non-Cash Election Shares shall be
determined by multiplying the Cash Proration Factor by the total number
of Shares (other than Electing Shares, Dissenting Shares and Management
Rollover Shares), rounded down to the nearest whole number; and
(iii) subject to Section 2.1(d), Shares subject to clause (ii)
of this paragraph (c) shall be converted into the right to retain Non-Cash
Election Shares in accordance with Section 2.1(c)(i) (on a consistent basis
among stockholders who held Shares as to which they did not make the
election referred to in Section 2.1(c)(i), pro rata to the number of Shares
as to which they did not make such election).
<PAGE>
8
Section 2.4 Treatment of Options; Directors Retainer Fee Plan.
-------------------------------------------------
(a) Immediately prior to the Effective Time, each outstanding option
(a "Company Stock Option") to purchase shares of Common Stock, shall become
--------------------
immediately vested and exercisable in full, subject to all expiration, lapse and
other terms and conditions thereof.
(b) Subject to Section 2.4(c), the Company shall take all action
necessary so that each Company Stock Option (and any rights thereunder)
outstanding immediately prior to the Effective Time shall be canceled
immediately prior to the Effective Time in exchange for the right to receive an
amount in cash equal to the product of (A) the number of shares of Common Stock
subject to such Company Stock Option immediately prior to the Effective Time
(after giving effect to Section 2.4(a)) and (B) the excess, if any, of the Cash
Election Price over the per share exercise price of such Company Stock Option,
to be delivered by the Surviving Corporation immediately following the Effective
Time. All applicable withholding taxes attributable to the payments made
hereunder or to distributions contemplated hereby shall be deducted from the
amounts payable under this Section 2.4 and all such taxes attributable to the
exercise of Company Stock Options shall be withheld from the proceeds received
in respect of the shares of Common Stock issuable upon such exercise.
(c) Notwithstanding the provisions of Section 2.4(b), each person who,
on or prior to the Election Date, is the holder of a Company Stock Option will
be entitled, with respect to all or any portion of such holder's Company Stock
Option, to make an unconditional election to the Company in writing (a
"Retention Election") on or prior to the Election Date, to retain such portion
- -------------------
of their Company Stock Options in lieu of receiving a cash payment in
consideration for the cancellation of such portion of their Company Stock
Options in the manner described in Section 2.4(b). Any portion of a Company
Stock Option with respect to which a timely Retention Election has been
delivered to the Company (the "Elected Portion") shall, whether or not then
---------------
vested or exercisable, effective as of the Effective Time, become and represent
an option (a "Continuing Option") for the number of Shares subject to the
-----------------
Elected Portion of such Company Stock Option immediately prior to the Effective
Time at an exercise price per share equal to the exercise price of such Company
Stock Option immediately prior to the Effective Time. After the Effective Time,
each Continuing Option shall (unless otherwise agreed by the Company and the
holder of such Continuing Option) be subject to the same terms and conditions as
were applicable to the related Company Stock Option immediately prior to the
Effective Time, provided that all such Continuing Options shall as of the
Effective Time be immediately fully vested and exercisable.
(d) The Company has adopted a Directors Retainer Fee Plan (the "Fee
---
Plan") pursuant to which eligible directors may elect to receive certain fees
- ----
<PAGE>
9
in cash or in shares of Common Stock or to defer payment of such fees and credit
such fees to an account (the "Share Unit Account") consisting of units that are
------------------
equivalent in value to shares of Common Stock ("Share Units"). The Company
-----------
shall take all actions necessary so that all Share Units outstanding immediately
prior to the Effective Time shall be canceled immediately prior to the Effective
Time in exchange for the right of each holder of Share Units to receive an
amount in cash equal to the product of (A) the number of Share Units in such
holder's Share Unit Account outstanding immediately prior to the Effective Time
and (B) the Cash Election Price to be delivered by the Surviving Corporation
immediately following the Effective Time. All applicable withholding taxes
attributable to the payments contemplated by this Section 2.4(d) shall be
deducted from the amounts payable under this Section 2.4(d). Except as provided
in this Section 2.4(d), the Fee Plan shall terminate at the Effective Time.
Section 2.5 Payment for Common Stock.
------------------------
(a) Exchange Agent. On or before the Effective Time, MergerCo shall
--------------
cause to be deposited in trust with a bank or trust company designated by
MergerCo and reasonably satisfactory to the Company (the "Exchange Agent") the
--------------
aggregate Merger Consideration to which holders of Common Stock shall be
entitled at the Effective Time pursuant to Section 2.1 (the "Payment Fund").
------------
MergerCo shall cause the Exchange Agent to make the payments provided for in Sec
tion 2.1 out of the Payment Fund (other than Section 2.4 which shall be paid by
the Surviving Corporation immediately following the Effective Time and other
than Section 2.1(d)). The Exchange Agent shall invest undistributed portions of
the Payment Fund as MergerCo directs in obligations of or guaranteed by the
United States of America, in commercial paper obligations receiving the highest
investment grade rating from both Moody's Investor Services, Inc. and Standard &
Poor's Corporation, or in certificates of deposit, bank repurchase agreements or
banker's acceptances of commercial banks with capital exceeding $1,000,000,000
(collectively, "Permitted Investments"); provided, however, that the maturities
--------------------- -------- -------
of Permitted Investments shall be such as to permit the Exchange Agent to make
prompt payment to former holders of shares of Common Stock entitled thereto as
contemplated by this Section. MergerCo shall cause the Payment Fund to be
promptly replenished to the extent of any losses incurred as a result of
Permitted Investments. All net earnings of Permitted Investments shall be paid
to MergerCo as and when requested by MergerCo. If for any reason (including
losses) the Payment Fund is inadequate to pay the amounts to which holders of
Common Stock shall be entitled under Section 2.1 or this Section 2.5, MergerCo
shall in any event be liable for payment thereof. The Payment Fund shall not be
used for any purpose except as expressly provided in this Agreement. If any
cash or cash equivalents deposited with the Exchange Agent for purposes of
paying the Merger Consideration for the Common Stock pursuant to this Article 2
remain unclaimed following the expiration of one year after the Effective Time,
such cash or cash equivalents (together with accrued
<PAGE>
10
interest) shall be delivered to the Surviving Corporation by the Exchange Agent
and, thereafter, holders of certificates that immediately prior to the Effective
Time represented shares of Common Stock shall be entitled to look only to the
Surviving Corporation (subject to abandoned property, escheat or similar laws)
as general creditors thereof.
(b) Exchange. Promptly after the Effective Time, MergerCo shall cause
--------
the Exchange Agent to mail to each holder of record of a certificate or
certificates that immediately prior to the Effective Time represented
outstanding shares of Common Stock (the "Certificates") a form letter of
------------
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Exchange Agent) and instructions for use in effecting the
surrender of the Certificates for payment therefor. In effecting the payment of
the Cash Election Price in respect of Shares represented by Certificates
entitled to payment of the Cash Election Price pursuant to Section 2.1 (the
"Cashed Shares"), upon the surrender of each such Certificate, the Exchange
- --------------
Agent shall pay the holder of such Certificate the Cash Election Price
multiplied by the number of Cashed Shares, in consideration therefor. Upon such
payment (and the exchange, if any, of Certificates formerly representing Shares
for certificates representing Non-Cash Election Shares) such Certificate shall
forthwith be canceled. In effecting the exchange of Non-Cash Election Shares in
respect of Shares represented by Certificates which, at the Effective Time,
shall become Non-Cash Election Shares, upon surrender of each such Certificate,
the Exchange Agent shall deliver to the holder of such Certificate a certificate
representing that number of whole Non-Cash Election Shares which such holder has
the right to receive pursuant to the provisions of Section 2.1, and cash in lieu
of fractional Non-Cash Election Shares. Upon such exchange (and any payment of
the Cash Election Price for Cashed Shares), such Certificate so surrendered
shall forthwith be canceled. No interest will be paid or accrued on the cash
payable upon the surrender of the Certificates. If the payment is to be made to
a person other than the person in whose name a Certificate surrendered is
registered, it shall be a condition of payment that (a) the Certificate so
surrendered shall be properly endorsed or otherwise in proper form for transfer
and (b) the person requesting such payment shall pay any transfer or other taxes
required by reason of the payment to a person other than the registered holder
of the Certificate surrendered or establish to the satisfaction of the Surviving
Corporation that such tax has been paid or is not applicable. Until surrendered
in accordance with the provisions of this Section 2.5, each Certificate shall
represent for all purposes whatsoever only the right to receive the Merger
Consideration applicable thereto, without any interest thereon.
(c) Distribution with Respect to Unexchanged Shares. No dividends or
-----------------------------------------------
other distributions with respect to retained Shares with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Certificate for
Shares with respect to the retained Shares represented thereby and no cash
<PAGE>
11
payment in lieu of fractional Shares shall be paid to any such holder pursuant
to Section 2.5(e) until the surrender of such Certificate in accordance with
Article 2. Subject to the effect of applicable laws, following surrender of any
such Certificate, there shall be paid to the holder of the certificate
representing whole shares of retained Shares issued in connection therewith,
without interest, at the time of such surrender or as promptly thereafter as
practicable, the amount of any cash payable in lieu of a fractional Share to
which such holder is entitled pursuant to Section 2.5(e) and the proportionate
amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole retained Shares, and
at the appropriate payment date, the proportionate amount of dividends or other
distributions with a record date after the Effective Time but prior to such
surrender and a payment date subsequent to such surrender payable with respect
to such whole retained Shares.
(d) No Further Ownership Rights in Shares Exchanged for Cash. All
--------------------------------------------------------
cash paid upon the surrender for exchange of Certificates in accordance with the
terms of Article 2 shall be deemed to have been issued (and paid) in full
satisfaction of all rights pertaining to the Shares exchanged for cash
theretofore represented by such Certificates.
(e) No Fractional Shares. No certificates or scrip representing
--------------------
fractional retained Shares shall be issued in connection with the Merger, and
such fractional share interests will not entitle the owner thereof to vote or to
any rights of a stockholder of the Surviving Corporation after the Merger.
Notwithstand ing any other provision of this Agreement, each record holder of
Shares exchanged pursuant to the Merger who would otherwise have been entitled
to receive a fraction of a retained Share (after taking into account all Shares
delivered by such holder) shall receive, in lieu thereof, a cash payment
(without interest) equal to such fraction multiplied by the Cash Election Price.
(f) No Transfers. After the Effective Time there shall be no
------------
transfers on the stock transfer books of the Surviving Corporation of the shares
of Common Stock that were outstanding immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation for transfer or for any other reason, they shall be canceled and
exchanged for cash as provided in this Article 2, except as otherwise provided
by law.
(g) No Liability. None of MergerCo, the Company or the Exchange Agent
------------
shall be liable to any person in respect of any Non-Cash Election Shares (or
dividends or distributions with respect thereto) or cash from the Payment Fund
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law. If any Certificate shall not have been surrendered
prior to seven years after the Effective Time (or immediately prior to such
earlier date on which any Merger Consideration payable to the holder of such
Certificate pursuant to
<PAGE>
12
this Article 2 would otherwise escheat to or become the property of any
Governmental Entity (as defined in Section 3.6)), any such Merger Consideration
shall, to the extent permitted by applicable law, become the property of the
Surviving Corporation, free and clear of all claims or interest of any person
previously entitled thereto.
Section 2.6 Stockholders' Meeting; Proxy Statement.
--------------------------------------
(a) Stockholders Meeting. The Company will, as promptly as
--------------------
practicable following the date of this Agreement, (i) take all action necessary
in accordance with applicable law to convene a meeting of its stockholders for
the purpose of considering, approving and adopting this Agreement and the
transactions contemplated hereby (the "Stockholders Meeting"), (ii) include in
--------------------
the Proxy Statement (as defined in Section 2.6(b)) the recommendation of the
Board of Directors of the Company (the "Board") that the stockholders of the
-----
Company vote in favor of the approval and adoption of this Agreement and the
transactions contemplated hereby, and the written opinion of Schroder & Co. Inc.
("Schroders"), the Board's financial advisor, that the consideration to be
---------
received by the stockholders of the Company pursuant to the Merger is fair to
such stockholders from a financial point of view and (iii) use its reasonable
best efforts to obtain the necessary approval of this Agreement and the
transactions contemplated hereby by its stockholders; provided, however, that
-------- -------
the Board may fail to make or may withdraw or modify such recommendation or fail
to seek such approval and adoption if one or more persons or group shall have
made an Acquisition Proposal (as defined in Section 5.3) and the Board shall
have determined in good faith, after consultation with outside counsel, that it
is obligated by its fiduciary duty under applicable law to do so.
(b) Proxy Statement. Promptly following the date of this Agreement,
---------------
the Company shall prepare a proxy statement relating to the Stockholder's
Meeting (as amended or supplemented, the "Proxy Statement") and the Company
---------------
shall prepare and file with the Securities and Exchange Commission (the "SEC") a
---
registration statement on Form S-4 (as amended or supplemented, the "Form S-4"),
--------
in which the Proxy Statement will be included. The Company shall use its
reasonable best efforts to have the Form S-4 declared effective under the
Securities Act of 1933, as amended (the "Securities Act"), as promptly as
--------------
practicable after such filing. The Company shall also take any action required
to be taken under any applicable state securities laws in connection with the
registration and qualification of the Non-Cash Election Shares in connection
with the Merger. MergerCo and the Company will cooperate with each other in the
preparation of the Proxy Statement. Without limiting the generality of the
foregoing, the Company will as promptly as practicable notify MergerCo of the
receipt of any comments from the SEC and any request by the SEC for any
amendment to the Proxy Statement or for additional information. All filings
with the SEC, including the Proxy Statement and any amendment thereto, and all
mailings to the Company's stockholders in connection with the Merger, including
the
<PAGE>
13
Proxy Statement, shall be subject to the prior review, comment and approval of
MergerCo (which approval by MergerCo shall not be unreasonably withheld or
delayed). MergerCo will furnish to the Company the information relating to it
required by the Securities Act, the Exchange Act and the rules and regulations
promulgated thereunder to be set forth in the Proxy Statement. The Company
agrees to use its reasonable best efforts to respond promptly to any comments
made by the SEC with respect to the Proxy Statement and any preliminary version
thereof filed by it and cause such Proxy Statement to be mailed to the Company's
stockholders at the earliest practicable time.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company represents and warrants to MergerCo as follows:
Section 3.1 Organization. The Company and each of its subsidiaries is
------------
duly incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite power and authority to
own, lease and operate its properties and to carry on its business as now being
conducted. The Company and each of its subsidiaries is duly qualified to do
business and in good standing in its jurisdiction of organization and in each
jurisdiction in which the property owned, leased or operated by it or the nature
of the business conducted by it makes such qualification necessary, except for
such failures to be so duly qualified and in good standing that, individually or
in the aggregate, will not have a Material Adverse Effect (as defined in Section
8.1(e)) with respect to the Company. The Company has previously delivered (or,
in the case of subsidiaries, delivered or made available) to MergerCo correct
and complete copies of the certificates of incorporation and by-laws (or
equivalent governing instruments), as currently in effect, of the Company and
each of its subsidiaries.
Section 3.2 Capitalization. The authorized capital stock of the
--------------
Company consists of 30,000,000 shares of Common Stock, $.01 par value per share,
and 1,000,000 shares of Preferred Stock, $.01 par value per share. As of April
9, 1998, there were (i) no shares of Preferred Stock issued or outstanding, (ii)
8,011,664 shares of Common Stock issued and outstanding, (iii) 759,417 shares of
Common Stock issuable upon the exercise of outstanding stock options and (iv) no
shares of capital stock of the Company held in the treasury of the Company.
Section 3.2 of the letter delivered to MergerCo concurrently herewith (the
"Disclosure Letter") sets forth a complete and accurate schedule as of the date
- ------------------
hereof of all outstanding options to purchase Common Stock, identifying the
holder of each such option and applicable exercise price. Since February 28,
1998, no additional shares of capital stock have
<PAGE>
14
been issued by the Company (except such shares of Common Stock if any, that have
been issued pursuant to the exercise of stock options so identified in Section
3.2 of the Disclosure Letter) and, except as set forth in Section 3.2 of the
Disclosure Letter, no additional stock options or other stock rights have been
granted. All issued and outstanding shares of Common Stock have been duly
authorized and are validly issued, fully paid, nonassessable and free of
preemptive rights. Except as disclosed in this Section 3.2 or in Section 3.2 of
the Disclosure Letter, as of April 9, 1998, (A) there are no outstanding
securities, options, warrants, calls, rights, commitments, agreements,
arrangements or undertakings of any kind to which the Company or any of its
subsidiaries is a party or by which any of them is bound obligating the Company
or any of its subsidiaries to issue, sell, redeem or otherwise acquire or vote
any shares of capital stock or other equity securities of the Company or of any
of its subsidiaries and (B) the Company is not a party to or bound by (x) any
agreement or commitment pursuant to which the Company is or could be required to
register any securities under the Securities Act or (y) any debt agreements or
instruments which grant any rights to vote (contingent or otherwise) on matters
on which stockholders of the Company may vote.
Section 3.3 Subsidiaries. Except as disclosed in the SEC Filings (as
------------
defined in Section 8.1(g)) or in Section 3.3 of the Disclosure Letter, the
Company does not own, directly or indirectly, (a) any shares of capital stock of
any subsidiary of the Company or (b) any other equity interest in any person,
domestic or foreign, having a cost or fair value in excess of $500,000. All of
the outstanding shares of capital stock and all equity interests of each of the
Company's subsidiaries that are owned by the Company or any other subsidiary of
the Company (collectively, the "Subsidiary Shares") have been duly authorized
-----------------
and are validly issued, fully paid and nonassessable and free of preemptive
rights. There are no irrevocable proxies or similar obligations with respect to
any of the Subsidiary Shares and, except as set forth in Section 3.3 of the
Disclosure Letter, all of the Subsidiary Shares are owned by the Company free
and clear of all liens, claims, charges, encumbrances or security interests
(collectively, "Liens") with respect thereto. Except as disclosed in Section
-----
3.3 of the Disclosure Letter, the Company owns and has full voting and
disposition power over all of the equity interests of each of its subsidiaries.
Section 3.4 Authorization; Binding Agreement. The Company has the
--------------------------------
full corporate power and authority to execute and deliver this Agreement and,
subject to adoption of this Agreement by the stockholders of the Company in
accordance with the DGCL, the certificate of incorporation and by-laws of the
Company, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly and validly authorized by all necessary corporate action
on the part of the Company, subject to the adoption of this Agreement by the
stockholders of the Company in accordance with the DGCL and the certificate of
incorporation and by-laws of the Company. This Agreement has been duly and
validly executed and
<PAGE>
15
delivered by the Company and, subject, in the case of the Merger, to the
adoption of this Agreement by the stockholders of the Company in accordance with
the DGCL and the certificate of incorporation and by-laws of the Company,
constitutes a legal, valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms except as may be limited by (a)
bankruptcy, insolvency, reorganization or other laws now or hereafter in effect
relating to creditors' rights generally and (b) general principles of equity
(regardless of whether enforceability is considered in a proceeding at law or in
equity).
Section 3.5 Noncontravention. Neither the execution and delivery of
----------------
this Agreement nor the consummation of the transactions contemplated hereby will
(a) conflict with or result in any violation of any provision of the certificate
of incorporation or by-laws (or equivalent governing instruments) of the Company
or any of its subsidiaries, (b) except as set forth in Section 3.5 of the
Disclosure Letter, require any consent, approval or notice under, or conflict
with or result in a violation or breach of, or constitute (with or without
notice or lapse of time or both) a default (or give rise to any right of
termination, cancellation or acceleration) under, any of the terms, conditions
or provisions of any note, bond, mortgage, indenture, lease, agreement or other
instrument or obligation (collectively, "Contracts and Other Agreements") to
------------------------------
which the Company or any of its subsidiaries is a party or by which any of them
or any portion of their properties or assets may be bound or (c) subject to the
approvals, filings and consents referred to in Section 3.6, violate any order,
judgment, writ, injunction, determination, award, decree, law, statute, rule or
regulation (collectively, "Legal Requirements") applicable to the Company or any
------------------
of its subsidiaries or any portion of their properties or assets, except in the
case of clauses (b) and (c), with respect to matters that will not, individually
or in the aggregate, (w) cause the Company or any of its subsidiaries to be in
default (with or without notice or lapse of time or both) or give rise to any
right of termination, cancellation or acceleration under any Facilities Lease
(as defined in Section 8.1(c)) or any indebtedness which is secured by any of
the Facilities or result in any violation of any Legal Requirements regulating
ownership or control of any of the Facilities (as defined in Section 8.1(b)) the
consequence of which in each case would be to jeopardize the ability of the
Company or any of its subsidiaries to lawfully continue to operate, own or
control such Facility, (x) have a Material Adverse Effect with respect to the
Company, (y) impair the ability of the Company to perform its obligations under
this Agreement in any material respect or (z) delay in any material respect or
prevent the consummation of any of the transactions contemplated by this
Agreement.
Section 3.6 Governmental Approvals. Except as set forth in Section
----------------------
3.6 of the Disclosure Letter, no consent, approval or authorization of or
declaration or filing with any foreign, federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality
(each, a "Governmental Entity") on the part of the Company or any of its
-------------------
subsidiaries that has not been obtained or made is required in connection with
the execution or delivery by the
<PAGE>
16
Company of this Agreement or the consummation by the Company of the transactions
contemplated hereby, other than (a) the filing of the Certificate of Merger with
the Secretary of State of the State of Delaware, (b)(1) filings and other
applicable requirements under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"), and (2) the filing with the SEC of (A) the
-------
Proxy Statement and the Form S-4, and (B) such reports and other filings under
the Securities Act and the Exchange Act as may be required in connection with
this Agreement and the transactions contemplated by this Agreement, (c) the
filing of appropriate documents with the relevant authorities of states other
than Delaware in which the Company or any of its subsidiaries is authorized to
do business, (d) such filings as may be required in connection with any state or
local tax which is attributable to the beneficial ownership of the Company's or
its subsidiaries', real property, if any, (e) such filings as may be required by
any applicable state securities or "blue sky" laws or state takeover laws, (f)
such filings and consents as may be required under any health care licensure
laws, reimbursement authorities and their agents, certificate of need laws and
other health care laws and regulations, pertaining to any notification,
disclosure or required approval required by the Merger or the transactions
contemplated by this Agreement and (g) consents, approvals, authorizations,
declarations or filings that, if not obtained or made, will not, individually or
in the aggregate, (w) cause the Company or any of its subsidiaries to be in
default (with or without notice or lapse of time or both) or give rise to any
right of termination, cancellation or acceleration under any Facilities Lease
(as defined in Section 8.1(c)) or any indebtedness which is secured by any of
the Facilities or result in any violation of any Legal Requirements regulating
ownership or control of any of the Facilities (as defined in Section 8.1(b)) the
consequence of which in each case would be to jeopardize the ability of the
Company or any of its subsidiaries to lawfully continue to operate, own or
control such Facility, (x) result in a Material Adverse Effect with respect to
the Company, (y) impair the ability of the Company to perform its obligations
under this Agreement in any material respect or (z) delay in any material
respect or prevent the consummation of any of the transactions contemplated by
this Agreement.
Section 3.7 SEC Filings; Financial Statements. Except as described in
---------------------------------
Section 3.7 of the Disclosure Letter, the Company has made all required SEC
Filings. As of their respective dates, the SEC Filings complied as to form in
all material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the SEC
promulgated thereunder applicable to such SEC Filings, and the SEC Filings did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
financial statements set forth in the SEC Filings comply as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC promulgated under the Securities Act or the
Exchange Act, as the case may be, and have been prepared in accordance with
generally accepted accounting principles applied on a consistent
<PAGE>
17
basis during the periods involved (except as may be indicated in the notes to
such financial statements) and fairly present in all material respects the
consolidated financial position of the Company and its subsidiaries at the
respective dates thereof and the consolidated results of operations and cash
flows for the respective periods then ended (subject, in the case of unaudited
interim financial statements, to exceptions permitted by Form 10-Q under the
Exchange Act and to normal year-end adjustments).
Section 3.8 Information Supplied. Neither the Form S-4 nor the Proxy
--------------------
Statement will at the date the Proxy Statement is first mailed to the Company's
stockholders and at the time of the meeting of the Company's stockholders held
to vote on approval and adoption of this Agreement, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading, except that no
representation or warranty is made by the Company with respect to statements
made based on information supplied by MergerCo in writing specifically for
inclusion therein. The Proxy Statement will comply as to form in all material
respects with the requirements of the Exchange Act and the rules and regulations
thereunder, except that no representation or warranty is made by the Company
with respect to statements made therein based on information supplied by
MergerCo in writing specifically for inclusion therein.
Section 3.9 Absence of Certain Changes or Events. Except as disclosed
------------------------------------
in the SEC Filings or set forth in Section 3.9 of the Disclosure Letter, since
December 31, 1997 the Company and its subsidiaries have conducted their
respective businesses in the ordinary course consistent with past practice and
there has not been (i) any condition, event or occurrence (including, without
limitation, any regulatory development, publication or announcement regarding
the "Prospective Payment System for Skilled Nursing Facilities" as contemplated
by Section 4432 of Chapter 3 of Subtitle E of the Balanced Budget Act of 1997 or
any other change in Medicare reimbursement methodologies, rates or conditions
having revenue or cost structure implications for skilled nursing facilities)
that, individually or in the aggregate, has resulted or is reasonably likely to
result in a Material Adverse Effect with respect to the Company, (ii) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to any of the Company's
capital stock, (iii) any split, combination or reclassification of any of its
capital stock or any issuance or the authorization of any issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, (iv) (x) any granting by the Company or any of its subsidiaries
to any executive officer or other key employee of the Company or any of its
subsidiaries of any increase in compensation, except for normal increases in the
ordinary course of business consistent with past practice or as required under
employment agreements in effect as of December 31, 1997, (y) any granting by the
Company or any of its subsidiaries to any such executive officer of any increase
in severance or termination pay, except as was required under any
<PAGE>
18
employment, severance or termination agreements in effect as of December 31,
1997 or (z) any entry by the Company or any of its subsidiaries into any
employment, severance or termination agreement with any such executive officer
except in the ordinary course of business consistent with past practice, (v) any
damage, destruction or loss to property, whether or not covered by insurance,
that has had or will have a Material Adverse Effect with respect to the Company
or (vi) except insofar as may have been disclosed in the SEC Filings or required
by a change in generally accepted accounting principles, any change in
accounting methods, principles or practices except as required by generally
accepted accounting principles. Except (i) for liabilities or obligations
incurred in the ordinary course of business, (ii) for liabilities or obligations
incurred in connection with the transactions contemplated by this Agreement,
(iii) as disclosed in the SEC Filings or in Section 3.9 of the Disclosure
Letter, since December 31, 1997, the Company and its subsidiaries have not
incurred any liabilities or obligations (whether absolute, accrued, contingent
or otherwise) that would constitute a Material Adverse Effect with respect to
the Company and that would be required to be reflected in or reserved against a
consolidated balance sheet of the Company prepared in accordance with generally
accepted accounting principles.
Section 3.10 Finders and Investment Bankers. Neither the Company nor
------------------------------
any of its officers or directors has employed any investment banker, business
consultant, financial advisor, broker or finder in connection with the
transactions contemplated by this Agreement, except for Schroders, or incurred
any liability for any investment banking, business consultancy, financial
advisory, brokerage or finders' fees or commissions in connection with the
transactions contemplated hereby, except for fees payable to Schroders. The
amount of such fees payable to Schroders and the terms related thereto have been
previously and accurately disclosed in writing to MergerCo.
Section 3.11 Voting Requirement. The affirmative vote of the holders
------------------
of a majority of the outstanding shares of Common Stock in favor of adoption of
this Agreement and the Merger is the only vote of the holders of any class or
series of the Company's capital stock necessary to approve this Agreement and
the transactions contemplated hereby under any applicable law, rule or
regulation or pursuant to the requirements of the Company's certificate of
incorporation or by-laws.
Section 3.12 Litigation. Except as disclosed in the SEC Filings or in
----------
Section 3.12 of the Disclosure Letter, there is no suit, action, investigation
or proceeding pending or, to the knowledge of the Company, threatened in writing
against the Company or any of its subsidiaries that, individually or in the
aggregate, has had or is reasonably likely to have a Material Adverse Effect
with respect to the Company, nor is there any judgment, decree, injunction, rule
or order of any Governmental Entity or arbitrator outstanding against the
Company or any of its subsidiaries having any such effect.
<PAGE>
19
Section 3.13 Taxes. The Company and any consolidated, combined,
-----
unitary or aggregate group for tax purposes of which the Company is or has been
a member has timely filed all Tax Returns (defined below) required to be filed
by it and has paid, or has set up an adequate reserve for the payment of, all
Taxes (defined below) required to be paid for the taxable periods covered by
such returns, other than Taxes that it is contesting in good faith in
appropriate proceedings and except such an amount of Taxes the nonpayment of
which would not have a Material Adverse Effect with respect to the Company, and
the most recent financial statements contained in the SEC Filings reflect an
adequate reserve for all material Taxes payable by the Company and each of its
subsidiaries accrued through the date of such financial statements whether or
not shown as being due on any returns. All material Taxes that the Company and
its subsidiaries are required by law to withhold or to collect for payment have
been duly withheld and collected, and have been paid or accrued. The unpaid
Taxes, including any contingent tax liabilities and net deferred tax
liabilities, of the Company and each of its subsidiaries which have accrued as
of the date of the most recent financial statements contained in the SEC Filings
do not materially exceed the reserve for accrued tax liability set forth or
included in such financial statements. Except as set forth in Section 3.13 of
the Disclosure Letter: neither the Company nor any of its subsidiaries has been
notified that any Tax Returns of the Company or its subsidiaries are currently
under audit by the Internal Revenue Service (the "IRS") or any state or local
---
tax agency and no action, suit, investigation, claim or assessment is pending or
proposed with respect to any material amount of Taxes of the Company or any of
its subsidiaries; no agreements have been made by the Company or its
subsidiaries for the extension of time or the waiver of the statute of
limitations for the assessment or payment of any federal, state or local Taxes;
no material claim for unpaid Taxes has become a lien or encumbrance of any kind
against the property of the Company or any of its subsidiaries or is being
asserted against the Company or any of its subsidiaries, and neither the Company
nor any subsidiary has made, is obligated to make, or is party to any agreement
that could obligate it to make, any payment that will not be deductible by the
Company either by reason of Section 280G or Section 162(m) of the Internal
Revenue Code of 1986, as amended. As used herein, "Taxes" shall mean any taxes
-----
of any kind, including but not limited to those on or measured by or referred to
as income, gross receipts, capital, sale, use, ad valorem, franchise, profits,
license, withholding, payroll, employment, excise, severance, stamp, occupation,
premium, value added, property or windfall profits taxes, customs, duties or
similar fees, assessments or charges of any kind whatsoever, together with any
interest and any penalties, additions to tax or additional amounts imposed by
any governmental authority, domestic or foreign. As used herein, "Tax Return"
----------
shall mean any return, report or statement required to be filed with any
governmental authority with respect to Taxes.
Section 3.14 Compliance with Laws.
--------------------
<PAGE>
20
(a) The Company and each of its subsidiaries have (i) all franchises,
grants, authorizations, licenses, establishment registrations, product listings,
permits, easements, variances, exceptions, consents, certificates,
identification and registration numbers, approvals and orders of any
Governmental Entity necessary for the Company or any of its subsidiaries to own
or lease and to operate its properties or otherwise to carry on its business as
it is now being conducted and (ii) agreements and certifications from all
federal, state, foreign and local governmental agencies and accrediting and
certifying organizations having jurisdiction over such facility or facilities
that are required to operate the facility or facilities in the manner in which
it or they are currently operated and, to the extent such facility participates
in the Federal Medicare program ("Medicare") and the applicable state Medicaid
--------
program ("Medicaid"), receive reimbursement for care provided to patients
--------
covered under Medicare and any applicable Medicaid (all the matters referred to
in clauses (i) and (ii) hereinafter referred to collectively as the "Company
-------
Permits"), except where the failure to have, or the suspension or cancellation
- -------
of, any of the Company Permits will not have, individually or in the aggregate,
a Material Adverse Effect with respect to the Company, and, subject to receipt
of all approvals from governmental agencies (including the regulatory approvals
listed or referred to in Section 3.14(a) of the Disclosure Letter) with regard
to the transactions contemplated under this Agreement, no suspension or
cancellation of any of the Company Permits is pending, or to the knowledge of
the Company, threatened, except where the failure to have, or the suspension or
cancellation of, any of the Company Permits will not have, individually or in
the aggregate, a Material Adverse Effect with respect to the Company. Except as
set forth in Section 3.14(a) of the Disclosure Letter, all the Company's
facilities are certified for participation or enrollment in the Medicare program
and the Medicaid programs for states in which the Company has facilities, have
current and valid provider contracts with the Medicare program and the Medicaid
programs for states in which the Company has facilities and are in substantial
compliance with the conditions of participation of such programs in all material
respects. Neither the Company nor any of its subsidiaries is in conflict with,
or in default or violation of, (A) any law applicable to the Company or any such
subsidiary or by which any property or assets of the Company or any such
subsidiary is bound or affected or (B) any Company Permits, except in the case
of clauses (A) and (B) for any such conflicts, defaults or violations that will
not have, individually or in the aggregate, a Material Adverse Effect with
respect to the Company. Except as set forth in Section 3.14(a) of the
Disclosure Letter, neither the Company nor any of its subsidiaries has received
notice from the regulatory authorities that enforce the statutory or regulatory
provisions in respect of either the Medicare or Medicaid program of any pending
or threatened investigations, and no such investigations are pending or, to the
knowledge of the Company, threatened or imminent. Section 3.14(a) of the
Disclosure Letter sets forth, as of the date of this Agreement, all actions,
proceedings or investigations pending or, to the knowledge of the Company,
threatened against the Company or any of its subsidiaries that could reasonably
be expected to result in (i) the loss or revocation of a Company Permit
<PAGE>
21
necessary to operate one or more facilities or for a facility to receive
reimbursement under the Medicare or Medicaid programs or (ii) the suspension or
cancellation of any other Company Permit, except, in the case of clauses (i) and
(ii), any such Company Permit where such suspension or cancellation will not
have, individually or in the aggregate, a Material Adverse Effect with respect
to the Company.
(b) The Company and each of its subsidiaries, as appropriate, is an
approved participating provider in and under all third party payment programs
from which it receives revenues. No action or investigation is pending, or to
the knowledge of the Company, threatened to suspend, limit, terminate,
condition, or revoke the status of the Company or any of its subsidiaries as a
provider in any such program, and neither the Company nor any such subsidiary
has been provided written notice by any third party payor of its intention to
suspend, limit, terminate, revoke, condition or fail to renew in whole or in
part or decrease the amounts payable under any arrangement with the Company or
such subsidiary as a provider, which action, investigation, proceeding,
suspension, limitation, termination, revocation, conditioning or failure to
renew will have, individually or in the aggregate, a Material Adverse Effect
with respect to the Company.
(c) Neither the Company nor any of its subsidiaries is delinquent with
respect to the filing of any claims, cost reports or annual filings required to
be filed to secure payments for services rendered by them under any third party
payment program from which they receive or expect to receive revenues,
including, without limitation, Medicare and Medicaid, except where such
delinquency will not individually or in the aggregate have a Material Adverse
Effect with respect to the Company. Except as indicated in its financial
statements included in the SEC Filings, the Company or each of its subsidiaries,
as applicable, has paid, or caused to be paid, all refunds, discounts,
adjustments, or amounts owing that have become due to such third party payors
pursuant to such claims, reports or filings and, to the knowledge of the
Company, there are no material changes required to be made to any cost reports,
claims or filings made by it for any period or of any deficiency in any such
claim, report, or filing, except for changes and deficiencies that in the
aggregate will not have a Material Adverse Effect with respect to the Company.
Section 3.15 Title to Properties. The Company and its subsidiaries
-------------------
have good, valid and marketable title to the properties and assets reflected on
the most recent consolidated balance sheet included in the SEC Filings (the
"Balance Sheet") (other than properties and assets disposed of in the ordinary
- --------------
course of business since the date of the Balance Sheet), and has good leasehold
title to all leased property, and all such properties, assets and leasehold
interests are free and clear of any Liens and imperfections of title, except as
described in the SEC Filings and the financial statements included therein,
liens for current taxes not yet due, Liens identified in the title insurance
policies covering such properties made available to
<PAGE>
22
MergerCo and other than Liens or title imperfections that in the aggregate will
not have a Material Adverse Effect with respect to the Company.
Section 3.16 Other Agreements. Neither the Company nor any of its
----------------
subsidiaries is in default in any respect in the performance, observance or
fulfillment of any of the obligations, covenants or conditions contained in any
agreement or instrument to which it is a party where such default will have a
Material Adverse Effect with respect to the Company.
Section 3.17 Employee Benefit Plans.
----------------------
(a) The Company and each of its subsidiaries have complied, and
currently are in compliance, in all material respects with the applicable
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), the Code and all other applicable laws with respect to each
- -------
compensation or benefit plan, agreement, policy, practice, program or
arrangement (whether or not subject to ERISA) maintained by the Company or any
of its subsidiaries for the benefit of any employee, former employee,
independent contractor or director of the Company and its subsidiaries
(including, without limitation, any employment agreements or any pension,
savings, profit-sharing, bonus, medical, insurance, disability, severance,
equity-based or deferred compensation plans) (collectively, the "Plans").
-----
(b) The Company has provided or made available a current, accurate and
complete copy of each Plan to MergerCo and, to the extent applicable to the
Plans, (i) copies of any funding instruments, (ii) summary plan descriptions and
(iii) Forms 5500 for the last three years.
(c) Each of the Plans that is intended to qualify under Section 401(a)
of the Code has received, or has filed for, a favorable determination letter
from the IRS ruling that the Plan, does so qualify and that the trust is exempt
from taxation pursuant to Section 501(a) of the Code.
(d) Except as set forth in Section 3.17(d) of the Disclosure Letter,
neither the Company nor any of its subsidiaries has within the past 5 years
maintained, adopted or established, contributed or been required to contribute
to, or otherwise participated in or been required to participate in, any
employee benefit plan or other program or arrangement subject to Title IV of
ERISA (including, without limitation, a "multi-employer plan" (as defined in
Section 3(37) of ERISA) and a defined benefit plan (as defined in Section 3(35)
of ERISA)) or any plan otherwise subject to the minimum funding standards of
ERISA Section 302 or Code Section 412.
(e) No Plan provides any health or medical benefits (whether or not
insured), with respect to current or former employees of the Company beyond
<PAGE>
23
their retirement or other termination of service with the Company (other than
(i) coverage mandated by Code Section 4980B or applicable law, (ii) benefits the
full cost of which is borne by the current or former employee (or his or her
beneficiary) or (iii) benefits pursuant to employment agreements or other
arrangements disclosed pursuant to this Agreement).
(f) Except as set forth in Section 3.17(f) of the Disclosure Letter,
neither the Company nor its subsidiaries has incurred any withdrawal liability
with respect to any Plan that is a multiemployer plan (within the meaning of
Section 3(37) of ERISA).
(g) No reportable event (within the meaning of Section 4043 of ERISA)
(other than an event for which the 30-day notice period is waived) or prohibited
transaction (within the meaning of Section 4975 of the Code or Section 406 of
ERISA) has occurred with respect to any Plan that will have a Material Adverse
Effect with respect to the Company.
(h) There are no pending or, to the knowledge of the Company,
threatened actions, claims or lawsuits by any individuals or entities with
respect to any Plan (other than for routine benefit claims) that will have a
Material Adverse Effect with respect to the Company.
(i) Except as set forth in Section 3.17(i) of the Disclosure Letter,
no payments or benefits under any Plan are triggered (in whole or in part)
solely as a result of the transactions contemplated by this Agreement.
(j) No civil or criminal action brought pursuant to the provisions of
Title I, Subtitle B, Part 5 is pending or threatened against any fiduciary of
any Plan, and none of the Plans or any fiduciary thereof has been the direct or
indirect subject of an audit investigation or examination by any governmental or
quasi-governmental agency which, in either case, will have a Material Adverse
Effect with respect to the Company.
(k) No agreement, commitment or obligation exists to materially
increase any benefit under any Plan or to adopt any new Plan.
(l) Each Plan that is a group health plan has been operated in
compliance in all material respects with Code Section 4980B and Sections 601-609
of ERISA.
(m) No Plan has any material unfunded accrued benefits that are not
fully reflected in the Company's audited financial statements.
<PAGE>
24
Section 3.18 Insurance. Except as set forth in Section 3.18 of the
---------
Disclosure Letter, the Company maintains, and has maintained, without
interruption, during the past three years, policies or binders of insurance
covering such risks, and events, including personal injury, property damage and
general liability, in amounts the Company reasonably believes adequate for its
business and operations. The Company has previously furnished MergerCo with an
accurate summary of its existing insurance coverages.
Section 3.19 Environmental Matters.
---------------------
(a) Except as set forth in the SEC Filings, (i) the assets,
properties, businesses and operations of the Company and its subsidiaries are
and have been in compliance with applicable Environmental Laws (as defined
below), except for such non-compliance which has not had and will not have,
individually or in the aggregate, a Material Adverse Effect with respect to the
Company); (ii) the Company and its subsidiaries have obtained and, as currently
operating, are and have been in compliance with all Company Permits necessary
under any Environmental Law for the conduct of the business and operations of
the Company and its subsidiaries in the manner now conducted except for failure
to hold such Company Permits or such non-compliance which has not had and will
not have, individually or in the aggregate, a Material Adverse Effect with
respect to the Company; (iii) all Hazardous Substances generated at the real
properties or in connection with any operations of the Company have been
transported and otherwise handled, treated and disposed of in compliance with
all applicable Environmental Laws and in a manner that does not result in
liability under Environmental Laws, except for noncompliance or liability which
has not had and will not have, individually or in the aggregate, a Material
Adverse Effect with respect to the Company, (iv) no Hazardous Substances have
been disposed of or otherwise released, handled or stored by the Company on the
real properties on which the Company's business is conducted or elsewhere in
violation of applicable Environmental Laws except for such violations which have
not had and will not have, individually or in the aggregate, a Material Adverse
Effect or in a manner that would result in liability under applicable
Environmental Laws which will have a Material Adverse Effect with respect to the
Company and (v) neither the Company nor any of its subsidiaries nor any of their
respective assets, properties, businesses or operations has received or is
subject to any outstanding order, decree, judgment, complaint, agreement, claim,
citation, notice, or to the knowledge of the Company, any investigation, inquiry
or proceeding indicating that the Company or any of its subsidiaries is or may
be (a) liable for a violation of any Environmental Law or (b) liable for any
Environmental Liabilities and Costs (including, without limitation, any such
Environmental Liabilities or Costs incurred in connection with being designated
as a "potentially responsible party" pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act or any analogous state law), where in
each case such liability would have, individually or in the aggregate, a
Material Adverse Effect with respect to the Company.
<PAGE>
25
(b) For purposes of Section 3.19(a), the terms below shall have the
following meanings:
"Environmental Law" means any law (including, without limitation, common
-----------------
law), regulation, ordinance, guideline, code, decree, judgment, order, permit or
authorization or other legally enforceable requirement of any Governmental
Authority relating to toxic torts, worker or public safety or health and the
indoor and outdoor environment, including, without limitation, pollution,
contamination, Hazardous Substances, cleanup, regulation and protection of the
air, water or soils in the indoor or outdoor environment; and
"Environmental Liabilities and Costs" means all damages, penalties,
-----------------------------------
obligations or clean-up costs assessed or levied pursuant to any Environmental
Law;
"Hazardous Substances" means petroleum products, asbestos, radioactive
--------------------
material, or hazardous or toxic substances or wastes as defined or regulated
under any Environmental Law or the presence of which poses a hazard to the
health or safety of persons.
Section 3.20 Board Recommendation. The Board, at a meeting duly called
--------------------
and held, has (i) determined that this Agreement and the transactions
contemplated hereby, taken together, are advisable and in the best interests of
the Company and its stockholders and (b) subject to the other provisions hereof,
resolved to recommend that the holders of the Common Stock approve and adopt
this Agreement and the transactions contemplated hereby, including the Merger.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF MERGERCO
MergerCo represents and warrants to the Company as follows:
Section 4.1 Organization. MergerCo is a corporation duly
------------
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. MergerCo is a newly formed corporation and,
except for activities incident to the acquisition of the Company, MergerCo has
not engaged in any business activities of any type or kind whatsoever. MergerCo
has provided to the Company a true and correct copy of its by-laws as in effect
on the date hereof and as of the Effective Time.
Section 4.2 Authorization; Binding Agreement. MergerCo has the full
--------------------------------
corporate power and authority to execute and deliver this Agreement and to
<PAGE>
26
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized by all necessary corporate action on the part
of MergerCo. This Agreement has been duly and validly executed and delivered by
MergerCo and constitutes a legal, valid and binding agreement of MergerCo,
enforceable against it in accordance with its terms except as may be limited by
(a) bankruptcy, insolvency, reorganization or other laws now or hereafter in
effect relating to creditors' rights generally and (b) general principles of
equity (regardless of whether enforceability is considered in a proceeding at
law or in equity).
Section 4.3 Noncontravention. Neither the execution and delivery of
----------------
this Agreement nor the consummation of the transactions contemplated hereby will
(a) conflict with or result in any violation of any provision of the certificate
of incorporation or by-laws of MergerCo, (b) require any consent, approval or
notice under, or conflict with or result in a violation or breach of, or
constitute (with or without notice or lapse of time or both) a default (or give
rise to any right of termina tion, cancellation or acceleration) under, any of
the terms, conditions or provisions of any Contracts and Other Agreements to
which MergerCo is a party or by which it or any portion of its properties or
assets may be bound or (c) subject to the matters referred to in clauses (a),
(b) and (c) of Section 4.4 below, violate any Legal Requirements applicable to
MergerCo or any material portion of their properties or assets; provided that no
--------
representation or warranty is made in the foregoing clauses (b) and (c) with
respect to matters that, individually or in the aggregate, will not have a
Material Adverse Effect with respect to MergerCo.
Section 4.4 Governmental Approvals. No consent, approval or
----------------------
authorization of, or declaration or filing with, any Governmental Entity on the
part of MergerCo that has not been obtained or made is required in connection
with the execution or delivery by MergerCo of this Agreement or the consummation
by MergerCo of the transactions contemplated hereby, other than (a) the filing
of the Certificate of Merger with the Secretary of State of the State of
Delaware, (b) (1) fil ings under the HSR Act, (2) the filing with the SEC of
such reports under the Exchange Act as may be required in connection with this
Agreement and the transactions contemplated by this Agreement, and (c) the
filing of appropriate documents with the relevant authorities of states other
than Delaware in which MergerCo is authorized to do business, (d) such filings
as may be required in connection with any state or local tax which is
attributable to the beneficial ownership of MergerCo's real property, if any,
(e) such filings as may be required by any applicable state securities or "blue
sky" laws or state takeover laws, (f) such filings and consents as may be
required under any environmental, health or safety law or regulation, or any
health care licensure laws, reimbursement authorities and their agents,
certificate of need laws and other health care laws and regulations, pertaining
to any notification, disclosure or required approval required by the Merger or
the transactions contemplated by this Agreement and (g) consents, approvals,
<PAGE>
27
authorizations, declarations or filings that, if not obtained or made, will not,
individually or in the aggregate, result in a Material Adverse Effect on
MergerCo or prevent or significantly delay MergerCo from consummating the
transactions contemplated hereby.
Section 4.5 Information Supplied. None of the information supplied or
--------------------
to be supplied in writing by MergerCo (other than projections of future
financial performance) specifically for inclusion or incorporation by reference
in the Proxy Statement or the Form S-4 will, at the date the Form S-4 or the
Proxy Statement is first mailed to the Company's stockholders or at the time of
the meeting of the Company's stockholders held to vote on approval and adoption
of this Agreement, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading.
Section 4.6 Financing. MergerCo has, or prior to the Closing will
---------
have, sufficient funds available to consummate the Merger and the transactions
contemplated hereby and to pay all fees and expenses related to the transactions
contemplated hereunder. MergerCo has provided the Company with true and correct
copies of any financing commitments with respect thereto.
Section 4.7 Regulatory Approval. Neither MergerCo nor any of its
-------------------
affiliates is aware of any existing impediment to the approval of the
transactions contemplated hereby by any Governmental Authority whose approval is
required to consummate the transactions contemplated hereby. Neither MergerCo
nor any of its affiliates owns or operates regulated healthcare facilities in
the United States.
Section 4.8 Delaware Law. MergerCo was not, immediately prior to the
------------
execution of this Agreement, an "interested stockholder" within the meaning of
Section 203 of the DGCL.
ARTICLE 5
COVENANTS
Section 5.1 Conduct of Business of the Company. Except as
----------------------------------
contemplated by this Agreement or the transactions related hereto, during the
period commencing on the date hereof and ending at the Effective Time, the
Company shall, and shall cause each of its subsidiaries to, conduct its
operations according to its ordinary course of business consistent with past
practice, and the Company shall, and shall cause each of its subsidiaries to,
use all reasonable efforts to preserve intact its business organization and to
maintain satisfactory relationships with its customers, suppliers, governmental
agencies having authority over any material aspect of the
<PAGE>
28
Company's business and others having material business relationships with it.
In addition, and except as contemplated by this Agreement or the transactions
relating hereto, prior to the Effective Time, the Company will not and will not
permit any or its subsidiaries to, without the prior consent of MergerCo (which
consent shall not be unreasonably withheld):
(a) amend or propose to amend its certificate of incorporation or
by-laws (or equivalent governing instruments);
(b) authorize for issuance, issue, sell, pledge, deliver or agree or
commit to issue, sell, pledge or deliver (whether through the issuance or
granting of any options, warrants, calls, subscriptions, stock appreciation
rights or other rights or other agreements) or otherwise encumber any capital
stock of any class or any securities convertible into or exchangeable for shares
of capital stock of any class, other than the issuance of shares of Common Stock
issuable upon exercise of Company Stock Options in accordance with the terms
thereof;
(c) split, combine or reclassify any of its capital stock or declare,
pay or set aside for payment any dividend or other distribution in respect of or
substitution for its capital stock, or redeem, purchase or otherwise acquire any
shares of its capital stock;
(d) increase, modify or establish any compensation or benefit plan,
agreement, policy, practice, program or arrangement that would be a Plan (had
such plan, agreement, policy, practice, program or arrangement been adopted
prior to the date of this Agreement) or otherwise increase in any manner the
compensation payable or to become payable by the Company or any of its
subsidiaries to any of their respective directors, officers, former employees,
or employees, other than in the ordinary course of business consistent with past
practice or as required under any existing employment agreement or plan or as
contemplated by this Agreement;
(e) acquire (by purchase, lease or otherwise) any asset, property or
business from any person or dispose of (by sale, lease or otherwise) any of its
assets or properties other than acquisitions and dispositions in the ordinary
course of business the value of which does not exceed $250,000 individually or
$1,000,000 in the aggregate, and other than those acquisitions identified on
Section 5.1(e) of the Disclosure Letter;
(f) other than in connection with transactions otherwise permitted
under this Agreement, (i) incur or assume any funded debt obligations or issue
any debt securities except for borrowings under existing credit facilities in
the ordinary course of business; (ii) guarantee to otherwise become liable for
(whether directly, contingently or otherwise) any debts or obligations of any
person (other than the Company and its subsidiaries) except in the ordinary
course of business not to
<PAGE>
29
exceed $1,000,000 in the aggregate; (iii) make any loans, advances or capital
contributions to, or investments in, any person (other than the Company and its
subsidiaries) except in the ordinary course of business not to exceed $250,000
individually and $1,000,000 in the aggregate; (iv) mortgage, pledge or otherwise
encumber any of its assets except in the ordinary course of business with
respect to assets having a value not exceeding $250,000 individually and
$1,000,000 in the aggregate;
(g) settle or compromise any claim or litigation which (after
insurance reimbursement) results in liability on the part of the Company or any
of its subsidiaries in excess of $1,000,000;
(h) make or commit to make capital expenditures in excess of
$500,000 of the 1998 budget disclosed to MergerCo;
(i) enter into any other agreements, commitments or contracts that are
material to the Company and its subsidiaries taken as a whole, other than in the
ordinary course of business consistent with past practice, or otherwise make any
material change that is adverse to the Company in (i) any existing agreement,
commitment or arrangement that is material to the Company and its subsidiaries
taken as a whole or (ii) the conduct of the business or operations of the
Company and its subsidiaries;
(j) cancel or fail to maintain any insurance policies in effect
immediately following the execution of this Agreement; or
(k) agree, commit or arrange to do any of the foregoing.
Section 5.2 Access and Information. Between the date of this
----------------------
Agreement and the Effective Time, the Company shall, and shall cause its
subsidiaries to, afford MergerCo and its authorized representatives (including
its accountants, financial advisors and legal counsel) reasonable access during
normal business hours to all of the properties, personnel, Contracts and Other
Agreements, books and records of the Company and its subsidiaries and shall
promptly deliver or make available to MergerCo (a) a copy of each report,
schedule and other document filed by the Company pursuant to the requirements of
federal or state securities laws, (b) monthly financial statements and (c) all
other information concerning the business, properties, assets and personnel of
the Company and its subsidiaries as MergerCo may from time to time reasonably
request. MergerCo agrees that any information furnished pursuant to this
Section 5.2 will be subject to the provisions of the Confidentiality Agreement,
dated December 1, 1997 (the "Confidentiality Agreement") between Schroders and
-------------------------
Investcorp International, Inc., the terms of which are incorporated herein by
reference.
<PAGE>
30
Section 5.3 No Solicitation. The Company shall immediately cease, and
---------------
shall direct its advisors and other agents to cease, any existing discussions or
negotiations, if any, with any parties conducted heretofore with respect to any
Acquisition Proposal (defined below); provided that following the cessation of
--------
any such discussions or negotiations, future discussions or negotiations with
any such parties shall be governed solely by the following provisions of this
Section 5.3. Except as provided pursuant to this Agreement, the Company shall
not, directly or indirectly (through representatives or otherwise), solicit,
knowingly encourage, participate in or initiate discussions or negotiations
with, or provide any information to, any person or group (other than MergerCo or
any affiliate, associate or designee of MergerCo) concerning any proposal (an
"Acquisition Proposal") for an acquisition of all or any substantial part of the
- ---------------------
business and properties or capital stock of the Company and its subsidiaries
taken as a whole, directly or indirectly, whether by merger, consolidation,
share exchange, tender offer, purchase of assets or shares of capital stock or
otherwise (an "Acquisition Transaction"). Notwithstanding the foregoing, (a)
-----------------------
the Board may take, and disclose to the Company's stockholders, a position
contemplated by Rules 14d-9 and 14e-2 promulgated under the Exchange Act with
respect to any tender offer for shares of capital stock of the Company;
provided, that the Board shall not recommend that the stockholders of the
- --------
Company tender their shares in connection with any such tender offer unless the
Board shall have determined in good faith, after consultation with outside
counsel, that failing to take such action would constitute a breach of the
Board's fiduciary duty under applicable law; and (b) the Company may, directly
or indirectly, furnish information and access, in each case only in response to
unsolicited requests therefor, to any person or group pursuant to customary
confidentiality agreements, and may participate in discussions and negotiate
with any such person or group concerning any Acquisition Proposal not received
in violation of this Section 5.3, if the Board determines in its good faith
judgment, after consultation with outside counsel, that failing to take such
action would constitute a breach of the Board's fiduciary duty under applicable
law; and (c) the Company may take the actions described in Section 7.1(c). The
Board shall promptly (and in no event later than 24 hours after receipt of the
relevant Acquisition Proposal) notify (which notice shall be provided both
orally and in writing) MergerCo if any such Acquisition Proposal is made and
shall, in such notice, indicate in reasonable detail the terms and conditions of
such proposal and shall keep MergerCo promptly advised of any material changes
to such terms and conditions. The Company agrees not to release any third party
from, or waive any provisions of, any confidentiality or standstill agreement to
which the Company may be a party, unless the Board shall have determined in good
faith that failing to release such third party or waive such provisions would
constitute a breach of the fiduciary duties of the Board under applicable law.
<PAGE>
31
Section 5.4 Reasonable Efforts; Additional Actions.
--------------------------------------
(a) Upon the terms and subject to the conditions of this Agreement,
each of the parties hereto shall use all reasonable efforts to take, or cause to
be taken, all action, and to do or cause to be done, and to assist and cooperate
with the other parties in doing, all things necessary, proper or advisable to
consummate and make effective as promptly as practicable the transactions
contemplated by, and in connection with, this Agreement, including using all
reasonable efforts to (i) obtain all consents, amendments to or waivers under
the terms of any of the Company's contractual arrangements required by the
transactions contemplated by this Agreement (other than Agreements relating to
its long term debt, consents, amendments or waivers the failure of which to
obtain will not, individually or in the aggregate, (x) have a Material Adverse
Effect with respect to the Company, (y) impair the ability of the Company to
perform its obligations under this Agreement in any material respect or (z)
delay in any material respect or prevent the consummation of any of the
transactions contemplated by this Agreement), (ii) effect promptly all necessary
or appropriate registrations and filings with Governmental Entities, including,
without limitation, filings and submissions pursuant to the HSR Act, the
Securities Act, the Exchange Act, the DGCL and state and federal licensing
authorities, and shall (A) take all action necessary to ensure that no state
takeover statute or similar statute or regulation (including, without
limitation, Section 203 of the DGCL) is or becomes applicable to the Merger,
this Agreement or any of the other transactions contemplated by this Agreement
and (B) if any state takeover statute or similar statute or regulation becomes
applicable to the Merger, this Agreement or any other transaction contemplated
by this Agreement, take all action necessary to ensure that the Merger and the
other transactions contemplated by this Agreement may be consummated as promptly
as practicable on the terms contemplated by this Agreement and otherwise to
minimize the effect of such statute or regulation on the Merger, this Agreement
and the other transactions contemplated by this Agreement. Notwithstanding the
foregoing, neither party shall not be prohibited from taking any action
permitted by the terms of this Agreement.
(b) In furtherance and without limiting the above provisions, each of
the Company and MergerCo shall as promptly as practicable following the
execution and delivery of this Agreement, but not later than ten days following
the date hereof, file with the United States Federal Trade Commission (the
"FTC") and the United States Department of Justice ("DOJ") the notification and
--- ---
report form, if any, required for the transactions contemplated hereby and any
supplemental information requested in connection therewith pursuant to the HSR
Act. Any such notification and report form and supplemental information shall
be in substantial compliance with the requirements of the HSR Act. Each of the
Company and MergerCo shall furnish to the other such necessary information and
reasonable assistance as the other may request in connection with its
preparation of any filing or submission which is necessary under the HSR Act.
The Company and MergerCo
<PAGE>
32
shall keep each other apprised of the status of any communications with, and any
inquiries or requests for additional information from, the FTC and the DOJ and
shall comply promptly with any such inquiry or request. Each of MergerCo and
the Company shall use all reasonable efforts to obtain any clearance required
under the HSR Act for, and to provide assistance to the other in any antitrust
proceedings related to, the consummation of the transactions contemplated by
this Agreement.
(c) MergerCo agrees to cause to be filed as promptly as practicable
all other applications and notices ("Applications") required to be filed by it
------------
with Governmental Authorities in order to consummate the Merger, and to pursue
diligently the approval of such Applications.
(d) The Company and MergerCo shall each use its commercially
reasonable efforts to cause the Merger to be recorded as a recapitalization for
financial reporting purposes.
Section 5.5 Notification of Certain Matters. The Company shall give
-------------------------------
notice to MergerCo, and MergerCo shall give notice to the Company, promptly upon
becoming aware of (a) any occurrence, or failure to occur, of any event, which
occurrence or failure to occur has caused or will cause any representation or
warranty in this Agreement to be untrue or inaccurate in any material respect at
any time after the date hereof and prior to the Effective Time and (b) any
material failure on its part to comply with or satisfy any covenant, condition
or agreement to be complied with or satisfied by it hereunder; provided that the
--------
delivery of any notice pursuant to this Section 5.5 shall not limit or otherwise
affect the remedies available hereunder to the party receiving such notice.
Section 5.6 Public Announcements. The initial press release or
--------------------
releases with respect to the transactions contemplated by this Agreement shall
be in the form agreed to by MergerCo and the Company. Thereafter, for as long
as this Agreement is in effect, MergerCo, on the one hand, and the Company, on
the other hand, shall not, and shall cause their subsidiaries and affiliates not
to, issue or cause the publication of any press release or any other
announcement with respect to the Merger, this Agreement or the other
transactions contemplated hereby without the consent of the other (which shall
not be unreasonably withheld or delayed), except where such release or
announcement is required by applicable law or pursuant to any listing agreement
with, or the rules or regulations of, any securities exchange or any other
regulatory requirement. MergerCo acknowledges and accepts that, promptly after
the execution and delivery of this Agreement, the Company will file with the SEC
a Current Report on Form 8-K, reporting such event and including a copy of this
Agreement as an exhibit thereto.
<PAGE>
33
Section 5.7 Indemnification and Insurance.
-----------------------------
(a) MergerCo agrees that (i) the certificate of incorporation and the
by-laws of the Surviving Corporation and its subsidiaries shall contain
provisions with respect to indemnification and exculpation from liability that
are at least as favorable to the beneficiaries of such provisions as those
provisions that are set forth in the certificate of incorporation and by-laws of
the Company and its subsidiaries, respectively, on the date of this Agreement,
which provisions shall not be amended, repealed or otherwise modified for a
period of six years following the Effective Time in any manner that would
adversely affect the rights thereunder of persons who at or prior to the
Effective Time were directors, officers, employees or agents of the Company or
any of its subsidiaries, unless such modification is required by law and (ii)
all rights to indemnification as provided in any indemnification agreements with
any current or former directors, officers and employees of the Company or any of
its subsidiaries as in effect as of the date hereof with respect to matters
occurring at or prior to the Effective Time shall survive the Merger and
thereafter terminate as provided in such agreements.
(b) For a period of six years after the Effective Time, the Surviving
Corporation shall maintain officers' and directors' liability insurance and
fiduciary liability insurance covering the persons described in paragraph (a) of
this Section 5.7 (whether or not they are entitled to indemnification
thereunder) who are currently covered by the Company's existing officers' and
directors' or fiduciary liability insurance policies on terms no less
advantageous to such indemnified parties than such existing insurance; provided,
--------
that the Surviving Corporation shall not be obligated to pay annual premiums for
such insurance in excess of 150% of the last annual premium paid prior to the
date of this Agreement.
(c) The Surviving Corporation shall indemnify and hold harmless (and
shall advance expenses to), to the fullest extent permitted under applicable
law, each director, officer, employee, fiduciary and agent of the Company or any
subsidiary of the Company including, without limitation, officers and directors,
serving as such on the date hereof against any costs and expenses (including
reasonable attorneys' fees), judgments, fines, losses, claims, damages,
liabilities and amounts paid in settlement in connection with any claim, action,
suit, proceeding or investigation relating to any of the transactions
contemplated hereby, and in the event of any such claim, action, suit,
proceeding or investigation (whether arising before or after the Effective
Time), (i) the Surviving Corporation shall pay the reasonable fees and expenses
of counsel selected by the indemnified parties, promptly as statements therefor
are received and (ii) the parties hereto will cooperate in the defense of any
such matter; provided, however, that the Surviving Corporation shall not be
-------- -------
liable for any settlement effected without its prior written consent, which
consent shall not unreasonably be withheld.
<PAGE>
34
(d) The Surviving Corporation shall pay all reasonable costs and
expenses, including attorneys' fees, that may be incurred by and indemnified
parties in enforcing the indemnity and other obligations provided for in this
Section 5.7 to the fullest extent permitted by applicable law.
(e) In the event the Surviving Corporation or any of its respective
successors or assigns (i) consolidates with or merges into any other person and
is not the continuing or surviving corporation or entity of such consolidation
or merger or (ii) transfers all or substantially all of its properties and
assets to any person, proper provisions shall be made so that the successors and
assigns of the Surviving Corporation assumes the obligations set forth in this
Section 5.7.
(f) This Section 5.7, which shall survive the consummation of the
Merger at the Effective Time and shall continue for the periods specified
herein, is intended to benefit the Company, the Surviving Corporation, and any
person or entity referenced in this Section 5.7 or indemnified hereunder each of
whom may enforce the provisions of this Section 5.7 (whether or not parties to
this Agreement).
Section 5.8 New York Stock Exchange Delisting. Each of the parties
---------------------------------
agrees to cooperate with each other in taking, or causing to be taken, all
actions necessary to delist the Common Stock from the New York Stock Exchange;
provided that such delisting shall not be effective until after the Effective
- --------
Time. The parties also acknowledge that it is MergerCo's intent that the Common
Stock following the Merger will not be quoted in the New York Stock Exchange or
listed on any other national securities exchange.
Section 5.9 Affiliates. Prior to the Effective Time, the Company
----------
shall deliver to MergerCo a letter identifying all persons who are, at the time
this Agreement is submitted for approval to the stockholders of the Company,
"affiliates" of the Company for purposes of Rule 145 under the Securities Act.
The Company shall use its reasonable efforts to cause each such person to
deliver to MergerCo at or prior to the Effective Time a written agreement
substantially in the form attached as Exhibit B hereto.
Section 5.10 Resignation of Directors. Prior to the Effective Time,
------------------------
the Company shall deliver to MergerCo evidence reasonably satisfactory to
MergerCo of the resignation of each of the directors of the Company that
MergerCo has previously requested to resign, effective at the Effective Time.
Section 5.11 Cooperation With Proposed Financings. The Company agrees
------------------------------------
to provide, and will use all reasonable efforts to cause its subsidiaries and
its and their respective officers, employees and advisers to provide,
commercially reasonable cooperation in connection with (i) the arrangement of
any financing to be
<PAGE>
35
consummated contemporaneously with or at or after the Effective Time in respect
of the transactions contemplated by this Agreement, including without
limitation, participation in meetings, due diligence sessions, road shows, the
preparation of offering memoranda, private placement memoranda, prospectuses and
similar documents, the execution and delivery of any commitment letters,
underwriting or placement agreements, pledge and security documents, other
definitive financing documents, or other requested certificates or documents,
including a customary certificate of the chief financial offer of the Company
with respect to solvency matters, comfort letters of accountants, legal opinions
and real estate title documentation as may be reasonably requested by MergerCo;
provided that any agreements or other documents to be entered into, provided or
- --------
otherwise used in connection with any such financing shall be in form and
substance customary for companies such as the Company. The parties acknowledge
that the payment of any fees by the Company in connection with any commitment
letters shall be subject to the occurrence of the Effective Time and shall not
be obligations of the Company's directors or officers. In addition, in
conjunction with the obtaining of any such financing, the Company agrees, at the
request of MergerCo, to call for prepayment or redemption, or to prepay, redeem
and/or renegotiate, as the case may be, any then existing indebtedness of the
Company; provided that no such prepayment or redemption shall themselves
--------
actually be made until contemporaneously with or after the Effective Time;
provided further that, unless indemnified by MergerCo to the Company's
- -------- -------
reasonable satisfaction, the Company shall not be required to call for such
prepayment or redemption to so renegotiate if the same may result in liability
of the Company in the event the Merger and other transactions contemplated by
this Agreement does not occur.
Section 5.12 Stockholder Rights. The Company and MergerCo shall enter
------------------
into appropriate documentation prior to the Effective Time reflecting the
stockholder rights set forth on Exhibit C to this Agreement.
Section 5.13 Minimum Equity of the Surviving Corporation. MergerCo
-------------------------------------------
covenants that, upon consummation of the Merger, the related financings and the
disposition of the cash portion of the Merger Consideration to the stockholders
of the Company pursuant to the Merger, not less than $135 million shall have
been contributed to MergerCo, in cash or cash equivalents.
ARTICLE 6
CONDITIONS
Section 6.1 Conditions to Each Party's Obligations. The respective
--------------------------------------
obligations of each party to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Time of each of the following
conditions:
<PAGE>
36
(a) this Agreement shall have been adopted by the affirmative vote of
the stockholders of the Company by the requisite vote in accordance with
applicable law;
(b) no Legal Requirements (including, without limitation, any
temporary restraining order or preliminary injunction) shall have been enacted,
entered, promulgated, issued or enforced by any court or Governmental Entity,
and no other legal restraint or prohibition shall be in effect, that prohibits
or prevents the consummation of the Merger; provided, that the party or parties
--------
invoking this condition shall use reasonable efforts to have any such Legal
Requirement vacated or removed;
(c) any waiting period applicable to the Merger under the HSR Act
shall have expired or been terminated; and
(d) the Form S-4 shall have become effective under the Securities Act
and shall not be the subject of any stop order or proceedings seeking a stop
order, and all material state securities laws applicable to the registration and
qualification of the Non-Cash Election Shares following the Merger shall have
been complied with.
Section 6.2 Conditions to Obligation of MergerCo to Effect the Merger.
---------------------------------------------------------
The obligation of MergerCo to effect the Merger is further subject to the
satisfaction (or waiver by it) at or prior to the Effective Time of the
following:
(a) the representations and warranties of the Company shall be true
and correct as of the date of this Agreement and as of the Effective Time as if
made on and as of such date (other than representations and warranties which
address matters only as of certain date(s), which shall be true and correct as
of such certain date(s)); provided, however, that, other than with respect to
-------- -------
the representations in Section 3.2 (Capitalization) as to the number of issued
and outstanding shares of Common Stock and options to purchase Common Stock, the
condition set forth in this Section 6.2(a) shall be considered satisfied unless
there exist inaccuracies in representations and warranties which in the
aggregate have a Material Adverse Effect with respect to the Company;
(b) the Company shall have performed all of its obligations required
to be performed by it hereunder on or prior to the Effective Time (except for
such failures to perform as have not had or are not reasonably likely to have a
Material Adverse Effect with respect to the Company or materially adversely
affect the ability of the Company to consummate the transactions contemplated
hereby or to perform its obligations hereunder);
<PAGE>
37
(c) the consents and agreements identified in Exhibit D to this
Agreement shall have been obtained and remain in effect;
(d) all regulatory approvals required in connection with the change of
ultimate ownership and control of the Facilities resulting from the transactions
contemplated by this Agreement, the consequence of the failure to obtain such
approvals would be to jeopardize the ability of the Company or any of its
subsidiaries to lawfully continue to operate, own or control the Facilities,
shall have been obtained and remain in effect; and
(e) the 1998 Amended and Restated Administrative Services Agreement,
as in effect on the date hereof, shall not have been amended or modified without
the consent of MergerCo, which consent shall not be unreasonably withheld.
Section 6.3 Conditions to Obligation of the Company to Effect the
-----------------------------------------------------
Merger. The obligation of the Company to effect the Merger is further subject
- ------
to the satisfaction (or waiver by it) at or prior to the Effective Time of the
following:
(a) the representations and warranties of MergerCo shall be true and
correct as of the date of this Agreement and as of the Effective Time as if made
on and as of such date (other than representations and warranties which address
matters only as of a certain date(s), which shall be true and correct as of such
certain date(s)); provided, however, that the condition set forth in this
-------- -------
Section 6.3(a) shall be considered satisfied unless there exist inaccuracies in
representations and warranties which in the aggregate have a Material Adverse
Effect with respect to MergerCo;
(b) MergerCo shall have performed all of its obligations required to
be performed by it hereunder on or prior to the Effective Time (except for such
failures to perform as have not had or would not have a Material Adverse Effect
with respect to MergerCo or materially adversely affect the ability of MergerCo
to consummate the transactions contemplated hereby or to perform MergerCo's
obligations hereunder); and
(c) the Company shall have received an opinion or certificate of a
reputable expert firm selected by MergerCo and reasonably satisfactory to the
Company confirming the solvency of the Surviving Corporation and its
subsidiaries on a consolidated basis after giving effect to the transactions
contemplated hereby, involving the related financings, which opinion or
certificate shall be addressed to the Board and upon which the Board shall be
entitled to rely.
<PAGE>
38
ARTICLE 7
TERMINATION
Section 7.1 Termination. This Agreement may be terminated and the
-----------
Merger contemplated hereby may be abandoned at any time prior to the Effective
Time, whether before or after adoption by the stockholders of the Company:
(a) By the mutual written consent of MergerCo and the Company;
(b) By MergerCo or the Company:
(i) if a court of competent jurisdiction or other Governmental
Entity of the United States shall have issued an order or taken any other
action permanently restraining, enjoining or otherwise prohibiting the
Merger and such Order or other action shall have become final and
nonappealable; or
(ii) if the Effective Time shall not have occurred on or prior
to 270 days from the date hereof; provided that the right to terminate this
--------
Agreement pursuant to this Section 7.1(b)(ii) shall not be available to any
party whose failure to perform any of its obligations under this Agreement
results in the failure of such condition;
(c) By the Company, if the Company receives an Acquisition Proposal in
writing from any person or group as a result of which the Board determines in
good faith, after consultation with outside counsel, that it is obligated by its
fiduciary duty under applicable law to terminate this Agreement;
(d) By MergerCo in the event of a breach by the Company of any
representation, warranty, covenant or other agreement contained in this
Agreement which has not been cured within 30 days after the giving of written
notice to the Company and which has a Material Adverse Effect with respect to
the Company or the ability of the Company to consummate the transactions
contemplated hereby;
(e) By the Company, if MergerCo shall have breached in any material
respect any of their respective representations, warranties, covenants or other
agreements contained in this Agreement, which failure to perform has not been
cured within 30 days after the giving of written notice to MergerCo and which
has a Material Adverse Effect with respect to MergerCo or the ability of
MergerCo to consummate the transactions contemplated hereby; and
<PAGE>
39
(f) By MergerCo, if the Company shall have (1) withdrawn, modified or
amended in any respect adverse to MergerCo its approval or recommendation of
this Agreement or the Merger, (2) failed to include in the Proxy Statement such
recommendation, (3) recommended any Acquisition Proposal or Acquisition
Transaction from or with a person other than MergerCo or any of its subsidiaries
or affiliates or (4) resolved to do any of the foregoing.
Section 7.2 Fees and Expenses. In the event that this Agreement is
-----------------
terminated (i) by the Company pursuant to Section 7.1(c) or (ii) by MergerCo
pursuant to Section 7.1(f), then, notwithstanding anything to the contrary
contained in this Agreement, the Company shall reimburse MergerCo for all actual
documented out-of-pocket expenses (other than any expenses payable as a
financing commitment or similar fee) incurred by or on behalf of MergerCo in
connection with the transactions contemplated by this Agreement and any related
financings; provided that such reimbursable expenses shall not exceed $4,000,000
--------
in the aggregate. In addition, in the event that, within nine months following
any such termination pursuant to Section 7.1(c) or Section 7.1(f), the Company
shall have consummated an Acquisition Transaction with a person unaffiliated
with MergerCo, then, in addition to reimbursement of MergerCo's expenses as
provided above, the Company shall pay to MergerCo a fee equal to $6,000,000.
Section 7.3 Procedure for and Effect of Termination. In the event
---------------------------------------
that this Agreement is terminated and the Merger is abandoned by MergerCo, on
the one hand, or by the Company, on the other hand, pursuant to Section 7.1,
written notice of such termination and abandonment shall forthwith be given to
the other parties and this Agreement shall terminate and the Merger shall be
abandoned without any further action. If this Agreement is terminated as
provided herein, no party hereto shall have any liability or further obligation
to any other party under the terms of this Agreement except with respect to the
willful breach by any party hereto and except that the provisions of this
Section 7.3, Section 7.2, Article 8 and the final sentence of Section 5.2 shall
survive the termination of this Agreement.
ARTICLE 8
MISCELLANEOUS
Section 8.1 Certain Definitions. For purposes of this Agreement, the
-------------------
following terms shall have the meanings ascribed to them in this Section 8.1:
(a) "affiliate," with respect to any person, shall mean any person
---------
controlling, controlled by or under common control with such person;
<PAGE>
40
(b) "Facilities" means any of the facilities identified on Schedule
----------
8.1(b) annexed hereto;
(c) "Facilities Lease" means any operating, capital or "synthetic"
----------------
lease relating to any of the Facilities;
(d) "knowledge," with respect to the Company, shall mean the actual
---------
knowledge of any executive officer or director of the Company;
(e) "Material Adverse Effect," with respect to any person, shall mean
-----------------------
a material adverse effect on the business, assets, properties, condition
(financial or otherwise) or results of operations of such person and its
subsidiaries taken as a whole;
(f) "person" shall mean and include an individual, a partnership, a
------
joint venture, a limited liability company, a corporation, a trust, an
unincorporated organization and a government or any department or agency
thereof; and
(g) "SEC Filings" means filings by the Company required to be made
-----------
under the Exchange Act with the SEC since June 30, 1996; provided that, with
--------
respect to all representations and warranties of the Company contained in
Article 3 (except those in Section 3.7), references to SEC Filings shall refer
only to those filings made prior to the date hereof.
(h) "subsidiary," with respect to any person, shall mean any
----------
corporation 50% or more of the outstanding voting power of which, or any
partnership, joint venture, limited liability company or other entity 50% or
more of the total equity interest of which, is directly or indirectly owned by
such person. For purposes of this Agreement, all references to "subsidiaries"
of a person shall be deemed to mean "subsidiary" if such person has only one
subsidiary.
Section 8.2 Amendment and Modification. Subject to applicable law,
--------------------------
this Agreement may be amended, modified or supplemented only by a written
agreement signed by each of the parties hereto at any time prior to the
Effective Time with respect to any of the terms contained herein; provided,
--------
however, that after this Agreement is adopted by the Company's stockholders, no
- -------
such amendment or modification shall (a) alter or change the amount or kind of
the consideration to be delivered to the stockholders of the Company, (b) alter
or change any term of the certificate of incorporation of the Surviving
Corporation or (c) alter or change any of the terms or conditions of this
Agreement if such alteration or change would adversely affect the stockholders
of the Company.
<PAGE>
41
Section 8.3 Waiver of Compliance; Consents. Any failure of MergerCo,
------------------------------
on the one hand, or the Company, on the other hand, to comply with any
obligation, covenant, agreement or condition herein may, subject to Section 8.2,
be waived by MergerCo or the Company, respectively, only by a written instrument
signed by the party granting such waiver, but such waiver or failure to insist
upon strict compliance with such obligation, covenant, agreement or condition
shall not operate as a waiver of, or estoppel with respect to, any subsequent or
other failure. Whenever this Agreement requires or permits consent by or on
behalf of any party hereto, such consent shall be given in writing in a manner
consistent with the requirements for a waiver of compliance as set forth in this
Section 8.3.
Section 8.4 Survival. The respective representations and warranties
--------
of MergerCo and the Company contained herein shall terminate at, and not
survive, the Closing hereunder.
Section 8.5 Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed to have been duly given when delivered
in person or by telecopier (with a confirmed receipt thereof), and on the next
business day when sent by overnight courier service, to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to MergerCo, to:
c/o Investcorp International Inc.
280 Park Avenue
37th Floor West
New York, New York 10017
Attention: Christopher J. O'Brien
Telecopier: 212-983-7073
with a copy to:
Gibson, Dunn & Crutcher LLP
200 Park Avenue
48th Floor
New York, New York 10166
Attention: E. Michael Greaney
Sean P. Griffiths
Telecopier: 212-351-4035
<PAGE>
42
(b) if to the Company, to:
Harborside Healthcare Corporation
470 Atlantic Avenue
Boston, Massachusetts 02210
Attention: Stephen L. Guillard
Telecopier: 617-292-1913
and
Attention: General Counsel
Telecopier: 617-556-1408
with a copy to:
Paul, Weiss, Rifkind,
Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attention: James M. Dubin, Esq.
Michele R. Jenkinson, Esq.
Telecopier: 212-757-3990
Section 8.6 Assignment. This Agreement and all of the provisions
----------
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto without the prior written consent of the other
parties.
Section 8.7 Expenses. Except as otherwise provided herein, whether or
--------
not the Merger is consummated, all fees, charges and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such fees, charges or expenses.
Section 8.8 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD
TO THE CHOICE OF LAW PRINCIPLES THEREOF.
Section 8.9 Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 8.10 Interpretation. The article and section headings
--------------
contained in this Agreement are solely for the purpose of reference, are not
part of
<PAGE>
43
the agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement.
Section 8.11 Entire Agreement. This Agreement (including the
----------------
schedules, exhibits, documents or instruments referred to herein) and the
Confidentiality Agreement embody the entire agreement and understanding of the
parties hereto in respect of the subject matter hereof and thereof and supersede
all prior agreements and understandings, both written and oral, among the
parties, or between any of them, with respect to the subject matter hereof and
thereof.
Section 8.12 No Third Party Beneficiaries. Except as expressly
----------------------------
provided in Sections 5.7, this Agreement is not intended to, and does not,
create any rights or benefits of any party other than the parties hereto.
Section 8.13 Confidentiality Agreement. The Company agrees that the
-------------------------
"standstill" paragraph contained in the Confidentiality Agreement shall not
apply to any actions taken by MergerCo or its representatives pursuant to the
Stockholders Agreement.
[SIGNATURES ON NEXT PAGE]
<PAGE>
IN WITNESS WHEREOF, MergerCo and the Company have caused this Agreement
to be signed by their respective duly authorized officers as of the date first
above written.
HH ACQUISITION CORP.
By: /s/ Christopher J. O'Brien
--------------------------
Name: Christopher J. O'Brien
Title: President
HARBORSIDE HEALTHCARE CORPORATION
By: /s/ Stephen L. Guillard
-----------------------
Name: Stephen L. Guillard
Title: President and Chief Executive Officer
<PAGE>
The undersigned, INVESTCORP BANK E.C., hereby undertakes and agrees to
cause HH Acquisition Corp. ("MergerCo") to perform all of MergerCo's obligations
--------
and agreements under this Agreement and the undersigned expressly agrees to be
liable in the event MergerCo fails to perform any of its obligations or
agreements under this Agreement; provided however, that this undertaking and
----------------
agreement shall terminate immediately following the Effective Time of the
Merger. The undersigned hereby represents and warrants to Harborside Healthcare
Corporation that (i) it has full corporate power and authority to execute and
deliver this agreement and perform its obligations hereunder, (ii) it has taken
all actions necessary to authorize the execution, delivery and performance of
this agreement by it, (iii) such execution, delivery and performance do not
conflict with, violate or otherwise result in a default under its Certificate of
Incorporation, By-laws or other organizational documents and (iv) this agreement
is the legal, valid and binding obligation of Investcorp, enforceable in
accordance with its terms.
INVESTCORP BANK E.C.
By: /s/ Zahid Zakiuddin
--------------------
Name: Zahid Zakiuddin
Title: Authorized Representative
<PAGE>
ANNEX II
STOCKHOLDER AGREEMENT
---------------------
STOCKHOLDER AGREEMENT (this "Agreement"), dated as of April 15, 1998, by
---------
and between HH Acquisition Corp., a Delaware corporation ("MergerCo") and the
--------
individuals and entities listed on Exhibit A hereto (collectively, the
"Stockholders" and each a "Stockholder").
- ------------- -----------
W I T N E S S E T H:
WHEREAS, concurrently herewith, MergerCo and Harborside Healthcare
Corporation, a Delaware corporation (the "Company"), will enter into an
-------
Agreement and Plan of Merger of even date herewith (as such agreement may be
amended from time to time, the "Recapitalization Agreement") pursuant to which
--------------------------
MergerCo will be merged with and into the Company, with the Company continuing
as the surviving corporation (the "Merger");
------
WHEREAS, as of the date hereof, each Stockholder owns (either beneficially
or of record) the number of shares of common stock of the Company, par value
$0.01 per share (the "Company Common Stock"), set forth opposite such
--------------------
Stockholder's name on Exhibit A hereto (the "Existing Shares" and, together with
---------------
all other shares of Company Common Stock owned by the Stockholders and any
shares of Company Common Stock hereafter acquired by the Stockholders in any
capacity prior to the termination of this Agreement, whether upon exercise of
options, conversion of convertible securities, purchase, exchange or otherwise,
being collectively referred to herein as the "Shares");
------
WHEREAS, as an inducement and a condition to the willingness of MergerCo to
enter into the Recapitalization Agreement, MergerCo requires that each
Stockholder enter into, and each Stockholder has agreed, severally and not
jointly, to enter into, this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual premises,
representations, warranties, agreements and covenants set forth herein and in
the Recapitalization Agreement, MergerCo and each of the Stockholders, each
intending to be legally bound, hereby agrees as follows:
1. Representations and Warranties of the Stockholders. Each Stockholder
--------------------------------------------------
hereby represents and warrants (as to itself) to MergerCo as follows:
1.1 Organization; Authorization; Validity of Agreement. Such Stockholder
--------------------------------------------------
(if it is a corporation, partnership, trust or other legal entity) is duly
organized and validly existing under the laws of its jurisdiction of
organization and has full power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by such Stockholder and the consummation by such
Stockholder of the transactions contemplated hereby have been duly authorized by
all necessary action on the part of such Stockholder and no other proceedings on
the part of such Stockholder are necessary to authorize its execution or
performance of this Agreement or any of the transactions contemplated hereby.
This Agreement has been duly executed and delivered by such Stockholder and
constitutes a valid and binding obligation of such Stockholder enforceable
<PAGE>
against such Stockholder in accordance with its terms, except that (a) such
enforcement may be subject to applicable bankruptcy, insolvency or other similar
laws, now or hereafter in effect, affecting creditors' rights generally, and (b)
the remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought.
1.2 Consents and Approvals; No Violations. The execution and delivery of
-------------------------------------
this Agreement does not and the performance of this Agreement by such
Stockholder will not (a) conflict with, violate or result in any breach of the
certificate of incorporation, by-laws or other similar organizational documents
of such Stockholder, (b) result in a violation or breach of, or constitute (with
or without notice or lapse of time or both) a default (or give rise to any third
party right of termination, cancellation, material modification or acceleration)
or result in the creation of any Lien (as defined below) on any property or
assets of such Stockholder or (if such Stockholder is a corporation) any of its
subsidiaries, under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, contract, commitment, arrangement,
understanding, lease, permit, franchise, agreement or other instrument or
obligation of any kind to which such Stockholder is a party or by which such
Stockholder or any of its properties or assets is bound or affected or (c)
conflict with or violate any order, writ, injunction, decree, judgment, statute,
rule or regulation applicable to such Stockholder or any of its properties or
assets. The execution and delivery of this Agreement by such Stockholder does
not, and the performance of this Agreement by such Stockholder will not, require
any consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority, domestic or foreign,
except (i) for applicable requirements, if any, of the Securities Exchange Act
of 1934, as amended, and the rules and regulations thereunder (the "Exchange
--------
Act"), (ii) the Hart-Scott-Rodino Antitrust Improvement Act of 1976 and the
rules and regulations promulgated thereunder (the "HSR Act") and (iii) such
-------
filings as may required by or under any health care licensure laws,
reimbursement authorities and their agents, certificate of need laws and other
health care laws and regulations, pertaining to any notification, disclosure or
required approval required due to the purchase of the Stockholders' Shares as
contemplated by Section 4.1 hereof.
1.3 Ownership of Shares. (a) Such Stockholder is the record and/or
-------------------
beneficial owner of that number of Shares set forth opposite such Stockholder's
name on Exhibit A attached hereto.
(b) On the date hereof, the Existing Shares constitute all of the
outstanding shares of Company Common Stock owned of record and/or
beneficially by such Stockholder.
(c) Such Stockholder has sole power of disposition with respect to all
of the Existing Shares owned by it and sole voting power with respect to
the matters set forth in Section 3.1 hereof and sole power to demand
dissenter's or appraisal rights, in each case with respect to all of the
Existing Shares owned by it with no restrictions on such rights, subject to
applicable federal securities laws and the terms of this Agreement.
2
<PAGE>
(d) Such Stockholder will have sole power of disposition with respect to
shares of Company Common Stock other than Existing Shares, if any, which
become beneficially owned by such Stockholder and will have sole voting
power with respect to the matters set forth in Section 3.1 hereof and sole
power to demand dissenter's or appraisal rights, in each case with respect
to all such shares, if any, which become beneficially owned by such
Stockholder prior to termination of this Agreement with no restrictions on
such rights, subject to applicable federal securities laws and the terms of
this Agreement.
1.4 No Encumbrances. The Existing Shares owned by the Stockholder listed
---------------
in Section 1 of Exhibit B (the "Pledgor Stockholder") are, and any shares of
-------------------
Company Common Stock hereafter acquired by the Pledgor Stockholder, whether upon
exercise of options, conversion of convertible securities, purchase, exchange or
otherwise, in any capacity prior to the termination of this Agreement, will be,
pledged to BankBoston, N.A., as Agent (the "Bank") pursuant to the Revolving and
----
Term Loan and Security Agreement (the "Loan and Security Agreement") dated as of
---------------------------
August 30, 1996, as amended, by and among the Pledgor Stockholder, certain of
its subsidiaries and Bank, a true and correct copy of the terms of such
agreement which describe such stock pledge has been provided to MergerCo (the
"Stock Pledge"). Except for the Stock Pledge, the Existing Shares and the
- -------------
certificates representing such shares are now, and the Shares and the
certificates representing such Shares at all times during the term hereof will
be, held by such Stockholder, free and clear of all claims, liens, charges,
security interests, proxies, pledges, charges, equities, options, voting
restrictions, rights of first refusal, voting trusts or agreements,
understandings or arrangements and any other encumbrances of any kind or nature
whatsoever (collectively, "Liens"), except as otherwise provided in this
-----
Agreement. At the Closing (as defined in Section 4.1(c), such Stockholder will
deliver good, marketable and valid title to its Shares free and clear of any
Liens, including without limitation, the Stock Pledge. Upon delivery of such
Shares and payment of the Share Purchase Price (as defined herein) as
contemplated herein and the Letter Agreement dated as of the date hereof by and
among the Pledgor Stockholder, Bank and MergerCo (the "Letter Agreement"),
----------------
MergerCo will receive good and valid title to such Shares, free and clear of any
Liens, including without limitation, the Stock Pledge.
1.5 Brokers and Intermediaries. No broker, investment banker, financial
--------------------------
adviser or other person is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the transactions
contemplated hereby based upon arrangements made by or on behalf of such
Stockholder.
1.6 Reliance. Each Stockholder understands and acknowledges that MergerCo
--------
is entering into the Recapitalization Agreement in reliance upon such
Stockholder's execution and delivery of this Agreement with MergerCo.
2. Representations and Warranties of MergerCo. MergerCo hereby represents
------------------------------------------
and warrants to the Stockholders as follows:
2.1 Organization; Authorization; Validity of Agreement. MergerCo is a
--------------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of Delaware and
3
<PAGE>
has the corporate power and authority to enter into this Agreement and to carry
out its obligations hereunder. The execution and delivery of this Agreement by
MergerCo and the consummation by MergerCo of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of MergerCo and no other corporate proceedings on the part of MergerCo are
necessary to authorize this Agreement or any of the transactions contemplated
hereby. This Agreement has been duly executed and delivered by MergerCo and
constitutes a valid and binding obligation of MergerCo enforceable against
MergerCo in accordance with its terms, except that (a) such enforcement may be
subject to applicable bankruptcy, insolvency or other similar laws, now or
hereafter in effect, affecting creditors' rights generally, and (b) the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought.
2.2 Consents and Approvals; No Violations. The execution and delivery of
-------------------------------------
this Agreement do not and the performance of this Agreement by MergerCo will not
(a) conflict with, violate or result in any breach of the certificate of
incorporation, by-laws or other corporate organizational documents of MergerCo,
(b) result in a violation or breach of, or constitute (with or without notice or
lapse of time or both) a default (or give rise to any third party right of
termination, cancellation, material modification or acceleration) or result in
the creation of any Lien on any property or assets of MergerCo under any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, license,
contract, commitment, arrangement, understanding, lease, permit, franchise,
agreement or other instrument or obligation of any kind to which MergerCo is a
party or by which MergerCo or any of its properties or assets is bound or
affected or (c) conflict with or violate any order, writ, injunction, decree,
judgment, statute, rule or regulation applicable to MergerCo or any of its
properties or assets. The execution and delivery of this Agreement by MergerCo
do not, and the performance of this Agreement by MergerCo will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental or regulatory authority, domestic or foreign, except (i)
for applicable requirements, if any, of the Exchange Act, (ii) the HSR Act and
(iii) such filings as may required by or under any health care licensure laws,
reimbursement authorities and their agents, certificate of need laws and other
health care laws and regulations, pertaining to any notification, disclosure or
required approval required due to the purchase of the Stockholders' Shares as
contemplated by Section 4.1 hereof.
3. Agreement to Vote; Proxy.
------------------------
3.1 Voting. Each Stockholder hereby agrees that, during the period
------
commencing on the date hereof and continuing until the first to occur of the
Effective Time (as defined in the Recapitalization Agreement) or termination of
the Recapitalization Agreement in accordance with its terms (the "Termination
-----------
Date"), at any meeting of the stockholders of the Company, however called, or in
- ----
connection with any written consent of the stockholders of the Company, such
Stockholder shall vote (or cause to be voted) the Shares held of record or
beneficially by such party (a) in favor of the Merger, the execution and
delivery by the Company of the Recapitalization Agreement and the approval of
the terms thereof and each of the other actions contemplated by the
Recapitalization Agreement and this Agreement and any actions required in
furtherance hereof and thereof; (b) against any action or agreement that is
intended, or
4
<PAGE>
could reasonably be expected, to impede, interfere with, or prevent the Merger
or result in a breach of any covenant, representation or warranty or any other
obligation or agreement of the Company under the Recapitalization Agreement or
this Agreement; and (c) except as specifically requested in writing by MergerCo
in advance, against the following actions (other than the Merger and the
transactions contemplated by the Recapitalization Agreement): (i) any
extraordinary corporate transaction, such as a merger, consolidation or other
business combination involving the Company or any of its subsidiaries or
affiliates; (ii) a sale, lease or transfer of a material amount of assets of the
Company or any of its subsidiaries or affiliates or reorganization,
recapitalization, dissolution or liquidation of the Company or any of its
subsidiaries or affiliates; (iii)(A) any change in the management or board of
directors of the Company or any of its subsidiaries or affiliates; (B) any
material change in the present capitalization of the Company or any amendment of
the Company's Certificate of Incorporation or By-Laws; (C) any other material
change in the Company's or any of its subsidiaries' or affiliates' corporate
structure or business; or (D) any other action which is intended, or could
reasonably be expected, to impede, interfere with, delay, postpone, discourage
or adversely affect the Merger or the transactions contemplated by the
Recapitalization Agreement or this Agreement or the contemplated economic
benefits of any of the foregoing. No Stockholder, in its capacity as such,
shall enter into any agreement or understanding with any person or entity prior
to the Termination Date to vote, commit, agree to take any action or give
instructions after the Termination Date in any manner inconsistent with clauses
(i), (ii) or (iii) of the preceding sentence. Each Stockholder hereby
acknowledges receipt and review of a copy of the Recapitalization Agreement.
3.2 Proxy. Each Stockholder hereby grants to, and appoints, MergerCo and
-----
Christopher J. O'Brien and Robert G. Sharp, in their respective capacities as
officers of MergerCo, and any individual who shall hereafter succeed to any such
office of MergerCo, and any other designee of MergerCo, each of them
individually, such Stockholder's irrevocable (until the Termination Date) proxy
and attorney-in-fact (with full power of substitution) to vote the Shares as
indicated in Section 3.1 above. Each Stockholder intends this proxy to be
irrevocable (until the Termination Date) and coupled with an interest and will
take such further action and execute such other instruments as may be necessary
to effectuate the intent of this proxy and hereby revokes any proxy previously
granted by such Stockholder with respect to the Shares. This proxy shall
terminate automatically on the Termination Date.
4. Certain Covenants of the Stockholders. Each Stockholder hereby agrees
-------------------------------------
as follows:
4.1 Grant of Options. (a) Subject to the terms of this Section 4.1, such
----------------
Stockholder hereby grants to MergerCo (or its designee) an irrevocable option
(each, an "Option") to purchase such Stockholder's Shares at a purchase price
------
per share equal to $25 (the "Share Purchase Price").
--------------------
(b) Exercise of Options. MergerCo may exercise the Options, in whole or in
-------------------
part, at any time and from time to time, following the occurrence of a Purchase
Event (as defined below); provided that any Options not theretofore exercised
--------
shall expire and be of no further force and effect upon the earliest to occur
(the "Expiration Date") of (i) the Effective
---------------
5
<PAGE>
Time of the Merger, (ii) 120 days after the first occurrence of a Purchase Event
or (iii) termination of the Recapitalization Agreement in accordance with its
terms, other than a termination pursuant to Sections 7.1(c) or 7.1(f).
As used herein, a "Purchase Event" shall mean any of the following events
that occurs after the date hereof: (A) beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Exchange Act of more than 15% of the
outstanding shares of Company Common Stock (or rights to acquire such stock)
shall have been acquired by any person or "group" (within the meaning of such
Rule) other than MergerCo or any affiliate of MergerCo, (B) the Company shall
have entered into a definitive agreement or approved or recommended any proposal
which provides for the acquisition of 15% or more of the outstanding shares of
Company Common Stock or all or substantially all of the assets of the Company by
any person or group (so defined) other than MergerCo or an affiliate of
MergerCo; (C) any person or group other than MergerCo or an affiliate of
MergerCo shall have proposed to acquire more than 15% of the outstanding shares
of Company Common Stock or all or substantially all of the assets of the Company
for a consideration per share greater than the Share Purchase Price and
thereafter the Merger shall not have been approved by the Company's stockholders
when submitted for stockholder approval, or the meeting of stockholders to
approve the Merger shall not have been held or shall have been canceled prior to
the termination of the Recapitalization Agreement, or (D) the Board of Directors
of the Company shall have withdrawn or adversely modified its recommendation of
the Merger.
(c) Notice of Exercise. To exercise an Option, MergerCo shall, prior to
------------------
the Expiration Date, give written notice (a "Notice of Exercise") to the
------------------
Stockholder who granted such Option specifying the location in New York, New
York, and time for the closing (the "Closing") of such purchase. The Closing
-------
shall be held on the date that is no later than three business days after the
date on which each of the conditions set forth in Section 4.1(d) below has been
satisfied or waived by MergerCo.
(d) Conditions to Closing Following Exercise of Options. The occurrence
---------------------------------------------------
of the Closing shall be subject to the satisfaction of each of the following
conditions:
(i) to the extent necessary, any applicable waiting periods (and any
extension thereof) under the HSR Act with respect to the purchase of the Shares
following the exercise of an Option shall have expired or been terminated;
(ii) to the extent necessary, such filings as may required by or under
any health care licensure laws, reimbursement authorities and their agents,
certificate of need laws and other health care laws and regulations, pertaining
to any notification, disclosure or required approval required due to the
purchase of the Stockholders' Shares as contemplated hereby shall have been made
and such approvals shall have been received.
(iii) no preliminary or permanent injunction or other order, decree or
ruling issued by any court of governmental or regulatory authority, domestic or
foreign, of competent jurisdiction prohibiting the exercise of an Option or the
delivery of Shares shall be in effect.
6
<PAGE>
(e) Payment for and Delivery of Certificates. At the Closing, (i)
----------------------------------------
MergerCo (or its designee) shall pay, by wire transfer of immediately available
funds to the account of such Stockholder at the Bank (in the case of the Pledgor
Stockholder) or other financial institution (such account and the wire
instructions therefor will be provided to MergerCo by such Stockholder at least
two (2) business days prior to the Closing), an amount equal to the product of
(x) $25 and (y) the number of Shares owned by such Stockholder and (ii) each
Stockholder whose Shares are being purchased shall deliver or shall cause to be
delivered to MergerCo a certificate or certificates evidencing such
Stockholder's Shares, and such Stockholder agrees that such Shares shall be
transferred free and clear of all Liens, including without limitation, the Stock
Pledge. All such certificates representing Shares shall be duly endorsed in
blank, or with appropriate stock powers, duly executed in blank, attached
thereto, in proper form for transfer, with the signature of such Stockholder
thereon guaranteed, and with all applicable taxes paid or provided for.
4.2 No Solicitation. Prior to the Termination Date, no Stockholder shall
---------------
(directly or indirectly through advisors, agents or other intermediaries), nor
shall such Stockholder authorize or permit any of its officers, directors,
agents, representatives or advisors to, solicit, knowingly encourage,
participate in or initiate discussions or negotiations with, or provide any
information to, any person or group (other than MergerCo or any affiliate,
associate or designee of MergerCo) concerning an Acquisition Proposal (as
defined in the Recapitalization Agreement) for an Acquisition Transaction (as
defined in the Recapitalization Agreement); provided, however, that the
-------- -------
foregoing shall not restrict any Stockholder who is a director of the Company
from taking actions in such person's capacity as a director of the Company to
the extent and in the circumstances permitted by Section 5.3 of the
Recapitalization Agreement. A Stockholder shall promptly (and in no event later
than 24 hours after receipt of the relevant Acquisition Proposal) notify (which
notice shall be provided both orally and in writing) MergerCo if any Acquisition
Proposal is made to such Stockholder (in its capacity as such) and shall, in
such notice, indicate in reasonable detail the terms and conditions of such
proposal and shall keep MergerCo promptly advised as to any material changes to
such terms and conditions; provided that such Stockholder need not give such
--------
notice or keep MergerCo so advised if the Company knows of such Acquisition
Proposal and has promptly done so or is promptly doing so. Each Stockholder
shall immediately cease, and shall direct its advisors and other agents to cease
any and all existing discussions or negotiations, if any, with any parties
conducted heretofore with respect to any Acquisition Proposal; provided that
--------
following the cessation of any such discussions or negotiations, future
discussions or negotiations with any such parties shall be governed solely by
the foregoing.
4.3 Restriction on Transfer, Proxies and Non-Interference; Restriction on
----------------------------------------------------- ---------------
Withdrawal. Prior to the Termination Date, no Stockholder shall directly or
- ----------
indirectly: (a) except pursuant to or as contemplated by the terms of the
Recapitalization Agreement, to MergerCo pursuant to this Agreement or to the
Bank pursuant to and in accordance with the Loan and Security Agreement, offer
for sale, sell, transfer, tender, pledge, encumber, assign or otherwise dispose
of, enforce or permit the execution of the provisions of any redemption
agreement with the Company or enter into any contract, option or other
arrangement or understanding with respect to or consent to the offer for sale,
sale, transfer, tender, pledge, encumbrance, or other disposition of, or
exercise any discretionary powers to distribute, any or
7
<PAGE>
all of the Shares owned by it or any interest therein; (b) except as
contemplated hereby or as provided in the Loan and Security Agreement, grant any
proxies or powers of attorney with respect to any Shares, deposit any Shares
into a voting trust or enter into a voting agreement with respect to any Shares;
or (c) take any action that would make any representation or warranty of any
Stockholder contained herein untrue or incorrect or have the effect of
preventing or disabling any Stockholder from performing its obligations under
this Agreement.
4.4 Waiver of Appraisal and Dissenter's Rights. Each Stockholder hereby
------------------------------------------
irrevocably waives any rights of appraisal or rights to dissent from the Merger
that such Stockholder may have.
4.5 Disclosure. Each Stockholder hereby permits MergerCo to publish and
----------
disclose in any press release issued in connection with the Merger and any
documents and schedules filed with the SEC in connection therewith, the identity
of the Stockholders and the nature of their commitments, arrangements and
understandings under this Agreement.
5. Election to Retain Company Stock. The Stockholders listed on Exhibit C
--------------------------------
acknowledge that recapitalization accounting treatment for the Merger is an
essential requirement for MergerCo to proceed with the Merger. In furtherance
thereof, each Stockholder listed on Exhibit C hereto hereby agrees that it will
take all actions and execute all documents reasonably necessary to cause that
number of such Stockholder's Shares determined to be "Pre-Closing Election
Shares" in accordance with the formula set forth on Exhibit C to be "Electing
Shares" for such Stockholder under the Recapitalization Agreement.
6. Further Assurances. From time to time, at any other party's request
------------------
and without further consideration, each party hereto (but, in the case of the
Stockholders, solely in their capacity as such) shall execute and deliver such
additional documents and take all such further action as may be necessary or
desirable (without unreasonable cost or expense) to consummate and make
effective, in the most expeditious manner practicable, the transactions
contemplated by this Agreement.
7. Certain Events. Each Stockholder agrees that this Agreement and the
--------------
obligations hereunder shall attach to all Shares and shall be binding upon any
person or entity to which legal or beneficial ownership of such Shares shall
pass, whether by operation of law or otherwise.
8. Stop Transfer. Each Stockholder agrees with, and covenants to MergerCo
-------------
that it shall not request that the Company register the transfer (book-entry or
otherwise) of any certificate or uncertificated interest representing any of the
Shares. Within 2 Business Days of the date hereof, the Company will direct the
Company's transfer agent to place stop transfer order instructions with respect
to the Shares and will notify such transfer agent that this Agreement places
restrictions on the Shares.
9. Termination. The obligations of each Stockholder under Sections 3, 4.2,
-----------
and 4.3 shall terminate upon the first to occur of (a) the Effective Time
of the Merger and (b) the date the Recapitalization Agreement is terminated in
accordance with its terms. Except as set forth in
8
<PAGE>
this Section 9, all other agreements and obligations of the parties hereto shall
survive the Effective Time of the Merger and/or the Termination Date, as
applicable.
9
<PAGE>
10. Miscellaneous.
-------------
10.1 Entire Agreement; Assignment. This Agreement and the Letter
----------------------------
Agreement (a) constitutes the entire agreement between the parties with respect
to the subject matter hereof and supersedes all other prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof and (b) shall not be assigned by operation of law or
otherwise without the prior written consent of the other parties, provided that
MergerCo may assign, in its sole discretion, its rights and obligations
hereunder to any affiliate of MergerCo, but no such assignment shall relieve
MergerCo of its obligations hereunder if such assignee does not perform such
obligations.
10.2 Amendments. This Agreement may not be modified, amended, altered or
----------
supplemented, except upon the execution and delivery of a written agreement
executed by the parties hereto.
10.3 Notices. All notices, requests, claims, demands and other
-------
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly received if so given) by hand delivery, telegram, telex
or telecopy, or by mail (registered or certified mail, postage prepaid, return
receipt requested) or by any courier service, such as Federal Express, providing
proof of delivery. All communications hereunder shall be delivered to the
respective parties at the following addresses:
(a) if to MergerCo, to:
c/o Investcorp International Inc.
280 Park Avenue, 37th Floor West
New York, New York 10017
Telephone: 212 599-4700
Telecopy: 212 983-7073
Attention: Christopher J. O'Brien
with a copy to:
Gibson, Dunn & Crutcher LLP
200 Park Avenue
New York, New York 10166-0193
Telephone: (212) 351-4000
Telecopy: (212) 351-4035
Attention: E. Michael Greaney, Esq.
Sean P. Griffiths, Esq.
(b) if to the Stockholders, to them at:
c/o Harborside Healthcare Corporation
470 Atlantic Avenue
Boston, MA 02210
10
<PAGE>
Telephone: (617) 423-2233
Telecopy: (617) 556-1408
with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1211 Avenue of the Americas
New York, New York 10019
Telephone: (212) 373-3000
Telecopy: (212) 373-42392
Attention: James M. Dubin, Esq.
and
Kaye, Scholer, Fierman, Hayes & Handler, LLP
425 Park Avenue
New York, New York 10022
Telephone: (212) 836-8000
Telecopy: (212) 836-8689
Attention: Mel Cherney
and
The Berkshire Group
470 Atlantic Avenue
Boston, MA 02210
Telephone: (617) 423-2233
Telecopy: (617) 556-1408
Attention: Scott Spelfogel
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above.
10.4 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
10.5 Enforcement. Each of the parties hereto agrees, recognizes and
-----------
acknowledges that a breach by it of any covenants or agreements contained in
this Agreement will cause the other party to sustain damage for which it would
not have an adequate remedy at law for money damages, and therefore each of the
parties hereto agrees that in the event of any such breach the aggrieved party
shall be entitled to the remedy of specific performance of such
11
<PAGE>
covenants and agreements and injunctive and other equitable relief in addition
to any other remedy to which it may be entitled, at law or in equity.
10.6 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same Agreement.
10.7 Descriptive Headings. The descriptive headings used herein are
--------------------
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
10.8 Severability. Whenever possible, each provision or portion of any
------------
provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or portion of any provision in such jurisdiction, and this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision or portion of any provision had never been
contained herein.
10.9 Definitions. For purposes of this Agreement:
-----------
(a) "beneficially own" or "beneficial ownership" with respect to any
securities shall mean having "beneficial ownership" of such securities (as
determined pursuant to Rule 13d-3 under the Exchange Act), including pursuant to
any agreement, arrangement or understanding, whether or not in writing. Without
duplicative counting of the same securities by the same holder, securities
beneficially owned by a Person shall include securities Beneficially Owned by
all other Persons with whom such Person would constitute a "group" as described
in Section 13(d)(3) of the Exchange Act.
(b) "Person" shall mean an individual, corporation, limited liability
company, partnership, joint venture, association, trust, unincorporated
organization or other entity.
(c) In the event of a stock dividend or distribution, or any change in
the Company Common Stock by reason of any stock dividend, split-up,
recapitalization, combination, exchange of shares or the like, the term "Shares"
shall be deemed to refer to and include the Shares as well as all such stock
dividends and distributions and any shares into which or for which any or all of
the Shares may be changed or exchanged.
(d) "Business Day" shall mean a day on which banks are not required or
authorized to be closed in the City of New York.
10.10 Stockholder Capacity, etc. Notwithstanding anything herein to the
--------------------------
contrary, no person who is a director, officer or employee of a Stockholder who
is, or becomes during the term hereof, a director of the Company makes any
agreement or understanding herein in his or her capacity as such director, and
the agreements set forth herein shall in no way restrict any director in the
exercise of his or her fiduciary duties as a director of the Company in
12
<PAGE>
accordance with the requirement of Section 5.3 of the Recapitalization
Agreement. Each Stockholder has executed this Agreement solely in its capacity
as the record and/or beneficial holder of Shares. Notwithstanding any transfer
of Shares, the transferor shall remain liable for the performance of all
obligations under this Agreement of the transferor.
[Signatures appear on next page]
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
HH ACQUISITION CORP.
By: /s/ Christopher J. O'Brien
--------------------------
Name: Christopher J. O'Brien
Title: President
KRUPP ENTERPRISES, L.P.
By: KGP-1 Incorporated,
its General Partner
By: /s/ Douglas Krupp
-----------------
Name: Douglas Krupp
Title: Chairman
THE BERKSHIRE COMPANIES LIMITED PARTNERSHIP
By: KGP-1 Incorporated,
its General Partner
By: /s/ Douglas Krupp
-----------------
Name: Douglas Krupp
Title: Chairman
THE GEORGE KRUPP 1994 FAMILY TRUST
By: /s/ Lawrence I. Silverstein
---------------------------
Name: Lawrence I. Silverstein
Title: Trustee
By: /s/ Paul Krupp
--------------
Name: Paul Krupp
Title: Trustee
By: /s/ M. Gordon Ehrlich
---------------------
Name: M. Gordon Ehrlich
Title: Trustee
<PAGE>
THE DOUGLAS KRUPP 1994 FAMILY TRUST
By: /s/ Lawrence I. Silverstein
---------------------------
Name: Lawrence I. Silverstein
Title: Trustee
By: /s/ Paul Krupp
--------------
Name: Paul Krupp
Title: Trustee
By: /s/ M. Gordon Ehrlich
---------------------
Name: M. Gordon Ehrlich
Title: Trustee
STEPHEN L. GUILLARD
/s/ Stephen L. Guillard
- -----------------------
Name: Stephen L. Guillard
DAMIAN DELL'ANNO
/s/ Damian N. Dell'Anno
- -----------------------
Name: Damian Dell'Anno
15
<PAGE>
EXHIBIT A
STOCKHOLDER AGREEMENT
---------------------
NAME AND ADDRESS OF STOCKHOLDER NUMBER OF SHARES OWNED
Krupp Enterprises, L.P. 63,360
c/o The Berkshire Group
470 Atlantic Avenue
Boston, MA 02210
Telephone: (617) 423-2233
Telecopy: (617) 556-1408
Attention: Scott Spelfogel
The Berkshire Companies Limited Partnership 2,696,903
c/o The Berkshire Group
470 Atlantic Avenue
Boston, MA 02210
Telephone: (617) 423-2233
Telecopy: (617) 556-1408
Attention: Scott Spelfogel
The George Krupp 1994 Family Trust 622,042
c/o The Berkshire Group
470 Atlantic Avenue
Boston, MA 02210
Telephone: (617) 423-2233
Telecopy: (617) 556-1408
Attention: Scott Spelfogel
The Douglas Krupp 1994 Family Trust 622,042
c/o The Berkshire Group
470 Atlantic Avenue
Boston, MA 02210
Telephone: (617) 423-2233
Telecopy: (617) 556-1408
Attention: Scott Spelfogel
Stephen L. Guillard 177,688
c/o Harborside Healthcare Corp.
470 Atlantic Avenue
Boston, MA 02210
Telephone: (617) 423-2233
Telecopy: (617) 556-1408
Damian Dell'Anno 47,563
c/o The Berkshire Group
470 Atlantic Avenue
Boston, MA 02210
Telephone: (617) 423-2233
Telecopy: (617) 556-1408
<PAGE>
ANNEX III
[LETTERHEAD OF SCHRODER & CO. INC.]
April 15, 1998
The Board of Directors
Harborside Healthcare Corporation
470 Atlantic Avenue
Boston, Massachusetts 02210
Members of the Board of Directors:
We understand that Harborside Healthcare Corporation (the "Company") and an
affiliate ("MergerCo") of Investcorp International Inc. ("Investcorp") have
entered into a Merger Agreement dated as of April 15, 1998 (the "Merger
Agreement"), pursuant to which MergerCo will be merged with and into the Company
in a transaction (the "Merger") in which each outstanding share of the Company's
common stock, par value $.01 per share (the "Common Stock") (other than
dissenting shares, shares of Common Stock held in treasury, shares owned by any
subsidiary of the Company, by MergerCo or by any affiliate of MergerCo and
approximately 225,651 shares held by Stephen L. Guillard, Damian Dell'Anno and
William H. Stephan (the "Rollover Stockholders")), will be converted into either
$25.00 in cash ("Consideration") or the right to retain, at the election of the
holder thereof, one share of Common Stock (a "Non-Cash Election Share"), up to a
minimum of 361,500 Non-Cash Election Shares and a maximum of 500,600 Non-Cash
Election Shares, representing approximately 6.0% of the outstanding shares of
Common Stock of the Company after giving effect to the Merger. Because the
right of a stockholder to elect to retain Common Stock is optional, we have not
been asked to value the stock of the surviving entity, and have not done so.
You have requested our opinion, as investment bankers, as to the fairness,
from a financial point of view, of the Consideration to be received by the
holders of Common Stock in the Merger (the "Opinion"). We have not been
requested to opine as to, and our opinion does not in any manner address, the
fairness of the Non-Cash Election Shares to be received by the holders of Common
Stock who elect not to receive the Consideration in the Merger or the
consideration to be received by the Rollover Stockholders. It is understood
that the Opinion shall be used by you solely in connection with your
consideration of the fairness of the Consideration to be received by holders of
Common Stock and for no other purpose, and that the Company will not furnish the
Opinion or any other material prepared by Schroder & Co. Inc. ("Schroders") to
any other person or persons or use or refer to the Opinion for any other purpose
without Schroders' prior written approval. Schroders understands and agrees
that the Opinion may be referred to and reproduced in any proxy statement of the
Company filed with the Securities and Exchange Commission in connection with the
Merger.
Schroders, as part of its investment banking business, is regularly engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, ne-
<PAGE>
Board of Directors
Harborside Healthcare Corporation
April 15, 1998
Page 2
gotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. As you are aware, Schroders has acted as financial advisor to the
Company in connection with the proposed Merger and will receive a fee for our
services. In addition, as you are aware, Schroders may propose to participate in
any financing to fund the cash payments to be made in the Merger.
In connection with our opinion set forth herein, we have, among other
things:
(i) reviewed the Merger Agreement;
(ii) visited the executive offices and certain operations of the Company
and participated in due diligence meetings with the Company and Investcorp;
(iii) reviewed the Company's Annual Reports on Form 10-K filed with the
Securities and Exchange Commission for the fiscal years ended December 31,
1996 and 1997;
(iv) reviewed projected financial statements of the Company prepared by
management of the Company;
(v) held discussions with management of the Company and Investcorp
regarding the business, operations and prospects of the Company and the
long-term care industry;
(vi) performed various financial analyses, as we deemed appropriate, of
the Company using generally accepted analytical methodologies, including:
(i) an analysis of premiums paid in recent public merger and acquisition
transactions; (ii) the application of the public trading multiples of
companies which we deemed comparable to the Company to the financial
results of the Company ; (iii) the application of the multiples reflected
in recent public mergers and acquisitions for businesses which we deemed
comparable to the Company to the financial results of the Company; (iv) a
discounted projected cash flow analysis;
(vii) reviewed the historical trading prices and volumes of the Common
Stock on the New York Stock Exchange; and
(viii) performed such other financial studies, analyses, inquiries and
investigations as we deemed appropriate.
In our review and analysis and in formulating our opinion, we have assumed
and relied upon the accuracy and completeness of all information supplied or
otherwise made available to us by the Company or obtained by us from other
sources, and upon the assurance of the Company's management that they are not
aware of any information or facts that would make the information provided to us
incomplete or misleading. We have not at-
<PAGE>
Board of Directors
Harborside Healthcare Corporation
April 15, 1998
Page 3
tempted to independently verify any of such information. We have not undertaken
an independent appraisal of the assets or liabilities (contingent or otherwise)
of the Company, nor have we been furnished with any such appraisals. With
respect to the projected financial statements referred to in clause (iv) above,
we have been advised by the Company, and we have assumed, without independent
investigation, that they have been reasonably prepared and reflect the Company's
best estimates and judgments of the Company's future results of operations and
financial condition at and for the periods specified therein, and we express no
opinion with respect to such projected financial statements.
Our opinion is necessarily based upon financial, economic, market and other
conditions as they exist and can be evaluated by us on the date hereof. We
disclaim any undertaking or obligation to advise any person of any change in any
fact or matter affecting our opinion which may come or be brought to our
attention after that date of the opinion unless specifically requested to do so.
Our opinion does not constitute a recommendation as to any action the Board
of Directors of the Company or any stockholder of the Company should take in
connection with the Merger Agreement, the Merger or any aspect thereof or
alternatives thereto. Without limitation to the foregoing, this letter does not
constitute a recommendation to any stockholder with respect to whether to elect
to receive the Consideration or vote in favor of transactions contemplated by
the Merger Agreement, and should not be relied upon by any stockholder as such.
In rendering our opinion, we have not been engaged as an agent or fiduciary of
the Company's stockholders or of any other third party. Our opinion relates
solely to the fairness, from a financial point of view, of the Consideration to
be received by the holders of Common Stock in the Merger. We express no opinion
herein as to the structure, terms or effect of any other aspect of the
transaction's contemplated by, or provisions of, the Merger Agreement.
Based upon and subject to all the foregoing, we are of the opinion, as
investment bankers, that as of the date hereof, the Consideration to be received
by the holders of Common Stock pursuant to the Merger is fair, from a financial
point of view, to such holders.
Very truly yours,
/s/ Ilan Kaufthal
Schroder & Co. Inc.
<PAGE>
ANNEX IV
DELAWARE CODE
TITLE 8. CORPORATIONS
CHAPTER I. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
8 DEL. C. SECTION 262
SECTION 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to Section 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under
this section
<PAGE>
shall be available for the shares of any class or series of stock of a
constituent corporation if the holders thereof are required by the terms of an
agreement of merger or consolidation pursuant to Sections 251, 252, 254, 257,
258, 263 and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipt in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash in
lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation party
to a merger effected under Section 253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to
<PAGE>
the corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of his shares. A proxy
or vote against the merger or consolidation shall not constitute such a demand.
A stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to Section 228 or
Section 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within twenty days after the date
of mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall not be more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on
<PAGE>
the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the
<PAGE>
shares, determining their fair value exclusive of any element of value arising
from the accomplishment or expectation of the merger or consolidation, together
with a fair rate of interest, if any, to be paid upon the amount determined to
be the fair value. In determining such fair value, the Court shall take into
account all relevant factors. In determining the fair rate of interest, the
Court may consider all relevant factors, including the rate of interest which
the surviving or resulting corporation would have had to pay to borrow money
during the pendency of the proceeding. Upon application by the surviving or
resulting corporation or by any stockholder entitled to participate in the
appraisal proceeding, the Court may, in its
discretion, permit discovery or other pretrial proceedings and may proceed to
trial upon the appraisal prior to the final determination of the stockholder
entitled to an appraisal. Any stockholder whose name appears on the list filed
by the surviving or resulting corporation pursuant to subsection (f) of this
section and who has submitted his certificates of stock to the Register in
Chancery, if such is required, may participate fully in all proceedings until it
is finally determined that he is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be
<PAGE>
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
<PAGE>
ANNEX V
FORM OF
RESTATED CERTIFICATE OF INCORPORATION
OF
HARBORSIDE HEALTHCARE CORPORATION
(Originally incorporated on ________________)
ARTICLE I -- NAME
-----------------
The name of the corporation (hereinafter called the "Corporation") is
Harborside Healthcare Corporation.
ARTICLE II -- REGISTERED OFFICE
-------------------------------
The address, including street, number, city, and county, of the registered
office of the Corporation in the State of Delaware is 1013 Centre Road, City of
Wilmington, County of New Castle, Delaware 19805; and the name of the registered
agent of the Corporation in the State of Delaware is The Prentice-Hall
Corporation System, Inc.
ARTICLE III -- PURPOSE
----------------------
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE IV -- CAPITALIZATION
----------------------------
1. Definitions. As used in this Article IV, the following terms shall
-----------
have the following meanings:
"Affiliate", with respect to a Class D Stockholder that is not a
---------
natural person, means (i) any Person which, directly or indirectly, is in
control of, is controlled by, or is under common control with, such Class D
Stockholder or (ii) any Person who is a director or officer (a) of such Class D
Stockholder, (b) of any subsidiary of such Class D Stockholder or (c) of any
Person described in clause (i) above. For purposes of this definition,
"control" of a Person shall mean the power, directly or indirectly, (y) to vote
fifty percent (50%) or more of the securities having ordinary voting power for
the election of directors of such Person whether by ownership of securities,
contract, proxy or otherwise, or (z) to direct or cause the direction of the
management and policies of such Person whether by ownership of securities,
contract, proxy or otherwise.
"Board" means the Board of Directors of the Corporation.
-----
<PAGE>
"Business Day" means any day other than a Saturday, Sunday, federal
------------
holiday or other day on which commercial banks in New York City are authorized
or required to close under the laws of the State of New York.
"Certificate of Incorporation" means this Restated Certificate of
----------------------------
Incorporation of the Corporation.
"Class A Stock" means the Class A Common Stock described in Section
-------------
2(c).
"Class B Stock" means the Class B Common Stock described in Section
-------------
2(c).
"Class C Stock" means the Class C Common Stock described in Section
-------------
2(c).
"Class D Stock" means the Class D Common Stock described in Section
-------------
2(c).
"Class A Stockholder" means a record holder of one or more shares of
-------------------
Class A Stock.
"Class B Stockholder" means a record holder of one or more shares of
-------------------
Class B Stock.
"Class C Stockholder" means a record holder of one or more shares of
-------------------
Class C Stock.
"Class D Stockholder" means a record holder of one or more shares of
-------------------
Class D Stock.
"Common Stock" has the meaning set forth in Section 2(c).
------------
"Common Stockholder" means a record holder of one or more shares of
------------------
Common Stock.
"Conversion Date" has the meaning set forth in Section 6.
---------------
"Corporation" means Harborside Healthcare Corporation.
-----------
"Difference Shares" has the meaning set forth in Section 5.
-----------------
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
and the rules and regulations promulgated thereunder.
"Initial Public Offering" means the effectiveness after [_____________
-----------------------
(Closing Date of Merger)] of a registration statement under the Securities Act
on any of Forms S-1, S-2, S-3 or any similar successor form covering any of the
Stock, and the completion of a sale of such Stock thereunder, (i) following
which the Corporation is, or becomes, a reporting company under Section 12(b) or
12(g) of the Exchange Act, and (ii) as a result of which the Stock is traded on
the New York Stock Exchange or the American Stock Exchange, or quoted on the
NASDAQ Stock Market or is traded or quoted on any other national stock exchange.
2
<PAGE>
"IPO Date" means the closing date of the Initial Public Offering.
--------
"Non-Redeemable Shares" means all shares of Class A Stock, Class B
---------------------
Stock or Class C Stock that have been previously sold (whether under Section 4
or Section 5(c)) pursuant to a Tag-Along Transfer other than pursuant to a
Single Transaction Sale.
"Notice Date" has the meaning set forth in Section 4(b).
-----------
"Other Stockholders" has the meaning set forth in Section 4(a).
------------------
"Permitted Transferee" with respect to a Transfer by a Class D
--------------------
Stockholder, means (i) with respect to any Class D Stockholder who is a natural
person, a Transfer to (a) such Stockholder's spouse or issue, or (b) a trust the
beneficiaries of which, and a partnership the limited and general partners of
which, include only the Class D Stockholder, his spouse or issue; (ii) with
respect to any Class D Stockholder that is not a natural person, (A) a Transfer
to an Affiliate of such Class D Stockholder; or (B) a Transfer to another Class
D Stockholder or its Affiliates; provided such other Class D Stockholder
--------
referenced in clauses (i) and (ii) did not acquire its shares of Class D Stock
pursuant to a Tag-Along Transfer.
"Person" means any natural person, partnership, limited liability
------
company, corporation (including the Corporation), trust or unincorporated
organization or a government or a political subdivision thereof.
"Preferred Stock" has the meaning set forth in Section 2(a).
---------------
"Preferred Stock Designation" has the meaning set forth in Section
---------------------------
2(b).
"Proposed Purchase Amount" has the meaning set forth in Section 4(a).
------------------------
"Proposed Transferee" has the meaning set forth in Section 4(a).
-------------------
"Proposed Transferor" has the meaning set forth in Section 4(a).
-------------------
"Redemption Date" has the meaning set forth in Section 5(d).
---------------
"Sale of the Corporation" means, (i) the sale of one hundred percent
-----------------------
(100%) of the outstanding shares of Stock; (ii) a sale of all or substantially
all of the assets of the Corporation; or (iii) a merger, consolidation or
recapitalization of the Corporation as a result of which the ownership of the
Stock of the Corporation (or the voting stock of the surviving corporation, if
the Corporation is not the survivor) is changed to the extent of one hundred
percent (100%).
"SEC" means the Securities and Exchange Commission.
---
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations promulgated thereunder.
"Single Transaction Sale" means a Sale of the Corporation in a single
-----------------------
transaction.
3
<PAGE>
"Staggered Sale" means a Sale of the Corporation in more than one
--------------
transaction, each such transaction also being referred to individually as a
"Staggered Sale."
"Stock" has the meaning set forth in Section 2(c).
-----
"Stockholder" means a record holder of one or more shares of Class A
-----------
Stock, Class B Stock, Class C Stock, Class D Stock, or Common Stock.
"Stockholder Agreements" means those certain Stockholder Agreements
----------------------
entered into in connection with the recapitalization of the Corporation prior to
or contemporaneously with the effectiveness of this Certificate of Incorporation
among the Corporation and certain Persons who then are or are thereby becoming
Stockholders, as the same may be supplemented, modified, amended and restated
from time to time in the manner provided therein. A copy of the Stockholder
Agreements will be supplied by the Corporation to any Stockholder party thereto
upon written request made to the Corporation at its registered office.
"Tag-Along Acceptance Date" has the meaning set forth in Section 4(c).
-------------------------
"Tag-Along Notice" has the meaning set forth in Section 4(c).
----------------
"Tag-Along Pro Rata Amount" has the meaning set forth in Section 4(a).
-------------------------
"Tag-Along Redemption Price" has the meaning set forth in Section
--------------------------
5(a).
"Tag-Along Transfer" has the meaning set forth in Section 4(a).
------------------
"Transfer", with respect to any share of Stock, means the sale,
--------
assignment, pledge, hypothecation, gift or any other disposition whatsoever of
such share (other than pursuant to the Initial Public Offering or pursuant to
the redemption or conversion of any such share of Stock, in either case in
accordance with the terms of this Certificate of Incorporation), or the
encumbrance or granting of any rights or interests whatsoever in or with respect
to such share, except with respect to any such encumbrance or granting of rights
or interests with respect to the Stockholder Agreements.
"Transfer Notice" has the meaning set forth in Section 4(b).
---------------
"Warrant" means the Class B Stock Purchase Warrant to be issued on or
-------
about the effective date of this Certificate of Incorporation by the Corporation
which entitles the Warrant Holder(s), upon the occurrence of a Warrant
Triggering Event, to purchase a number of shares of Common Stock of the
Corporation as specified therein.
"Warrant Date" means, (i) if the Warrant Triggering Event is the
------------
Initial Public Offering, the IPO Date, or (ii) if the Warrant Triggering Event
is a Sale of the Corporation, the closing date of (A) the Single Transaction
Sale, if the Sale of the Corporation is pursuant to a Single Transaction Sale,
or (B) the Staggered Sale that causes a Sale of the Corporation to occur, if the
Sale of the Corporation is pursuant to a series of Staggered Sales.
4
<PAGE>
"Warrant Holder(s)" means the holder(s) of the Warrants.
-----------------
"Warrant Redemption Price" has the meaning set forth in Section 5(b).
------------------------
"Warrant Shares" means the shares of Common Stock purchasable by the
--------------
Warrant Holder(s) pursuant to the exercise of the Warrants, which shall equal in
all cases the number of shares of Class B Stock redeemed in connection with the
exercise of such Warrant.
"Warrant Triggering Event" means the first to occur of (i) an Initial
------------------------
Public Offering or (ii) a Sale of the Corporation, whether such sale occurs
pursuant to a Single Transaction Sale or a series of Staggered Sales.
2. Designation and Number.
----------------------
(a) The total number of shares of all classes of stock which the
Corporation shall have authority to issue is [_________], of which [_________]
shares shall be preferred stock and shall have a par value of $0.01 per share
("Preferred Stock") and [__________] shares shall be common stock, as set forth
in paragraph (c) below.
(b) Preferred Stock. The Board is expressly authorized to provide for
---------------
the issue of all or any shares of the Preferred Stock, in one or more series,
and to fix for each such series such voting powers, full or limited, and such
designations, preferences and relative, participating, optional or other special
rights and such qualifications, limitations or restrictions thereof as shall be
stated and expressed in the resolution or resolutions adopted by the Board
providing for the issue of such series (a "Preferred Stock Designation") and as
may be permitted by the Delaware General Corporation Law ("DGCL"). The
Corporation may, by an amendment to the Certificate of Incorporation duly
adopted, increase or decrease, at any time and from time to time (but not below
the number of shares of Preferred Stock then outstanding), the number of
authorized shares of Preferred Stock. Unless otherwise provided in a Preferred
Stock Designation, shares of Preferred Stock redeemed, purchased or otherwise
acquired by the Corporation pursuant to the terms hereof shall be retired and
shall revert to authorized but unissued Preferred Stock.
(c) Common Stock. There shall be five classes of common stock of the
------------
Corporation. The first class of common stock of the Corporation shall have a
par value of $0.01 per share and shall be designated as "Class A Common Stock"
and the number of shares constituting such class shall be [_________]. The
second class of common stock of the Corporation shall have a par value of $0.01
per share and shall be designated as "Class B Common Stock" and the number of
shares constituting such class shall be [___________]. The third class of
common stock of the Corporation shall have a par value of $0.01 per share and
shall be designated as "Class C Common Stock" and the number of shares
constituting such class shall be [_________]. The fourth class of common stock
of the Corporation shall have a par value of $0.01 per share and shall be
designated as "Class D Common Stock" and the number of shares constituting such
class shall be [______]. The fifth class of common stock of the Corporation
shall have a par value of $0.01 per share and shall be designated as "Common
Stock" and the number of shares constituting such class shall be [_________].
The Class A
5
<PAGE>
Stock, Class B Stock, Class C Stock, Class D Stock and Common Stock are
sometimes referred to collectively herein as the "Stock". The Corporation may,
by an amendment to the Certificate of Incorporation duly adopted, increase or
decrease, at any time and from time to time (but not below the number of shares
of Class A Stock, Class B Stock, Class C Stock, Class D Stock or Common Stock
then outstanding), the number of authorized shares of Class A Stock, Class B
Stock, Class C Stock, Class D Stock or Common Stock, as the case may be. Shares
of Stock redeemed, purchased or otherwise acquired by the Corporation pursuant
to the terms hereof shall be retired and shall revert to authorized but unissued
Class A Stock, Class B Stock, Class C Stock, Class D Stock or Common Stock, as
the case may be.
3. Restrictions on Transfer.
------------------------
(a) Except for Transfers to a Permitted Transferee, no Class D
Stockholder shall Transfer any share of Class D Stock owned by such Class D
Stockholder except in accordance with the terms of this Certificate of
Incorporation. Any Transfer or attempt to Transfer any share of Class D Stock
in violation of the terms and conditions of this Certificate of Incorporation
shall be null and void and of no force and effect, the transferee thereof shall
not be deemed to be the registered holder thereof nor entitled to any rights
with respect thereto, and the Corporation shall refuse to Transfer any of such
Class D Stock on its books to such alleged transferee.
(b) No Stockholder shall Transfer any shares of Stock unless such
Transfer complies with the conditions specified in this Section 3(b), which are
intended to ensure compliance with the provisions of the Securities Act. Prior
to any Transfer, the holder of the shares of Stock proposed to be Transferred
(other than a holder of Class A Stock who is not an officer or director of the
Corporation) shall give written notice to the Corporation of such holder's
intention to effect such Transfer. Each such notice shall describe the manner
and circumstances of the proposed Transfer in sufficient detail, and, if
requested by the Corporation, shall be accompanied by either (i) a written
opinion of legal counsel who is reasonably satisfactory to the Corporation,
addressed to the Corporation and reasonably satisfactory in form and substance
to the Corporation's counsel, to the effect that the proposed Transfer may be
effected without registration under the Securities Act and qualification under
applicable state securities laws, or (ii) a "no action" letter from the SEC to
the effect that the Transfer of such securities without registration under the
Securities Act will not result in a recommendation by the staff of the SEC that
action be taken with respect thereof, or a combination of (i) and (ii) above,
whereupon the holder of such shares of Stock shall be entitled to Transfer such
shares in accordance with the terms of this Certificate and the written notice
delivered by the holder to the Corporation. Each certificate evidencing the
shares of Stock Transferred as above provided shall bear the appropriate
restrictive legend set forth in Section 9, provided that, following the Initial
-------- ----
Public Offering, such certificates shall bear the legend set forth in Section 9
or another legend only if, in the opinion of counsel to the Corporation, the
imposition of such legend is required under the Securities Act or other
applicable law. Any purported Transfer in violation of this Section 3(b) shall
be null and void and of no force or effect, and the Corporation shall not record
any such Transfer on its stock transfer books. The restrictions on Transfer
contained in this Section 3(b) shall not apply to Transfers of shares of Stock
(i) in the Initial Public Offering; or (ii) following the Initial Public
Offering, provided that such Transfer is made in compliance with
-------- ----
6
<PAGE>
the Securities Act and applicable state securities laws and in accordance with
any restrictions on transfer contained in any restrictive legend set forth on
the certificates representing such shares.
4. Tag-Along Rights.
----------------
(a) Transfer by Class D Stockholders. If, other than in connection
--------------------------------
with the Initial Public Offering, any Class D Stockholder or Stockholders (for
purposes of this Section 4, singularly or collectively, the "Proposed
Transferor"), at any time or from time to time in one transaction or in a series
of transactions, desires to enter into an agreement (whether oral or written) to
Transfer its shares of Class D Stock or any part thereof in a transaction which
is a sale to any Person other than a Permitted Transferee (the "Proposed
Transferee"), such proposed Transfer shall be deemed a "Tag-Along Transfer" and,
each of the Class A Stockholders, Class B Stockholders and Class C Stockholders
(collectively, the "Other Stockholders") shall have the right, as a condition to
such Tag-Along Transfer, to have the Proposed Transferee purchase from each such
Other Stockholder up to the number of shares (the "Tag-Along Pro Rata Amount")
of Class A Stock, Class B Stock or Class C Stock derived by multiplying the
total number of shares of Class A Stock, Class B Stock or Class C Stock
exclusive of Non-Redeemable Shares, as the case may be, owned by such Other
Stockholder by a fraction, the numerator of which is equal to the number of
shares of Class D Stock that is proposed to be Transferred by the Proposed
Transferor to the Proposed Transferee (the "Proposed Purchase Amount") and the
denominator of which is the total number of shares of Class D Stock (other than
shares of Class D Stock that have previously been Transferred pursuant to a Tag-
Along Transfer) outstanding as of the Notice Date (as defined in Section 4(b)).
All Tag-Along Transfers by Other Stockholders shall be on the same terms and
conditions (with such changes as are necessary to apply such terms and
conditions to a sale by such Other Stockholders) as the proposed Tag-Along
Transfer by the Proposed Transferor, provided that no Other Stockholder may be
-------- ----
required to make any representation or warranty in connection with the Tag-Along
Transfer other than as to its ownership and authority to Transfer the shares of
Stock to be Transferred by it, free and clear of any and all liens and
encumbrances (other than under this Certificate of Incorporation) and in
compliance with all applicable laws.
(b) Transfer Notice. The Proposed Transferor participating in a Tag-
---------------
Along Transfer shall at least thirty (30) Business Days prior to the closing
date thereof provide the Corporation and the Other Stockholders with written
notice (the "Transfer Notice") of the proposed Tag-Along Transfer containing the
following:
(i) the name and address of the Proposed Transferor and the
Proposed Transferee;
(ii) the Proposed Purchase Amount;
(iii) the proposed amount to be paid for such shares of Class D
Stock, the terms and conditions of payment offered by the Proposed
Transferee, the closing date for the proposed Tag-Along Transfer and the
estimated expenses payable pursuant to Section 4(d);
7
<PAGE>
(iv) the aggregate number of shares of Class A Stock, Class B
Stock or Class C Stock, as the case may be, held of record as of the date
the Transfer Notice is sent (the "Notice Date") by the Other Stockholder to
whom the notice is sent;
(v) the aggregate number of shares of Class A Stock, Class B
Stock or Class C Stock, as the case may be, held of record as of the Notice
Date by all Other Stockholders as a group;
(vi) the Tag-Along Pro Rata Amount for the Other Stockholder to
whom the notice is sent; and
(vii) a statement confirming that the Proposed Transferee has
agreed (i) to the tag-along rights, and (ii) pursuant to Section 5(c), to
purchase the number of shares of Stock redeemed pursuant to Section 5(a).
Upon written request by the Proposed Transferor, the Corporation shall
provide to the Proposed Transferor the information referred to in (iv) and (v)
above for inclusion in the Transfer Notice and such other information as may be
required to enable the Proposed Transferor to comply with the terms of this
Section 4(b).
(c) Tag-Along Notice. Each Other Stockholder desiring to participate
----------------
in the proposed Tag-Along Transfer shall provide a written notice (the "Tag-
Along Notice") to the Proposed Transferor on or before the expiration of ten
(10) Business Days after the Notice Date (the "Tag-Along Acceptance Date")
stating the number of shares held by such Other Stockholder (up to its Tag-Along
Pro Rata Amount) to be included in the proposed Tag-Along Transfer on the terms
and conditions specified in the Transfer Notice. The Tag-Along Notice given by
each Other Stockholder shall include and constitute such Other Stockholder's
binding agreement to include a number of shares equal to its Tag-Along Pro Rata
Amount (or such lesser amount as stated in the Tag-Along Notice) in the Tag-
Along Transfer on the terms and conditions specified in the Transfer Notice and
in this Certificate of Incorporation. If the Proposed Transferee does not
purchase all of the shares of Stock of the Proposed Transferor and the Other
Stockholders included in such proposed Tag-Along Transfer, as well as shares to
be issued under Section 5(c) in connection with the Tag-Along Transfer, then the
proposed Tag-Along Transfer to such Proposed Transferee shall be prohibited and
any attempt to consummate the proposed Tag-Along Transfer shall be null and void
and of no force and effect.
(d) Each Proposed Transferor and each Other Stockholder whose shares
are sold in a Tag-Along Transfer shall be entitled to receive the proceeds of
such Tag-Along Transfer less its pro rata share, based on the number of shares
included in such Tag-Along Transfer, of the expenses of the transaction
including, without limitation, legal, accounting and investment banking fees and
expenses, such determination of expenses to be made in the sole discretion of
the Board.
(e) The provisions of this Section 4 shall not apply to a subsequent
Transfer of any share of Class D Stock that has previously been the subject of a
completed Tag-Along Transfer which complied with the provisions of this Section
4.
8
<PAGE>
5. Redemption.
----------
(a) The number of shares of Class A Stock, Class B Stock or Class C
Stock equal to the difference ("Difference Shares") between (i) the number of
shares included in any Tag-Along Transfer by the Class A Stockholder, Class B
Stockholder or Class C Stockholder pursuant to Section 4 and (ii) the Tag-Along
Pro Rata Amount for each such Class A Stockholder, Class B Stockholder or Class
C Stockholder shall be redeemed by the Corporation, to the extent it is lawfully
permitted to do so, out of funds legally available therefor pro rata, based on
--- ----
the number of Difference Shares held by such Stockholders, from each of the
Class A Stockholders, Class B Stockholders and Class C Stockholders who elected
to include in the Tag-Along Transfer a number of shares of Stock less than the
number of shares that constitute their Tag-Along Pro Rata Amount or any such
Stockholders that did not elect to participate in a Tag-Along Transfer at a
redemption price (the "Tag-Along Redemption Price") for each share of Class A
Stock, Class B Stock or Class C Stock so redeemed equal to the per share price
paid for the Class D Stock by the Proposed Transferee (provided that, if the
consideration to be paid by the Proposed Transferee includes any non-cash
consideration, the per share amount to be paid in such redemption shall be the
fair value of the per share consideration to be paid by such Proposed Transferee
as determined in good faith by the Board) less such Other Stockholder's pro rata
--- ----
share, based on the number of shares of Stock so redeemed from such Other
Stockholder, of the expenses of the Tag-Along Transfer including, without
limitation, legal, accounting and investment banking fees and expenses, such
determination of expenses to be made in the sole discretion of the Board of
Directors of the Corporation. The provisions of this Section 5(a) shall not
apply to the Non-Redeemable Shares. Redemption under this subsection is
conditioned upon the contemporaneous purchase by the Proposed Transferee of the
shares issuable under Section 5(c) in connection with the applicable Tag-Along
Transfer.
(b) If the Warrant Holder(s) exercise(s) the Class B Warrant, the
Corporation shall redeem, to the extent it is lawfully permitted to do so, from
the Class B Stockholders, pro rata based on the number of shares of such Class B
--- ----
Stock then owned by each such Stockholder, out of funds legally available
therefor, a number of shares of Class B Stock equal to the number of Warrant
Shares at a redemption price (the "Warrant Redemption Price") equal to the par
value of each share of Class B Stock so redeemed. The provisions of this
Section 5(b) shall not apply to the Non-Redeemable Shares. If a redemption
pursuant to this Section 5(b) occurs as a result of a Sale of the Corporation,
such redemption shall occur immediately prior to any redemption pursuant to
Section 5(a) hereof. Redemption under this subsection is conditioned upon the
contemporaneous purchase of the Warrant Shares by the Warrant Holder(s) pursuant
to the Class B Warrant.
(c) The shares of Class B Stock redeemed by the Corporation pursuant
to a Section 5(b) mandatory redemption shall, on the Redemption Date (as defined
in Section 5(d)), be retired and upon such retirement shall automatically revert
to authorized but unissued shares of Class B Stock, and the Corporation shall,
on the Redemption Date, but immediately after such redemption and retirement,
issue, to the extent it is lawfully permitted to do so, to the Warrant Holder(s)
a number of shares of Common Stock equal to the number of Warrant Shares. The
shares of Class A Stock, Class B Stock or Class C Stock redeemed by the
Corporation pursuant to a Section 5(a) mandatory redemption pursuant to a Tag-
Along Transfer shall, on the
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Redemption Date, be retired and upon such retirement shall automatically revert
to authorized but unissued shares of Class A Stock, Class B Stock or Class C
Stock, as relevant, and the Corporation shall, on the Redemption Date, but
immediately after such redemption and retirement, issue, to the extent it is
lawfully permitted to do so, to the Proposed Transferee a number of shares of
Class A Stock, Class B Stock or Class C Stock equal to the number of shares of
such classes of Stock so redeemed. Upon any issuance of shares of Class A
Stock, Class B Stock or Class C Stock equal to the number of shares of such
class of Stock redeemed pursuant to a Section 5(a) mandatory redemption (and as
a condition to such issuance), the Corporation shall receive from the Proposed
Transferee as the purchase price for such shares an amount equal to the Tag-
Along Redemption Price.
(d) The Corporation shall give to each holder of record of the shares
of Class A Stock, Class B Stock or Class C Stock to be redeemed pursuant to the
terms of this Section 5 prior written notice of such redemption not less than
two Business Days prior to the date such shares will be redeemed (the
"Redemption Date") which (i) in the case of a redemption pursuant to Section
5(a) shall be the closing date of the Tag-Along Transfer and (ii) in the case of
a redemption pursuant to Section 5(b) shall be the Warrant Date. Each such
notice shall state: (A) the Redemption Date; (B) the total number of shares of
the Class A Stock, Class B Stock or Class C Stock to be redeemed and, if fewer
than all the shares held by such holder are to be redeemed, the number of such
shares to be redeemed from such holder; (C) the Tag-Along Redemption Price or
the Warrant Redemption Price, as relevant; and (D) the fact that the
certificates for the shares subject to redemption are to be surrendered in
exchange for payment of the Tag-Along Redemption Price or Warrant Redemption
Price, as relevant, at the principal office of the Corporation or at such other
place as the Corporation shall designate.
(e) On the Redemption Date, the shares of Class A Stock, Class B Stock
or Class C Stock required to be redeemed pursuant to the terms of this Section 5
shall be deemed to have been so redeemed, notwithstanding that the certificates
representing such Class A Stock, Class B Stock or Class C Stock shall not have
been surrendered at the principal office of the Corporation or such other place
as the Corporation may have designated or that notice from the Corporation shall
not have been given by the Corporation or, if given, shall not have been
received by any holder of Class A Stock, Class B Stock or Class C Stock whose
shares of Stock are to be so redeemed. All certificates representing the
redeemed shares of Class A Stock, Class B Stock or Class C Stock, including all
certificates not so delivered by such Class A Stockholders, Class B Stockholders
or Class C Stockholders, shall be, or shall be deemed to be, canceled by the
Corporation as of the Redemption Date and shall thereafter no longer be of any
force or effect.
6. Conversion.
----------
If the Initial Public Offering or a Sale of the Corporation (whether
pursuant to a Single Transaction Sale or a series of Staggered Sales) occurs,
each issued and outstanding share of Class A Stock, Class B Stock, Class C
Stock, and Class D Stock, not otherwise redeemed by the Corporation pursuant to
the mandatory redemption provisions of Section 5(a) or 5(b) hereof shall
automatically convert into one share of Common Stock effective on the Redemption
Date (or, in the case of an Initial Public Offering in which no Redemption Date
occurs, the IPO Date,
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<PAGE>
or, in the case of a Sale of the Corporation in which no Redemption Date occurs,
then effective immediately prior to the consummation of such Sale of the
Corporation), but immediately after the redemptions and issuances described in
Section 5 (the "Conversion Date"). Prior to or on the Conversion Date, each
holder of shares of Class A Stock, Class B Stock, Class C Stock, or Class D
Stock shall surrender such holder's certificates evidencing such shares at the
principal office of the Corporation or at such other place as the Corporation
shall designate to such holder in writing at least ten (10) Business Days prior
to the Conversion Date, and shall, within ten (10) Business Days after the
Conversion Date, be entitled to receive from the Corporation certificates
evidencing the number of shares of Common Stock into which such shares of Class
A Stock, Class B Stock, Class C Stock or Class D Stock are converted. On the
Conversion Date, each holder of shares of Class A Stock, Class B Stock, Class C
Stock or Class D Stock shall be deemed to be a holder of record of the Common
Stock issuable upon such conversion, notwithstanding that the certificates
representing such Class A Stock, Class B Stock, Class C Stock or Class D Stock
shall not have been surrendered at the principal office of the Corporation or
such other place as the Corporation may have designated, that notice from the
Corporation shall not have been given or, if given, shall not have been received
by any holder of shares of Class A Stock, Class B Stock, Class C Stock or Class
D Stock, or that certificates evidencing such shares of Common Stock shall not
then be actually delivered to such holder. All certificates representing the
converted shares of Class A Stock, Class B Stock, Class C Stock or Class D
Stock, including all certificates not so delivered by such Class A Stock, Class
B Stock, Class C Stock or Class D Stockholders, shall be, or shall be deemed to
be, canceled by the Corporation as of the Conversion Date and shall thereafter
no longer be of any force or effect and the Corporation shall not thereafter
issue any such shares of Class A Stock, Class B Stock, Class C Stock or Class D
Stock.
7. Voting Rights.
-------------
(a) Holders of shares of Class A Stock and Common Stock shall be
entitled to one vote, and holders of Class D Stock shall be entitled to [____]
votes, for each share of such stock held on all matters as to which stockholders
may be entitled to vote pursuant to the DGCL.
(b) Holders of Class B or Class C Stock shall not have any voting
rights, except that the holders of the Class B and Class C Stock shall have the
right to vote to the extent required under the laws of the State of Delaware.
Unless otherwise required by the terms of this Certificate of Incorporation,
paragraph (2) of subsection (b) of (S) 242 of the DGCL shall not entitle the
holders of any shares of Stock to vote as a class on the increase of the number
of authorized shares of such class of Stock or the decrease of the number of
authorized but not outstanding shares of such class of Stock. Except as
otherwise required by the DGCL and except as set forth in Section 7(c) below,
the holders of any class of Stock entitled to vote on any matter submitted to
such holders for a vote shall vote together as a single group and not as
separate classes.
(c) Any amendment, alteration or repeal of any provision of this
Certificate of Incorporation, whether by merger, consolidation or otherwise,
that would alter or change the relative powers, preferences, or special rights
of any class of capital stock so as to affect the holders of the Class A Stock
materially and adversely, will require, in addition to any other
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<PAGE>
approvals required by the DGCL and this Certificate of Incorporation, the
approval by the holders of a majority of the then outstanding shares of Class A
Stock.
8. Liquidation; Dividends; Certain Adjustments; Merger.
---------------------------------------------------
(a) Subject to the rights of the holders of any shares of then
outstanding Preferred Stock, any distribution made upon the liquidation,
dissolution or winding up of the affairs of the Corporation, whether voluntary
or involuntary, shall be allocated pro rata based upon the number of shares of
--- ----
Stock held by each Stockholder. None of the sale, transfer, conveyance or lease
of all or substantially all of the property or business of the Corporation, the
merger or consolidation of the Corporation into or with any other corporation or
the merger or consolidation of any other corporation into or with the
Corporation shall be deemed to be a dissolution, liquidation or winding up,
voluntary or involuntary, for the purposes of this Section 8(a).
(b) Subject to the rights of the holders of any shares of then
outstanding Preferred Stock, holders of Class A Stock, Class B Stock, Class C
Stock and Class D Stock shall be entitled to share ratably as a single class in
all dividends and other distributions of cash or any other right or property as
may be declared thereon by the Board of Directors from time to time out of
assets or funds of the Corporation legally available therefor.
(c) Whenever, during the period that shares of Class A Stock shall be
outstanding, the Corporation shall (i) declare a dividend on shares of any class
of Stock in shares of such class of Stock or in securities convertible into or
exchangeable for shares of such class of Stock, (ii) subdivide the outstanding
shares of any class of Stock, (iii) combine the outstanding shares of any class
of Stock into a smaller number of shares, or (iv) issue any shares of any class
of Stock upon reclassification of such shares, a corresponding dividend,
subdivision, combination or other adjustment shall be made with respect to the
shares of the other class or classes of Stock if and to the extent necessary to
prevent the interests of the holders of Class A Stock from being materially and
adversely affected.
(d) In the event of a merger or consolidation of the Corporation with
or into another entity (whether or not the Corporation is the surviving entity),
the holders of each share of Class A Stock shall be entitled to receive not less
than the same per share consideration as the per share consideration, if any,
received by the holders of Class B, Class C and Class D Stock in such merger or
consolidation (unless, in addition to such other approvals, if any as may be
required by the DGCL and this Certificate of Incorporation, a different
treatment is approved by holders of a majority of the then outstanding shares of
Class A Stock).
9. Legend.
------
(a) All certificates representing shares of Class A, Class B and Class
C Stock in the Corporation shall, in addition to other legends that may be
required by state or federal securities laws, bear the following legend:
"THESE SECURITIES ARE SUBJECT TO MANDATORY REDEMPTION BY THE
CORPORATION. AND SUCH REDEMPTION CAN BE ACCOMPLISHED WITHOUT THE
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<PAGE>
CERTIFICATES REPRESENTING SUCH SECURITIES BEING SURRENDERED AND WHETHER OR NOT
THE CORPORATION GIVES NOTICE OF SUCH REDEMPTION. THE CORPORATION WILL FURNISH
WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS THE POWERS, DESIGNATIONS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF
EACH CLASS OF STOCK OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR
RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS."
and the certificates representing shares of Class A Stock of the Corporation
held by officers and directors of the Corporation and shares of Class B and
Class C Stock of the Corporation shall bear the following additional legend:
"AS SPECIFIED IN THE CERTIFICATE OF INCORPORATION OF THE CORPORATION,
THE TRANSFERABILITY OF THESE SECURITIES IS SUBJECT TO RESTRICTION. THESE
SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE
SECURITIES LAWS OF ANY STATE AND MAY BE REOFFERED AND SOLD ONLY IF SO REGISTERED
OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE."
(b) All certificates representing shares of Class D Stock in the
Corporation shall, in addition to other legends that may be required by state or
federal securities laws, bear the following legend:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY BE REOFFERED AND SOLD ONLY IF
SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE."
"AS SPECIFIED IN THE CERTIFICATE OF INCORPORATION OF THE CORPORATION,
THE TRANSFERABILITY OF THESE SECURITIES IS SUBJECT TO RESTRICTION. THE
CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS THE
POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER
SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS."
(c) All certificates representing shares of Common Stock in the
Corporation shall, in addition to other legends that may be required by state or
federal securities laws, bear the following legend:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY BE REOFFERED AND SOLD ONLY IF
SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE."
"THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO
SO REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF
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<PAGE>
STOCK OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF
SUCH PREFERENCES AND/OR RIGHTS."
provided that, as specified in Section 3(b) hereof, following the Initial Public
- -------- ----
Offering, such certificates shall bear the first legend set forth in this
Section 9 (c) above or another legend similar to it only if, in the opinion of
counsel to the Corporation, the imposition of such legend is required under the
Securities Act or other applicable law and, to the extent applicable, the second
and third legends.
(d) All certificates representing shares of Stock shall bear such
additional legends as may be required pursuant to the Stockholder Agreements.
10. Record Holders. The Corporation shall be entitled to recognize the
--------------
exclusive right of a person registered in its records as the holder of shares of
Class A, Class B, Class C, Class D or Common Stock and such record holders shall
be deemed the holders of such shares for all purposes.
ARTICLE V -- MANAGEMENT OF BUSINESS AND AFFAIRS
-----------------------------------------------
For the management of the business and for the conduct of the affairs of
the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation and of its directors and of its stockholders or any
class thereof, as the case may be, it is further provided:
1. The management of the business and the conduct of the affairs of the
Corporation shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed by, or in the
manner provided in, the Bylaws. The phrase "whole Board" and the phrase "total
number of directors" shall be deemed to have the same meaning, to wit, the total
number of directors which the Corporation would have if there were no vacancies.
No election of directors need be by written ballot.
2. After the original or other Bylaws of the Corporation have been
adopted, amended, or repealed, as the case may be, in accordance with the
provisions of Section 109 of the DGCL, and, after the Corporation has received
any payment for any of its stock, the power to adopt, amend, or repeal the
Bylaws of the Corporation may be exercised by the Board of Directors of the
Corporation.
ARTICLE VI -- DIRECTOR LIABILITY
--------------------------------
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that (except as set forth below) this Article VI
does not eliminate or limit any such liability imposed by law: (i) for any
breach of the director's duty of loyalty to the Corporation or its stockholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) under Section 174 of the DGCL,
or (iv) for any transaction from which the director derived an improper personal
benefit. If the DGCL hereafter is amended to authorize the further elimination
or limitation of the liability of directors, then the liability of a director of
the
14
<PAGE>
Corporation shall be further eliminated or limited pursuant to this Article VI
to the fullest extent permitted by the DGCL as so amended. Unless applicable
law requires otherwise, any repeal of this Article VI by the stockholders of the
Corporation, and any modification to this Article VI (other than one further
eliminating or limiting director personal liability) shall be prospective only
and shall not adversely affect any elimination of, or limitation on, the
personal liability of a director of the Corporation existing at the time of such
repeal or modification.
ARTICLE VII -- INDEMNIFICATION
------------------------------
1. Indemnification. To the fullest extent from time to time permitted by
---------------
Section 145 of the DGCL, the Corporation shall indemnify each Authorized
Representative who was or is a party or who was or is threatened to be made a
party to or is otherwise involved in any threatened, pending or completed
action, suit or proceeding (including, without limitation, one by or in the
right of the Corporation to procure a judgment in its favor), whether civil,
criminal, administrative or investigative (hereinafter a "Proceeding"), by
reason of the fact that he or she is or was a director, officer, employee or
agent of the Corporation or is or was serving at the request of the Corporation
as a director, officer, employee or agent or another corporation, partnership,
joint venture, trust, limited liability company or other enterprise, including
service with respect to employee benefit plans, from and against any and all
expenses (including, without limitation, attorneys' fees and expenses),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such Authorized Representative or on such Authorized Representative's behalf
in connection with such Proceeding. The Corporation shall make such
indemnification to the Authorized Representative within 30 days after receipt by
the Corporation of the written request of the Authorized Representative for such
indemnification unless, within that time, the Corporation (by resolution of its
directors or stockholders or the written opinion of its independent legal
counsel) has determined that the Authorized Representative is not entitled to
such indemnification.
2. Advancement of Expenses. Expenses (including attorneys' fees and
-----------------------
expenses) incurred by an Authorized Representative or on such Authorized
Representative's behalf in defending any such Proceeding shall be paid by the
Corporation in advance of the final disposition of such Proceeding, within 10
days after receipt by the Corporation of the written request of the Authorized
Representative for such advance. To the extent required by law, the Corporation
may condition such advance upon the receipt of the written undertaking of such
Authorized Representative or on such Authorized Representative's behalf to repay
such amount if it shall ultimately be determined that the Authorized
Representative is not entitled to be indemnified by the Corporation. Such
undertaking shall not be required to be guarantied by any other person or
collateralized, and shall be accepted by the Corporation without regard to the
financial ability of the person providing such undertaking to make such
repayment.
3. Presumptions, Enforcement. For all purposes of this Article VII and to
-------------------------
the fullest extent permitted by applicable law, there shall be a rebuttable
presumption in favor of the Authorized Representative that all requested
indemnifications and advancements of expenses are reasonable and that all
conditions to indemnification or expense advancements, whether required under
this Article VII or the DGCL, have been satisfied. The rights to
indemnification and
15
<PAGE>
advancements of expenses provided by, or granted pursuant to, this Article VII
shall be enforceable by any person entitled to such indemnification or
advancement of expenses in any court of competent jurisdiction. Neither the
failure of the Corporation (including the directors, its independent legal
counsel and its stockholders) to have made a determination prior to the
commencement of such action that such indemnification or advancement of expenses
is proper in the circumstances nor an actual determination by the Corporation
(including its directors, independent legal counsel and its stockholders) that
such person in not entitled to indemnification or advancement of expenses shall
constitute a defense to the action or create a presumption that such person is
not so entitled. Such a person shall also be indemnified for any expenses
incurred in connection with successfully establishing his or her right to such
indemnification or advancement of expenses, in whole or in part, in any such
proceeding.
4. Definitions, Etc. As used in this Article VII, "Authorized
-----------------
Representative" means, collectively: (i) any person who is or was an officer or
director of the Corporation or is or was serving as a director, officer,
employee or agent or in any capacity at the request of the Corporation, for any
other corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise; and (ii) any other person who may be designated by the Board
from time to time as an "authorized representative" for purposes of this Article
VII. The provisions of Section 145(h), (i) and (j) of the DGCL shall apply to
this Article VII.
5. Insurance. The Corporation may maintain insurance, at its expense, to
---------
protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust, limited liability
company or other enterprise against expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under the DGCL or this Article VII.
6. Article Not Exclusive. The rights to indemnification and to the
---------------------
advancement of expenses conferred in this Article VII shall not be exclusive of
any other right which any Authorized Representative may have or hereafter
acquire under any statute, this Certificate of Incorporation, any by-law,
agreement (including any insurance policy), vote of stockholders or
disinterested directors or otherwise, both as to action in such Authorized
Representative's official capacity and as to action in another capacity while
holding such office. Nothing in this Article VII shall affect the right of the
Corporation to grant rights of indemnification, and the advancement of expenses,
to any other person or in any other circumstance.
7. Reliance. Each Authorized Representative shall be deemed to have acted
--------
in reliance upon the rights to indemnification and advancement of expenses
established in this Article VII. Unless applicable law requires otherwise, any
repeal or modification of this Article VII (other than a modification expanding
the right to indemnification and expense advancement in favor of Authorized
Representatives) shall be prospective only and shall not adversely affect any
right or benefit of an Authorized Representative to indemnification or expense
advancement at the time of such repeal or modification.
8. Severability. If any portion of this Article VII shall be held to be
------------
illegal, invalid or otherwise unenforceable by any court having appropriate
jurisdiction, then the Corporation nevertheless shall indemnify and advance
expenses to each Authorized Representative to the
16
<PAGE>
fullest extent permitted by the applicable portions of this Article VII not so
held to be illegal, invalid, unenforceable, and otherwise to the fullest extent
permitted by law.
9. Related Service. Any director or officer of the Corporation serving in
---------------
any capacity in (i) another corporation of which a majority of the shares
entitled to vote in the election of its directors is held, directly or
indirectly, by the Corporation or (ii) any employee benefit plan of the
Corporation or any corporation referred to in clause (i) shall be deemed to be
doing so at the request of the Corporation.
10. Applicable Law. To the extent permitted by law, any person entitled
--------------
to indemnification or advancement of expenses as a matter of right pursuant to
this Article VII may elect to have the right to indemnification or advancement
of expenses interpreted on the basis of the applicable law in effect at the time
of the occurrence of the event or events giving rise to the applicable
Proceeding, or on the basis of the applicable law in effect at the time such
indemnification or advancement of expenses is sought. Such election shall be
made, by a notice in writing to the Corporation, at the time indemnification or
advancement of expenses is sought; provided, however, that if no such notice is
given, the right to indemnification or advancement of expenses shall be
determined by the law in effect at the time such indemnification or advancement
or expenses is sought.
ARTICLE VIII -- AMENDMENTS
--------------------------
From time to time any of the provisions of this certificate of
incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any time conferred upon the stockholders of the Corporation by this
certificate of incorporation are granted subject to the provisions of this
Article VIII.
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IN WITNESS WHEREOF, this Restated Certificate of Incorporation which
restates and integrates and further amends the provisions the provisions of the
Amended and Restated Certificate of Incorporation of this Corporation, and which
has been duly adopted in accordance with Sections 242 and 245 of the DGCL has
been executed by its duly authorized officer this ______ day of __________,
1998.
HARBORSIDE HEALTHCARE CORPORATION
By:_____________________________
Name:
Title:
18
