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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 01-14358
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Harborside Healthcare Corporation
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3307188
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Beacon Street, Boston, Massachusetts 02108
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (617) 646-5400
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Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class On which registered
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11% Senior Subordinated Discount
Notes due 2008
13 1/2% Exchangeable Preferred Stock Mandatorily
Redeemable 2010 ("Preferred Stock")
13 1/2% Subordinated Exchange Debentures due 2010
Common Stock, par value $.01 per share
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_].
At March 31, 1999, the registrant had 7,261,332 shares of Common Stock
outstanding.
Documents incorporated by reference:
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K, including information set forth under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations", constitute "Forward-Looking Statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The
Company desires to take advantage of certain "safe harbor" provisions of the
Reform Act and is including this special note to enable the Company to do so.
Forward-looking statements included in this Form 10-K, or hereafter included in
other publicly available documents filed with the Securities and Exchange
Commission, reports to the Company's stockholders and other publicly available
statements issued or released by the Company involve known and unknown risks,
uncertainties, and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ materially from
the future results, performance (financial or operating) or achievements
expressed or implied by such forward-looking statements. The Company believes
the following important factors could cause such a material difference to occur:
1. The Company's ability to grow through the acquisition and development of
long-term care facilities or the acquisition of ancillary businesses.
2. The Company's ability to identify suitable acquisition candidates, to
consummate or complete construction projects, or to profitably operate or
successfully integrate enterprises into the Company's other operations.
3. The occurrence of changes in the mix of payment sources utilized by the
Company's patients to pay for the Company's services.
4. The adoption of cost containment measures by private pay sources such as
commercial insurers and managed care organizations, as well as efforts by
governmental reimbursement sources to impose cost containment measures.
5. Changes in the United States healthcare system, including changes in
reimbursement levels and the method of reimbursement, under Medicaid and
Medicare, and other changes in applicable government regulations that
might affect the profitability of the Company.
6. The Company's continued ability to operate in a heavily regulated
environment and to satisfy regulatory authorities, thereby avoiding a
number of potentially adverse consequences, such as the imposition of
fines, temporary suspension of admission of patients, restrictions on the
ability to acquire new facilities, suspension or decertification from
Medicaid or Medicare programs, and in extreme cases, revocation of a
facility's license or the closure of a facility, including as a result of
unauthorized activities by employees.
7. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth through acquisition and
development, as well as internal growth.
8. Changes in certificate of need laws that might increase competition in
the Company's industry, including, particularly, in the states in which
the Company currently operates or anticipates operating in the future.
9. The Company's ability to staff its facilities appropriately with
qualified healthcare personnel, including in times of shortages of such
personnel and to maintain a satisfactory relationship with labor unions.
10. The level of competition in the Company's industry, including without
limitation, increased competition from acute care hospitals, providers of
assisted and independent living and providers of home healthcare and
changes in the regulatory system in the state in which the Company
operates that facilitate such competition.
11. The continued availability of insurance for the inherent risks of
liability in the healthcare industry.
12. Price increases in pharmaceuticals, durable medical equipment and other
items.
13. The Company's reputation for delivering high-quality care and its ability
to attract and retain patients, including patients with relatively high
acuity levels.
14. Changes in general economic conditions, including changes that pressure
governmental reimbursement sources to reduce the amount and scope of
healthcare coverage.
15. The Company's, its vendors, banks and payors ability to address computer
system concerns related to the Year 2000 issue.
The foregoing review of significant factors should not be construed as
exhaustive or as an admission regarding the adequacy of disclosures previously
made by the Company.
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS 4
ITEM 2. PROPERTIES 12
ITEM 3. LEGAL PROCEEDINGS 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS 14
ITEM 6. SELECTED FINANCIAL DATA 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 49
ITEM 11. EXECUTIVE COMPENSATION 51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 54
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 57
SIGNATURES 63
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ITEM 1. BUSINESS
GENERAL OVERVIEW
Harborside Healthcare (the "Company") was created in March 1996, in anticipation
of an initial public offering (the "IPO"), in order to combine under its control
the operations of various long-term care facilities and ancillary businesses
(the "Predecessor Entities") which had operated since 1988. The Company
completed the IPO on June 14, 1996 and issued 3,600,000 shares of common stock
at $11.75 per share. Immediately prior to the IPO the owners of the Predecessor
Entities contributed their interests in such Predecessor Entities to the Company
and received 4,400,000 shares of the Company's common stock (the
"Reorganization").
On April 15, 1998, Harborside Healthcare Corporation ("Harborside") entered into
a Merger Agreement with HH Acquisition Corp. ("MergerCo"), an entity organized
for the sole purpose of effecting a merger on behalf of Investcorp S.A., certain
of its affiliates and certain other international investors (the "New
Investors"). On August 11, 1998, MergerCo merged with and into Harborside, with
Harborside as the surviving corporation. As a result of the transaction, and
pursuant to the Merger Agreement, the New Investors acquired approximately 91%
of the post-merger common stock of Harborside. The remaining 9% of the common
stock was retained by existing shareholders, including management. As a result
of the merger, Harborside shares have been de-listed from the New York Stock
Exchange.
The merger was approved by a majority of Harborside's shareholders at a special
meeting held on August 11, 1998. Each share not retained by existing
shareholders was converted into $25 in cash, representing in the aggregate, cash
payments of approximately $184 million. Holders of outstanding stock options of
the Company converted the majority of their options into cash at $25 per
underlying share (less applicable exercise price and withholding taxes) with
aggregate payments of approximately $8 million.
In connection with the transaction and prior to the Merger, the New Investors
made cash common equity contributions of $158.5 million, net of issuance costs,
to MergerCo, and MergerCo obtained gross proceeds of $99.5 million through the
issuance of 11% Senior Subordinated Discount Notes ("Discount Notes") due 2008
and $40 million through the issuance of 13.5% Exchangeable Preferred Stock
("Preferred Stock") mandatorily redeemable in 2010. In connection with the
Merger, Harborside also entered into a new $250 million collateralized credit
facility. In the third quarter Harborside recorded a charge to income from
operations of $37 million ($29 million after taxes) for direct and other costs
related to the Merger transaction. In connection with the Merger and the related
refinancings, the Company exercised purchase options for seven facilities which
had been financed through synthetic leases.
Harborside Healthcare provides high quality long-term care, subacute care and
other specialty medical services in five principal regions: the Southeast
(Florida), the Midwest (Ohio and Indiana), New England (Massachusetts and New
Hampshire), the Northeast (Connecticut and Rhode Island), and the Mid-Atlantic
(New Jersey and Maryland). Within these regions, as of December 31, 1998, the
Company operated 50 licensed long-term care facilities (22 owned, 27 leased and
one managed) with a total of 6,120 licensed beds. The Company provides
traditional skilled nursing care, a wide range of subacute care programs (such
as orthopedic, CVA/stroke, cardiac, pulmonary and wound care), as well as
distinct programs for the provision of care to Alzheimer's and hospice patients.
In addition, the Company provides certain rehabilitation therapy services both
at Company-operated and non-affiliated facilities. As of December 31, 1998, the
Company provided rehabilitation services to patients at 35 non-affiliated long-
term care facilities. From December 31, 1993 to December 31, 1998, the Company
increased its overall patient capacity by approximately 3,971 licensed beds, or
approximately 180%.
PATIENT SERVICES
Basic Patient Services
Basic patient services are those traditionally provided to elderly patients in
long-term care facilities to assist with the activities of daily living and to
provide general medical care. The Company provides 24-hour skilled nursing care
by registered nurses, licensed practical nurses and certified nursing aides in
all of its facilities. Each facility is managed by an on-site licensed
administrator who is responsible for the overall operation of the facility,
including the quality of care provided. The medical needs of patients are
supervised by a medical director, who is a licensed physician. Although
treatment of patients is the responsibility of their own attending physicians,
who are not employed by the Company, the medical director monitors all aspects
of delivery of care. The Company also provides support services, including
dietary services, therapeutic recreational activities, social services,
housekeeping and laundry services, pharmaceutical and medical supplies and
routine rehabilitation therapy.
Each facility offers a number of individualized therapeutic activities
designed to enhance the quality of life of its patients. These activities
include entertainment events, musical productions, trips, arts and crafts and
volunteer and other programs that encourage community interaction.
Specialty Medical Services
Specialty medical services are those provided to patients with medically
complex needs, who generally require more extensive treatment and a higher level
of skilled nursing care. These services typically generate higher net patient
service revenues per patient day than basic patient services as a result of
increased levels of care and the provision of ancillary services.
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Subacute Care. Subacute care is goal-oriented, comprehensive care designed for
an individual who has had an acute illness, injury, or exacerbation of a disease
process. Subacute care is typically rendered immediately after, or instead of,
acute hospitalization in order to treat one or more specific, active, complex
medical conditions or in order to administer one or more technically complex
treatments. The Company provides subacute care services at all but two of its
existing facilities in such areas as complex medical, cardiac recovery,
digestive, immuno-suppressed disease, post-surgical, wound, and CVA/stroke care,
hemodialysis, infusion therapy, and diabetes and pain management.
In facilities that have shown strong demand for subacute services, the Company
has developed distinct subacute units marketed under the name "COMprehensive
Patient Active Subacute System" or "COMPASS." Each COMPASS unit contains 20 to
60 beds and is specially staffed and equipped for the delivery of subacute care.
Patients in COMPASS units typically range in age from late teens to the elderly,
and typically require high levels of nursing care and the services of
physicians, therapists, dietitians, clinical pharmacists or psycho/social
counselors. Certain patients may also require life support or monitoring
equipment. Because patient goals are generally rehabilitation-oriented, lengths
of stay in COMPASS units are generally expected to be less than 30 days each.
The Company has designed clinical pathways for these COMPASS units 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 and cost-effective
manner. The Company's COMPASS units and the clinical pathways used in these
units 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 units to commercial insurers and managed care
organizations. The Company will continue to develop additional clinical pathways
based on market opportunities. Additionally, the Company provides COMPASS
programming at facilities in addition to those which maintain distinct COMPASS
units.
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, 1998, the Company operated
dedicated Alzheimer's units at eight facilities. The Company also operates
distinct hospice units at three of its facilities, where it provides care to
terminally ill patients and counseling to their families.
OPERATIONS
Facilities. Each of the Company's facilities is supervised by a licensed
facility administrator who is responsible for all aspects of the facility's
operations. The facility administrator oversees (i) a director of nursing who
supervises a staff of registered nurses, licensed practical nurses and certified
nursing aides, (ii) a director of admissions who is responsible for developing
local marketing strategies and programs and (iii) various other departmental
supervisors. The Company also contracts with one or more licensed physicians at
each facility to serve as medical directors for the purpose of supervising the
medical management of patients. Facilities with subacute or specialty medical
units or programs may also contract with physician specialists to serve as
rehabilitation or specialty program medical directors in areas such as physiatry
(physical medicine), neurology or gero-psychology. Facilities may also employ or
contract for additional clinical staff such as case managers, therapists and
program directors. Department supervisors at each of the Company's facilities
oversee personnel who provide dietary, maintenance, laundry, housekeeping,
therapy and social services. In addition, a business office staff at each
facility routinely performs administrative functions, including billing, payroll
and accounts payable processing. The Company's corporate and regional staff
provide support services such as quality assurance, management training,
clinical consultation and support, management information systems, risk
management, human resource policies and procedures, operational support,
accounting and reimbursement expertise.
Regions. The Company seeks to cluster its long-term care facilities and therapy
services in selected geographic regions to establish a strong competitive
position as well as to position the Company as a healthcare provider of choice
to managed care and private payors in these markets. The Company's facilities
currently serve five principal geographic regions: the Southeast (Florida), the
Midwest (Ohio and Indiana), New England (Massachusetts and New Hampshire),
Northeast (Connecticut and Rhode Island), and the Mid-Atlantic (New Jersey and
Maryland). The Company maintains regional operating offices in Clearwater,
Florida; Indianapolis, Indiana; Topsfield, Massachusetts; West Hartford,
Connecticut; Peterborough, New Hampshire and Bridgewater, New Jersey. Each
region is supervised by a regional director of operations who directs the
efforts of a team of professional support staff in the areas of clinical
services, marketing, bookkeeping, human resources and engineering. Other Company
staff, who are principally based in the regions, provide support and assistance
to all of the Company's facilities in the areas of subacute services, managed
care contracting, reimbursement services, risk management, data processing and
training. Financial control is maintained through financial and accounting
policies established at the corporate level for use at each facility. The
Company has standardized operating policies and procedures and continually
monitors operating performance to assure consistency and quality of operations.
The Company's therapy services business maintains offices in Palm Harbor,
Florida and 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 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
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program to seek accreditation from JCAHO for the Company's facilities. As of
December 31, 1998, 33 of the Company's facilities had received accreditation,
and of these 18 had received accreditation "with commendation".
MARKETING
The Company's marketing program is designed to attract patients who will have a
favorable impact on the Company's profits and quality mix of revenues. The
Company establishes monthly occupancy and revenue goals for each of its
facilities and maintains marketing objectives to be met by each facility. The
Company's Vice President of Marketing is principally responsible for the
development and implementation of the Company's marketing program. Regional
marketing directors provide routine support to the facility-based admissions
directors through the development of facility-based marketing strategies,
competitive assessments and routine visits.
The Company uses a decentralized marketing approach in order to capitalize on
each facility's strengths and reputation in the community it serves. Admissions
staff at each facility are primarily responsible for marketing basic medical
services and developing semi-annual marketing plans in consultation with the
Company's regional marketing and operations staff. Basic medical services are
marketed to area physicians, hospital discharge planning personnel, individual
patients and their families and community referral sources. Facility personnel
also market the Company's specialty medical services to these sources. Corporate
and regional personnel who specialize in subacute care, managed care and
reimbursement also assist in the marketing of specialty medical services.
The Company believes its marketing program has demonstrated its effectiveness.
The Company's average annual occupancy rates for the fiscal years ended December
31, 1996, 1997 and 1998 were 92.6%, 92.3% and 92.3%. In comparison, a study of
approximately 1,500 nursing facilities conducted by the U.S. Department of
Health and Human Services found that in 1995 nursing facilities operated at
approximately 87% of capacity.
Since June 1994, the Company has maintained a dedicated managed care marketing
group, led by the Senior Vice President of Marketing and Managed Care, whose
primary purpose is to solicit managed care and commercial insurance contracts.
The Company's regional and corporate staff attend trade shows and events for
managed care, commercial insurance companies and case managers in order to
broaden the Company's overall presence and recognition with these groups.
SOURCES OF REVENUES
The Company derives its revenues primarily from private pay sources, the Federal
Medicare program for certain elderly and disabled patients and state Medicaid
programs for indigent patients. The Company's revenues are influenced by a
number of factors, including (i) the licensed bed capacity of its facilities,
(ii) occupancy rates, (iii) the mix of patients and the rates of reimbursement
among payor categories (private and other, Medicare and Medicaid) and (iv) the
extent to which subacute and other specialty medical and ancillary services are
utilized by the patients and paid for by the respective payment sources. The
Company employs specialists to monitor reimbursement rules, policies and related
developments in order to comply with all reporting requirements and to assist
the Company in receiving reimbursements.
The following table identifies the Company's percentage of net revenues
attributable to each of its payor sources for the periods indicated:
PERCENTAGE OF NET REVENUES BY PAYOR (1)
YEAR ENDED DECEMBER 31,
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1996 1997 1998
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Private and other.................................... 35.5% 34.1% 30.2%
Medicare............................................. 26.3 25.9 27.7
Medicaid............................................. 38.2 40.0 42.1
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Total.............................................. 100.0% 100.0% 100.0%
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(1) Total net revenues exclude net revenues of the Larkin Chase Center which
is owned by the Bowie Center Limited Partnership ("Bowie L.P."). The Company
owns a 75% partnership interest in Bowie L.P. but records its investment in
Bowie L.P. using the equity method.
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.
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Medicare. All but three of the Company's facilities are certified Medicare
providers. The Company does not expect to seek Medicare certification for these
three 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. Prior to December
31, 1998 there were no limits on duration of coverage for Part B services, but
there was 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 used to depend on the type of
therapy provided. Prior to December 31, 1998, the Medicare program applied
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 and prior to April 10, 1998, Medicare provided
reimbursement for services on a reasonable cost basis, subject to the so-called
"prudent buyer" rule for evaluating the reasonableness of the costs. As of April
10, 1998, the Health Care Financing Administration ("HCFA") implemented new
rules which would establish new guidelines for reimbursement for rehabilitation
therapy services provided at skilled nursing facilities. These new guidelines
revised the salary equivalency rules for physical and respiratory therapies and
extended the salary equivalency methodology to speech and occupational therapy
services as well. Through December 31, 1998, the Medicare Part A program
reimbursed the Company under an existing cost-based reimbursement system for its
allowable direct costs (which consisted of routine, ancillary and capital
expenses) plus an allocation of allowable indirect costs. The total of routine
costs and the respective allocated overhead was subject to a regional routine
cost limit. As the Company has expanded its subacute care and other specialty
medical services, the costs of care for these patients have exceeded these
regional reimbursement routine cost limits. 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 Balanced Budget Act (the "BBA") was enacted in August 1997. The BBA
significantly amends the reimbursement methodology of the Medicare program and
eliminates the process of applying for and receiving routine cost limit
exceptions and exemptions. 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 (the "PPS") 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 virtually all the services
and supplies that its residents receive (both Part A and Part B), with the
exception of certain services, including those provided by physicians. 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, 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 had 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 services and supplies rendered on or after
July 1, 1998. Intermediaries were 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. Subsequent to the Program Memorandum of mid-April, 1998, HCFA has
issued additional Program Memoranda concerning the implementation of PPS,
affecting mainly the "consolidated billing" provisions. In July, 1998, HCFA
instructed Medicare program intermediaries and carriers that, due to systems
modification delays in implementing skilled nursing facility consolidated
billing, the instructions in the mid-April 1998 Program Memorandum, as they
apply to services and supplies rendered to residents in a Part A stay in a
skilled nursing facility not yet on PPS,
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and to the Part B stay (i.e., Part A benefits exhausted, post-hospital or level
of care requirements not met), are delayed until further notice. On August 1,
1998, HCFA issued an additional Program Memorandum asking carriers to refrain
from implementing the professional component/technical component indicator rules
previously issued by HCFA. The delay is effective until an indicator is
developed so that carriers can identify which skilled nursing facilities have
converted to PPS. Alternatively, the delay can be lifted whenever all skilled
nursing facilities have converted.
Regulations regarding Medicare PPS were published on May 12, 1998. The
regulations included (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
contained 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, including delays in implementing
consolidated billing for Part B services). Although 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 realize
these planned cost reductions. See "Management's Discussion and Analysis --
Liquidity and Capital Resources".
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 three of the Company's facilities
participate in the Medicaid program of the states in which they are located.
These three 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.
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.
-8-
<PAGE>
MANAGEMENT INFORMATION SYSTEMS
Effective January 1, 1999, 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. See "Management's
Discussion and Analysis - The Year 2000 Issue".
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, and, in certain states,
the approval of certain acquisitions and changes in ownership or 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. The BBA also mandated 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 are 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. However,
subsequent developments have delayed the implementation of "consolidated
billing" for Part B services.
-9-
<PAGE>
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 payment on or after October 1,
1995, move to the federal per diem rate effective with the cost report periods
beginning on or before 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.
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.
-10-
<PAGE>
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
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 where the CON program expired 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 June 30, 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. Although New Jersey does not have a "moratorium" on new skilled nursing
facility beds, with the exception of the Add-a-bed program (in which a facility
may request approval from the state licensure agency to increase total licensed
skilled nursing beds, including hospital based subacute care beds, by no more
than 10 beds or 10% of its licensed bed capacity, whichever is less, without
obtaining CON approval), New Jersey only accepts applications for a CON for
additional skilled nursing facility beds when the state CON agency issues a call
for beds. There is presently no call for additional beds, and no call is
expected to be made until the beginning of 1999 at the earliest. 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 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.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 9,076 facility-based
personnel on a full- and part-time basis. The Company's corporate and regional
staff consisted of 148 persons as of such date. Approximately 412 employees at
five of the Company's facilities are covered by collective bargaining
agreements. Although the Company believes that it maintains good relationships
with its employees and the unions that represent certain of its employees, it
cannot predict the impact of continued or increased union representation or
organizational activities on its future operations.
The Company believes that the attraction and retention of dedicated, skilled and
experienced nursing and other professional staff has been and will continue to
be a critical factor in the successful growth of the Company. The Company
believes that its wage rates and benefit packages for nursing and other
professional staff are commensurate with market rates and practices.
-11-
<PAGE>
The Company competes with other healthcare providers in attracting and retaining
qualified or skilled personnel. The long-term care industry has, at times,
experienced shortages of qualified personnel. A shortage of nurses or other
trained personnel or general economic inflationary pressures may require the
Company to enhance its wage and benefits package in order to compete with other
employers. There can be no assurance that the Company's labor costs will not
increase or, if they do, that they can be matched by corresponding increases in
private-payor revenues or governmental reimbursement. Failure by the Company to
attract and retain qualified employees, to control its labor costs or to match
increases in its labor expenses with corresponding increases in revenues could
have a material adverse effect on the Company.
INSURANCE
The Company carries general liability, professional liability, comprehensive
property damage and other insurance coverages that management considers adequate
for the protection of its assets and operations based on the nature and risks of
its business, historical experience and industry standards. There can be no
assurance, however, that the coverage limits of such policies will be adequate
or that insurance will continue to be available to the Company on commercially
reasonable terms in the future. A successful claim against the Company not
covered by, or in excess of, its insurance coverage could have a material
adverse effect on the Company. Claims against the Company, regardless of their
merit or eventual outcome, may also have a material adverse effect on the
Company's business and reputation, may lead to increased insurance premiums and
may require the Company's management to devote time and attention to matters
unrelated to the Company's business. The Company is self-insured (subject to
contributions by covered employees) with respect to most of the healthcare
benefits and workers' compensation benefits 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.
ITEM 2. PROPERTIES
The following table summarizes certain information regarding the Company's
facilities as of December 31, 1998:
<TABLE>
<CAPTION>
SUMMARY OF FACILITIES
LICENSED YEAR OWNED/ LICENSED
FACILITY LOCATION ACQUIRED LEASED/MANAGED BEDS
- -------- -------- -------- -------------- --------
<S> <C> <C> <C> <C>
SOUTHEAST REGION
Florida
Brevard Rockledge 1994 Leased 100
Clearwater Clearwater 1990 Owned 120
Gulf Coast New Port Richey 1990 Owned 120
Naples Naples 1989 Leased 120
Ocala Ocala 1990 Owned 180
Palm Harbor Palm Harbor 1990 Owned 120
Pinebrook Venice 1989 Leased 120
Sarasota Sarasota 1990 Leased 120
Tampa Bay Oldsmar 1990 Owned 120
--------
1,120
MIDWEST REGION
Ohio
Defiance Defiance 1993 Leased 100
Northwestern Ohio Bryan 1993 Leased 189
Swanton Swanton 1995 Leased 100
Perrysburg Perrysburg 1990 Owned 100
Troy Troy 1989 Leased 195
Beachwood Beachwood 1996 Owned (1) 274
Broadview Broadview Heights 1996 Owned (1) 159
Westlake I Westlake 1996 Owned (1) 153
Westlake II Westlake 1996 Owned (1) 106
Dayton Dayton 1997 Owned 100
Laurelwood Dayton 1997 Owned 115
New Lebanon New Lebanon 1997 Owned 126
Point Place Toledo 1998 Owned 98
Sylvania Sylvania 1998 Owned 150
Indiana
Decatur Indianapolis 1988 Owned 88
Indianapolis Indianapolis 1988 Leased 104
New Haven New Haven 1990 Leased 120
Terre Haute Terre Haute 1990 Owned 120
--------
2,397
</TABLE>
-12-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
NEW ENGLAND REGION
New Hampshire
Applewood Winchester 1996 Leased 70
Crestwood Milford 1996 Leased 82
Milford Milford 1996 Leased 52
Northwood Bedford 1996 Leased 147
Pheasant Wood Peterborough 1996 Leased 99
Westwood Keene 1996 Leased 87
Massachusetts
Maplewood Amesbury 1997 Leased 120
Cedar Glen Danvers 1997 Leased 100
Danvers-Twin Oaks Danvers 1997 Leased 101
North Shore Saugus 1997 Leased 80
The Stone Institute Newton Upper Falls 1997 Managed 106
-----
1,044
NORTHEAST REGION
Connecticut
Arden House Hamden 1997 Leased 360
Governor's House Simsbury 1997 Leased 73
Madison House Madison 1997 Leased 90
The Reservoir West Hartford 1997 Leased 75
Willows Woodbridge 1997 Leased 86
Glen Hill Danbury 1998 Owned (2) 100
Glen Crest Danbury 1998 Owned (2) 49
Rhode Island
Greenwood Warwick 1998 Owned 136
Pawtuxet Warwick 1998 Owned 131
-----
1,100
MID-ATLANTIC REGION
Maryland
Harford Gardens Baltimore 1997 Leased 163
Larkin Chase Center Bowie 1994 Owned (3) 120
New Jersey
Woods Edge Bridgewater 1988 Leased 176
-----
459
Total 6,120
=====
</TABLE>
(1) Indicates an owned facility, the acquisition of which has been accounted for
as a capital lease.
(2) Indicates an owned facility financed through a synthetic lease.
(3) Owned by Bowie L.P. The Company's interest in Bowie L.P. is pledged to the
facility's mortgage lender. The Company has guaranteed the indebtedness of
Bowie L.P.
The Company leases its Corporate offices in Boston as well as regional offices
in Clearwater, Florida and Indianapolis, Indiana, and owns a regional office in
Peterborough, New Hampshire. The Company's therapy services company leases
offices in Palm Harbor, Florida and Framingham, Massachusetts. The Company
considers its properties to be in good operating condition and suitable for the
purposes for which they are being used.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to claims and legal actions arising in the ordinary
course of business. Management does not believe that unfavorable outcomes in any
such matters, individually or in the aggregate, would have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
last quarter of the Company's fiscal year ended December 31, 1998.
-13-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS
The Company's common stock was listed on the New York Stock Exchange under the
symbol "HBR". The following table sets forth, for the periods indicated, the
high and low sale price per share of the Company's common stock as reported on
the New York Stock Exchange composite tape.
<TABLE>
<CAPTION>
1997 1998
High Low High Low
------- ------- ------- --------
<S> <C> <C> <C> <C>
First quarter $12.875 $ 11.00 $24.000 $ 18.000
Second quarter 14.375 11.125 24.063 20.250
Third quarter 18.75 14.25 24.875 23.813
Fourth quarter 21.75 16.75 - -
</TABLE>
The Company completed its initial public offering on June 14, 1996. The
Company's shares also began trading on June 14, 1996.
As a result of the August 11, 1998 Merger noted in the General Overview, the
Company's common stock was de-listed from the New York Stock Exchange on
August 11, 1998.
The Company has never declared or paid any dividends on its common stock since
its formation in 1996. The Company does not anticipate paying cash dividends on
its Common Stock for the foreseeable future and intends to retain all of its
earnings for reinvestment in the operations and activities of the Company. Any
future decision as to the payment of dividends will be at the discretion of the
Company's Board of Directors. The Company's ability to pay dividends is also
limited by the terms of current (and possibly future) lease and financing
arrangements that restrict, among other things, the ability of the Company's
subsidiaries to distribute funds to the Company.
-14-
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated financial data for the
Company. The selected historical consolidated financial data for each of the
years in the five year period ended December 31, 1998 have been derived from the
Company's consolidated financial statements, which have been audited by our
independent accountants. The financial data set forth below should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this filing.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND OTHER DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of operations data (1):
Total net revenues $ 86,376 $109,425 $ 165,412 $ 221,777 $ 311,044
-------- -------- ---------- ---------- ----------
Expenses:
Facility operating 68,951 89,378 132,207 176,404 246,000
General and administrative 3,859 5,076 7,811 10,953 15,422
Service charges paid to affiliate 759 700 700 708 1,291
Amortization of prepaid management fee - - - - 500
Special compensation and other - - 1,716 - -
Depreciation and amortization 4,311 4,385 3,029 4,074 6,350
Facility rent 1,037 1,907 10,223 12,446 22,412
Merger costs - - - - 37,172
-------- -------- ---------- ---------- ----------
Total expenses 78,917 101,446 155,686 204,585 329,147
-------- -------- ---------- ---------- ----------
Income (loss) from operations 7,459 7,979 9,726 17,192 (18,103)
Other:
Interest expense, net 4,609 5,107 4,634 5,853 11,271
Other expense (income) 448 114 263 189 (167)
Gain on sale of facilities, net - (4,869) - - -
Loss on refinancing of debt 453 - - - -
Minority interest in net income 1,575 6,393 - - -
-------- -------- ---------- ---------- ----------
Income (loss) before income taxes and
extraordinary loss 374 1,234 4,829 11,150 (29,207)
Income tax expense (benefit) - - 809 4,347 (5,020)
-------- -------- ---------- ---------- ----------
Income (loss) before extraordinary loss 374 1,234 4,020 6,803 (24,187)
Extraordinary loss on early
retirement of debt, net of tax - - (1,318) - -
-------- -------- ---------- ---------- ----------
Net income (loss) $ 374 $ 1,234 $ 2,702 $ 6,803 $ (24,187)
======== ======== ========== ========== ==========
Earnings (loss) available per common share:
Basic $ 0.85 $ (3.42)
========== ==========
Diluted $ 0.84 $ (3.42)
========== ==========
Pro forma data:
Historical income before income
taxes and extraordinary loss $ 374 $ 1,234 $ 4,829
Pro forma income taxes 146 481 799
-------- -------- ----------
Pro forma income before
extraordinary loss 228 753 4,030
Extraordinary loss, net of tax - - (1,318)
Pro forma net income $ 228 $ 753 $ 2,712
======== ======== ==========
Pro forma earnings per common share
(basic and diluted):
Pro forma income before extraordinary loss $ 0.05 $ 0.17 $0.63
Extraordinary loss - - 0.21
-------- -------- ----------
Pro forma earnings per common share $ 0.05 $ 0.17 $0.42
======== ======== ==========
Weighted average number of common shares
used in per share computations (2):
Basic 4,425,000 4,425,000 6,396,000 8,037,000 7,742,000
Diluted 4,425,000 4,425,000 6,396,000 8,139,000 7,742,000
</TABLE>
-15-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (continued)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operational data (as of end of year) (3):
Facilities 19 20 30 43 49
Licensed beds 2,365 2,471 3,700 5,290 6,014
Average occupancy rate (4) 92.6% 92.5% 92.6% 92.3% 92.3%
Patient days (4):
Private and other 261,054 261,488 335,363 394,151 513,426
Medicare 68,256 90,107 108,229 138,023 202,797
Medicaid 409,995 437,325 653,222 834,637 1,193,045
-------- -------- ---------- ---------- ----------
Total 739,305 788,920 1,096,814 1,366,811 1,909,268
======== ======== ========== ========== ==========
Sources of total net revenues:
Private and other (5) 37.4% 35.1% 35.5% 34.1% 30.2%
Medicare 24.8% 31.7% 26.3% 25.9% 27.7%
Medicaid 37.8% 33.2% 38.2% 40.0% 42.1%
Balance sheet data (1):
Working capital $ 13,915 $ 10,735 $ 16,826 $ 22,621 $ 36,403
Total assets 93,876 92,632 141,799 168,562 264,536
Total debt 53,296 43,496 18,208 33,642 134,680
Capital lease obligation - - 57,277 56,285 55,531
Stockholders' equity (6) 2,866 4,130 44,880 51,783 83
</TABLE>
(1) In 1994 and 1995, financial and operating data combine the historical
results of various legal entities (the "Predecessor Entities") that became
subsidiaries of Harborside Healthcare Corporation (the "Company") through a
reorganization (the "Reorganization") that occurred immediately prior to the
Company's initial public offering on June 14, 1996 (the "IPO"). Prior to the
Reorganization, the Predecessor Entities (primarily partnerships and
subchapter S corporations) were not directly subject to Federal or state
income taxation. A pro forma income tax expense has been reflected for each
year presented as if the Company had always owned the Predecessor Entities.
(2) Through the IPO, the Company issued 3,600,000 shares of common stock. Pro
forma net income per share for 1994 and 1995 is calculated based on the
4,400,000 shares of common stock issued through the Reorganization. For 1996
the calculation is based upon 4,400,000 shares outstanding for the entire
year and the appropriate weighting for shares issued through the IPO.
(3) Excludes two managed facilities with 178 licensed beds in 1997 and one
managed facility with 106 licensed beds in 1998. (4) "Average occupancy
rate" is computed by dividing the number of billed bed days by the total
number of available licensed bed days during each of the periods indicated.
(5) Consists primarily of revenues derived from private pay individuals, managed
care organizations, HMO's, hospice programs, commercial insurers, management
fees from managed facilities, and rehabilitation therapy revenues from
nonaffiliated facilities.
(6) In accordance with Securities and Exchange Commission requirements, the book
value of the Company's Exchangeable Preferred Stock is excluded from total
stockholders' equity. As of December 31, 1998, the book value of the
Company's Exchangeable Preferred Stock was $42,292,645.
-16-
<PAGE>
ITEM 7.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Harborside Healthcare Corporation, ("Harborside" or the "Company") 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 Southeast (Florida), the Midwest (Ohio and Indiana), New England
(Massachusetts and New Hampshire), the Northeast (Connecticut and Rhode Island),
and the Mid-Atlantic (New Jersey and Maryland). As of December 31, 1998, the
Company operated 50 facilities (22 owned, 27 leased and one managed) with a
total of 6,120 licensed beds. As described in Note A to the audited
consolidated financial statements of the Company included elsewhere in this
filing, the Company accounts for its investment in one of its owned facilities
using the equity method. 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 "IPO"), in order to combine under its control the operations of
various long-term care facilities and ancillary businesses (the "Predecessor
Entities") which had operated since 1988. The Company completed the IPO on
June 14, 1996 and issued 3,600,000 shares of common stock at $11.75 per share.
The owners of the Predecessor Entities contributed their interests in such
Predecessor Entities to the Company and received 4,400,000 shares of the
Company's common stock.
The Company's financial statements for periods prior to the IPO have been
prepared by combining the historical financial statements of the Predecessor
Entities, similar to a pooling of interests presentation. The Company's
financial statements prior to the date of the IPO do not include a provision for
Federal or state income taxes because the Predecessor Entities (primarily
partnerships and subchapter S corporations) were not directly subject to Federal
or state income taxation. The Company's combined financial statements for
periods prior to the date of the IPO include a pro forma income tax expense for
each period presented, as if the Company had always owned the Predecessor
Entities. See Note K to the accompanying audited consolidated financial
statements of the Company.
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. The net gain of $4,869,000 recognized by KYP in connection
with the sale of the Seven Facilities was allocated to the KYP Unitholders and
is reflected in "minority interest in net income." In March of 1996, a
liquidating distribution was paid to the Unitholders.
On April 15, 1998, Harborside entered into a Merger Agreement with HH
Acquisition Corp. ("MergerCo"), an entity organized for the sole purpose of
effecting a merger on behalf of Investcorp S.A., certain of its affiliates and
certain other international investors (the "New Investors"). On August 11,
1998, MergerCo merged with and into Harborside, with Harborside Healthcare
Corporation as the surviving corporation. As a result of the transaction, and
pursuant to the Merger Agreement, the New Investors acquired approximately 91%
of the post-merger common stock of Harborside. The remaining 9% of the common
stock was retained by existing shareholders, including management. As a result
of the merger, Harborside shares have been de-listed from the New York Stock
Exchange.
The merger was approved by a majority of the Company's shareholders at a
special meeting held on August 11, 1998. Each share not retained by existing
shareholders was converted into $25 in cash, representing in the aggregate, cash
payments of approximately $184 million. Holders of outstanding stock options of
the Company converted the majority of their options into cash at $25 per
underlying share (less applicable exercise price and withholding taxes) with
aggregate payments of approximately $8 million.
In connection with the transaction and prior to the merger, the New Investors
made cash common equity contributions of $158.5 million, net of issuance costs,
to MergerCo, and MergerCo obtained gross proceeds of $99.5 million through the
issuance of 11% Senior Subordinated Discount Notes ("Discount Notes") due 2008
and $40 million through the issuance of 13.5% Exchangeable Preferred Stock
("Preferred Stock") mandatorily redeemable in 2010. In connection with the
merger, Harborside also entered into a new $250 million collateralized credit
facility. In the third quarter Harborside recorded a charge to income from
operations of approximately $37 million (approximately $29 million after taxes)
for direct and other costs related to the Merger transaction. In connection with
the merger and the related refinancings, the Company exercised purchase options
for seven facilities which had been financed through synthetic leases.
-17-
<PAGE>
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 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; (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 the 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. These revenues are subject to adjustment in the event one
facility is denied reimbursement by Medicare or any other applicable payor on
the basis that the services provided by the Company were not medically
necessary.
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.
TOTAL NET REVENUES (1)
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Private and other............ 35.5% 34.1% 30.2%
Medicare..................... 26.3 25.9 27.7
Medicaid..................... 38.2 40.0 42.1
Total....................... 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 A to the Company's consolidated
financial statements included elsewhere in this filing.
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.
-18-
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Total Net Revenues. Total net revenues increased by $89,267,000 or 40.3%, from
$221,777,000 in 1997 to $311,044,000 in 1998. This increase resulted primarily
from the acquisition of the Harford Gardens facility on March 1, 1997, four
Massachusetts facilities (the "Massachusetts Facilities") on August 1, 1997,
three Dayton, Ohio facilities (the "Dayton Facilities") on September 1, 1997,
the five Connecticut facilities (the "Connecticut Facilities") on December 1,
1997, two North Toledo, Ohio facilities (the "North Toledo Facilities") on
April 1, 1998, two Rhode Island facilities (the "Rhode Island Facilities") on
May 8, 1998 and two Danbury, Connecticut facilities (the "Danbury Facilities")
on December 1, 1998. Of such increase, $1,022,000, or 1.1% of the increase,
resulted from the operation of the Harford Gardens facility; $11,986,000, or
13.4% of the increase, resulted from the operation of the Massachusetts
Facilities; $10,758,000, or 12.1% of the increase, resulted from the operation
of the Dayton Facilities, $43,916,000, or 49.2% of the increase, resulted from
the operation of the Connecticut Facilities; $8,469,000; or 9.5% of the
increase, resulted from the operation of the North Toledo Facilities;
$7,626,000, or 8.5% of the increase, resulted from the operation of the Rhode
Island Facilities; and $692,000, or 0.8% of this increase, resulted from the
operation of the Danbury Facilities. Revenues generated by providing
rehabilitation therapy services to non-affiliated long-term care facilities
decreased by $2,671,000, from $17,628,000 in 1997 to $14,957,000 in 1998. The
remaining $7,469,000, or 8.4% 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 by 3.0%
from $150.85 in 1997 to $155.44 in 1998. Contributing to the increase in total
net revenues was an increase in occupancy at "same store" facilities from 92.0%
in 1997 to 92.3% in 1998. The average occupancy rate at all of the Company's
facilities was 92.3% in 1997 and 1998. The Company's quality mix of private,
Medicare and insurance revenues was 60.0% for the year ended December 31, 1997
as compared to 57.9% for the year ended December 31, 1998. The decrease in the
quality mix percentage was primarily due to dilution resulting from the
acquisition of new facilities.
Facility Operating Expenses. Facility operating expenses increased by
$69,596,000 or 39.5%, from $176,404,000 in 1997 to $246,000,000 in 1998. The
operation of the Harford Gardens facility accounted for $1,659,000, or 2.4% of
this increase; the operation of the Massachusetts Facilities accounted for
$10,959,000, or 15.8% of this increase; the operation of the Dayton Facilities
accounted for $7,881,000, or 11.3% of this increase; the operation of the
Connecticut Facilities accounted for $35,308,000, or 50.7% of this increase; the
operation of the North Toledo Facilities accounted for $6,653,000 or 9.6% of
this increase; the operation of the Rhode Island Facilities accounted for
$6,741,000 or 9.7%; of this increase and the operation of the Danbury Facilities
accounted for $479,000 or 0.7% of this increase. Operating expenses associated
with rehabilitation therapy services provided to non-affiliated long-term care
facilities decreased as a result of fewer therapy contracts. Operating expenses
associated with these contracts decreased by $6,795,000 from 1997 to 1998. The
decrease in contracts resulted from the Company's decision to eliminate low
profit contracts. The remaining $6,711,000 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 $4,469,000 or 40.8%, from $10,953,000 in
1997 to $15,422,000 in 1998. As a percentage of total net revenues, general and
administrative expenses increased from 4.9% in 1997 to 5.0% in 1998. 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 reimbursed 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
1997, such reimbursements totaled $708,000 as compared to $1,291,000 in 1998.
The increased reimbursement related primarily to additional data processing
services.
Depreciation and Amortization. Depreciation and amortization increased by
$2,276,000 from $4,074,000 in 1997 to $6,350,000 in 1998 primarily due to the
acquisition of new facilities and the amortization of costs related to the
Merger.
Amortization of Prepaid Management Fees. Amortization of prepaid management fees
(paid in connection with the Merger) was $500,000 in 1998 (See Note O).
Facility Rent. Facility rent expense increased by $9,966,000 from $12,446,000 in
1997 to $22,412,000 in 1998. The increase in rent expense is due to the
acquisition of new facilities partially offset by a reduction of rent expense
resulting from the exercise of purchase options on seven facilities. The
exercise of these purchase options was funded through Merger-related financings.
Merger costs. In connection with the Merger completed on August 11, 1998, the
Company incurred merger costs of $37,172,000. Merger costs consisted of
transaction fees and expenses associated with the Merger and the related
refinancings and the elimination of deferred financing costs related to debt
retired in connection with these events.
Interest Expense, net. Interest expense, net, increased from $5,853,000 in 1997
to $11,271,000 in 1998. This increase is primarily due to the issuance of
$99,500,000 of 11% Senior Subordinated Discount Notes in connection with the
Merger. The interest associated with these notes accretes until cash payments
begin on August 1, 2003.
Income Taxes (Benefit). As a result of the loss incurred in 1998, an income tax
benefit of $5,020,000 was recognized for that year as compared to income tax
expense of $4,347,000 for 1997.
Net Income (Loss). Net income was $6,803,000 in 1997 as compared to a loss of
$24,187,000 in 1998
-19-
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, revenues increased
as the result of the generation of revenues from rehabilitation therapy services
provided to additional non-affiliated long-term care facilities and increased
net patient service revenues per patient day at the Company's "same store"
facilities. Of such increase, $19,147,000, or 34.0% of the increase, resulted
from the operation of the 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 by $7,333,000, from $10,295,000
in 1996 to $17,628,000 in 1997. The remaining $7,151,000, or 12.7% of such
increase, is largely attributable to higher average net patient service revenues
per patient day at the Company's "same store" facilities, primarily resulting
from increased levels of care provided to patients with medically complex
conditions. Average net patient service revenues per patient day at "same store"
facilities increased by 7.0% from $138.31 in 1996 to $147.96 in 1997. Partially
offsetting this increase was a reduction in occupancy at "same store" facilities
from 92.6% in 1996 to 91.7% in 1997. The average occupancy rate at all of the
Company's facilities decreased from 92.6% in 1996 to 92.3% in 1997. The
Company's quality mix of private, Medicare and insurance revenues was 61.8% for
the year ended December 31, 1996 as compared to 60.0% for the year ended
December 31, 1997. The decrease in the quality mix percentage was primarily due
to dilution resulting from the acquisition of new facilities.
Facility Operating Expenses. Facility operating expenses increased by
$44,197,000, or 33.4%, from $132,207,000 in 1996 to $176,404,000 in 1997. The
operation of the 1996 Ohio Facilities for a full year in 1997 accounted for
$13,499,000, or 30.5% of this increase; the operation of Harford Gardens
accounted for $4,726,000, or 10.7% of this increase; the operation of the
Massachusetts Facilities accounted for $6,034,000, or 13.7% of this increase;
the operation of the Dayton 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 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 Charge 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 and
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 reimbursed 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 IPO and corporate
reorganization, the Company recorded $1,716,000 of non-recurring charges in
1996. Of this amount, $1,524,000 consisted of compensation earned by key members
of management as a result of the successful IPO and the corporate restructuring
which preceded the IPO.
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 four
Ohio facilities on July 1, 1996.
Facility Rent. Facility rent expense increased by $2,223,000 from $10,223,000 in
1996 to $12,446,000 in 1997. The increase in rent expense 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.
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
IPO. 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 IPO, 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 IPO less a tax benefit resulting from
book-tax differences inherited as part of the Company's Reorganization.
Net Income. Net income increased by $4,101,000, from $2,702,000 in 1996 to
$6,803,000 in 1997.
-20-
<PAGE>
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 a credit facility. 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 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 borrowings under a
synthetic lease facility (the "Leasing Facility") that was entered into by the
Company in September 1997. The Company's existing facility leases generally
require it to make monthly lease payments 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 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 purchase option 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 of the facility while maintaining financial flexibility.
During 1998 the Company acquired the two Rhode Island Facilities in April and
the two North Toledo Facilities in May through synthetic leases funded by the
Leasing Facility. The total funding for these acquisitions through the Leasing
Facility was $35,650,000.
In connection with the Merger on August 11, 1998, the Company obtained gross
proceeds of $99.5 million through the issuance of 11% Senior Subordinated
Discount Notes (the "Discount Notes") due 2008 and $40 million through the
issuance of 13.5% Exchangeable Preferred Stock (the "Preferred Stock")
mandatorily redeemable in 2010. Interest on the Discount Notes accretes at 11%
per annum with cash interest on the Discount Notes not payable until August 1,
2003. Dividends on the Preferred Stock are payable, at the option of the
Company, in additional shares of the Preferred Stock until August 1, 2003. After
that date dividends may only be paid in cash. The Company also entered into a
new $250 million collateralized credit facility (the "New Credit Facility"). The
terms of the New Credit Facility provide up to $75 million on a revolving credit
basis plus an additional $175 million initially funded on a revolving basis that
convert to a term loan on an annual basis on each anniversary of the closing.
During the first four years of the facility, any or all of the full $250 million
of availability under the facility may be used for synthetic lease financings.
Proceeds of loans under the facility may be used for acquisitions, working
capital purposes, capital expenditures and general corporate purposes. Interest
is based on either LIBOR or prime rates of interest (plus applicable margins
determined by the Company's leverage ratio) at the election of the Company. The
New Credit Facility contains various financial and other restrictive covenants
and limits aggregate borrowings under the New Credit Facility to a predetermined
multiple of EBITDA. As of December 31, 1998, the Company had outstanding
$12,750,000 in revolving loans through the New Credit Facility and had
$13,700,000 in synthetic leasing financings.
The Company's operating activities in 1997 generated net cash of $5,621,000 as
compared to net cash used of $39,447,000 in 1998, a decrease of $45,068,000. The
increase in net cash used by operations was largely the result of the merger-
related expenses of approximately $37 million. In connection with the Merger,
Harborside incurred certain nonrecurring expenses and recorded in the third
quarter a charge to income from operations of approximately $37 million
(approximately $29 million after taxes) for direct and other costs related to
the Merger transaction, including among other items, certain investment banking
fees, the write-off of unamortized deferred financing costs, and a compensation
charge relating to the conversion into cash of 648,923 stock options. In
addition, the Company made a prepayment of $6,000,000 in management fees.
Net cash used by investing activities was $19,487,000 during 1997 as compared to
$78,664,000 used in 1998. The primary use of cash for investing purposes during
these periods related to additions to property and equipment ($5,274,000 in 1997
compared to $68,605,000 in 1998), additions to intangible assets ($6,301,000 in
1997 compared to $13,494,000 in 1998), and a note receivable issued for
$7,487,000 in connection with the acquisition of the five Connecticut facilities
on December 1, 1997. Most of the additions to property and equipment in 1998
related to the exercise of purchase options on the date of the Merger for seven
facilities which had previously been leased through the Leasing Facility. Most
of the additions to intangible assets related to deferred financing costs
associated with the Merger.
Net cash provided by financing activities was $12,891,000 in 1997 as compared to
$110,260,000 provided in 1998. The New Investors made cash equity contributions
of $165 million ($158.5 million, net of issuance costs) to MergerCo prior to its
merger with and into Harborside. These funds, as well as, the proceeds from the
issuance of the Discount Notes and the Preferred Stock, and borrowings totaling
$12,750,000 under the New Credit Facility were used to purchase shares of the
Company's common stock not retained by shareholders subsequent to the Merger and
to repay the outstanding balance on the previous credit facility. The Company
acquired 7,349,832 shares of its common stock for cash payments aggregating
approximately $184 million.
In addition to the Discount Notes, as of December 31, 1998, the Company had two
mortgage loans outstanding for $17,854,000 and $12,750,000 in advances on its
New Credit Facility. One mortgage loan had an outstanding principal balance of
$16,294,000 of which $15,140,000 is due at maturity in 2004. This loan bears
interest at an annual rate of 10.65% plus additional interest equal to 0.3% of
the difference between the annual operating revenues of the four mortgaged
facilities and actual revenues during the twelve-month base period. The
Company's other mortgage loan, which encumbers a single facility, had an
outstanding principal balance of $1,560,000 at December 31, 1998, of which
$1,338,000 is due in 2010. As of December 31, 1998, the Company had a maximum of
$250 million available under the New Credit Facility, subject to covenants
related to maximum senior and total leverage and minimum EBITDAR coverage of
cash interest plus rental expense. The New Credit Facility will mature in August
2004 and has no scheduled interim amortization. Cash interest payments on the
Discount Notes are not due until August 1, 2003, and dividends on the Preferred
Stock are payable, at the Company's option, in additional shares of Preferred
Stock during the same period. Effective August 1, 2003, dividends on the
preferred stock must be made in cash.
-21-
<PAGE>
Harborside expects that its capital expenditures for 1999, excluding
acquisitions of new long-term care facilities, will aggregate approximately
$12,000,000. Harborside's expected capital expenditures will relate to
maintenance capital expenditures, systems enhancements, special construction
projects and other capital improvements. Harborside expects that its future
facility acquisitions will be financed with borrowings under the New Credit
Facility, direct operating leases or assumed debt. Harborside may be required to
obtain additional equity financing to finance any significant acquisitions in
the future.
During the first quarter of 1999, the Company determined that its anticipated
financial results for that quarter would cause the Company to be out of
compliance with certain financial covenants of the New Credit Facility. The
Company's expected lower first quarter results are attributable to transitional
difficulties associated with the implementation of the new Medicare prospective
payment system which became effective at all of the Company's facilities on
January 1, 1999 (see "Business - Government Regulation"). Such transitional
difficulties have resulted in lower than expected revenues, primarily due to
fewer than expected Medicare patient days, lower Medicare rates, reduced
revenues from therapy services provided to non-affiliated long term care centers
and a reduction in revenues from the provision of Medicare Part B services. In
response, during the first quarter the Company initiated additional facility-
based training directed towards the documentation requirements of the revised
Medicare reimbursement system. The Company also continued to refine its
admission and assessment protocols in order to increase patient admissions and
introduced a series of targeted initiatives to lower operating expenses. Such
initiatives have included wage and staffing reductions (primarily related to the
delivery of rehabilitative therapy services and indirect nursing support)
renegotiation of vendor contracts and ongoing efforts to reduce the Company's
reliance on outside nurse agency personnel. Effective March 30, 1999, the
Company did obtain an amendment to the New Credit Facility which limits
borrowings under the New Credit Facility to an aggregate of $58,500,000
(exclusive of undrawn letters of credit outstanding as of March 30, 1999) and
which modifies certain financial covenants. Access to additional borrowings for
acquisitions and general corporate purposes under the New Credit Facility are
permitted to the extent the Company achieves certain financial targets. The
amendment allows the Company access to the entire $250 million facility if the
Company's operating performance returns to the level of compliance contemplated
by the original financial covenants. As of March 30, 1999, total borrowings
under the New Credit Facility (exclusive of undrawn letters of credit) were
approximately $33,500,000.
Harborside's principal sources of funds are cash flow from operations and
borrowings under the New Credit Facility. These funds are being used to finance
working capital, meet debt service and capital expenditure requirements, finance
acquisitions and for general corporate purposes. Harborside believes that
operating cash flow and availability under the New Credit Facility will be
adequate to meet its liquidity needs for the foreseeable future, although no
assurance can be given in this regard.
SEASONALITY
Harborside's earnings generally fluctuate from quarter to quarter. This
seasonality is related to a combination of factors which include, among other
things, the timing 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. Shortages in the labor market or general
inflationary pressure could have a significant effect on the Company. In
addition, suppliers attempt to 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 increased or if it
experiences significant delays in Medicare and Medicaid revenue sources
increasing their rates of reimbursement.
THE YEAR 2000 ISSUE
The Company is in the process of evaluating and addressing risks that could
arise in connection with the potential inability of computer programs to
recognize dates that follow December 31, 1999 (the "Year 2000 Issue"). The
Company's focus has been on evaluating the impact that the Year 2000 Issue might
have on essential equipment and systems of the Company as well as major
suppliers, customers and other third parties. The Company has formulated and
implemented a remediation plan in connection with those systems that will not be
Year 2000 compliant. As of December 31, 1998 the Company has tested and
evaluated approximately 90% of its information technology ("IT") systems and
equipment and approximately 90% of its facility based operating equipment. The
Company is also evaluating the compliance of its major suppliers and their
respective products with the Year 2000 Issue.
With respect to the Year 2000 compliance of critical third parties, the Company
derives a significant portion of its revenues from the Medicare and Medicaid
programs. The Health Care Finance Administration ("HCFA"), the governmental
agency that administers the Medicare program, has publicly stated that it will
be Year 2000 compliant by December 31, 1998. HCFA has imposed the same December
31, 1998 deadline on its fiscal intermediaries and has stated that it expects
state Medicaid agencies to be compliant by March 1999. The General Accounting
Office cannot make any assurances that the government payment systems will be
Year 2000 compliant on time. The Company derives its governmental payments
through fiscal intermediaries, however, there can be no assurance that the
payments from the fiscal intermediaries will not be negatively impacted by any
Year 2000 issues not corrected in a timely manner. The Company intends to
actively pursue assurances of the status of the remediation efforts and Year
2000 compliance by the government and its fiscal intermediaries.
The Company began replacing critical IT systems for Year 2000 issues in
connection with a comprehensive evaluation of system wide operational IT
efficiencies in 1996. The Company has recently completed the conversion of
certain of its financial reporting systems to new software that has been
certified as Year 2000 compliant. The Company is in the process of upgrading and
consolidating its remaining financial applications to new Year 2000 compliant
software by September 30, 1999. Additionally, the
-22-
<PAGE>
Company has received Year 2000 compliance certification from its remaining
software suppliers with respect to operating systems that will not be upgraded.
The Company's Year 2000 systems conversions and upgrades have been funded from
operating cash flow and existing credit facilities.
The Company, as part of its comprehensive ongoing evaluation process, is testing
and upgrading where necessary, all local area networks ("LANS") personal
computers and related operating software for compliance with Year 2000 Issues.
The Company expects to substantially complete the evaluation by April 30, 1999,
and implement any required remediation before September 30, 1999. The Company
plans to remediate any Year 2000 issues discovered in its review of LANS through
the installation of upgraded hardware and software. The Company on a going
forward basis is endeavoring to ensure that all software and hardware purchased
is Year 2000 compliant.
The Company has undertaken an evaluation of facility operating systems for
potential problems associated with Year 2000 Issues. The Company has evaluated
and tested virtually all of its facility heating, cooling and ventilation
("HVAC") systems, life safety and security systems, and mechanical systems for
Year 2000 compliance. In connection with the review and testing procedures, the
Company has contacted the manufacturer of the respective systems for further
assurance of potential exposure to Year 2000 Issues. Based on the results of
testing to date, the Company does not believe that above referenced facility
operating systems will have any significant risk associated with the Year 2000
Issue.
To date, the Company has expended approximately $5.5 million to remedy problems
associated with the Year 2000 issue and estimates that it will expend an
additional $1.5 million in the future. The Company's Year 2000 plans are still
evolving and estimated expenditures may vary, as new information becomes
available.
The Company is developing contingency plans in the event that the IT systems
conversion scheduled for completion before December 31, 1999 is unavoidably
delayed. The Company is planning to be fully Year 2000 compliant before December
31, 1999 although there can be no assurance that it will achieve its objective
by such date or by January 1, 2000. The Company can make no assurance that its
failure to achieve 100% Year 2000 compliance by such date will not have a
material adverse impact on the Company's business, financial condition, or
results of operations. Additionally, there can be no assurance that the
Company's critical suppliers and third parties will be compliant by January 1,
2000 and that any such non compliance will not have a material adverse impact on
the Company's business, its financial condition or results of operations.
-23-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES:
<S> <C>
Report of Independent Accountants.......................................... 25
Consolidated Balance Sheets as of December 31, 1997 and 1998............... 26
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998....................................................... 27
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1996, 1997 and 1998.................................... 28
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998........................................................ 29
Notes to Consolidated Financial Statements................................. 30
</TABLE>
-24-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Harborside Healthcare Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows present fairly, in all material respects, the financial position of
Harborside Healthcare Corporation and its subsidiaries (the "Company") at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 19, 1999 except as to the information
presented in Note H for which the
date is March 30, 1999
-25-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1998
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,747 $ 896
Accounts receivable, net of allowances for doubtful
accounts of $1,871 and $2,864 respectively 32,416 49,946
Prepaid expenses and other 6,532 10,934
Prepaid income taxes 179 3,873
Deferred income taxes (Note K) 2,150 4,084
-------- ---------
Total current assets 50,024 69,733
Restricted cash (Note C) 5,545 2,110
Property and equipment, net (Note D) 96,872 160,504
Intangible assets, net (Note E) 8,563 18,173
Other assets, net (Note O) - 4,300
Note receivable (Note F) 7,487 7,487
Deferred income taxes (Note K) 71 2,229
-------- ---------
Total assets $168,562 $ 264,536
======== =========
LIABILITIES
Current liabilities:
Current maturities of long-term debt (Note H) $ 186 $ 207
Current portion of capital lease obligation (Note I) 3,924 4,278
Accounts payable 7,275 7,401
Employee compensation and benefits 10,741 13,220
Other accrued liabilities 4,417 7,485
Accrued interest 251 62
Current portion of deferred income 609 677
-------- ---------
Total current liabilities 27,403 33,330
Long-term portion of deferred income (Note G) 3,559 3,104
Long-term debt (Note H) 33,456 134,473
Long-term portion of capital lease obligation (Note I) 52,361 51,253
-------- ---------
Total liabilities 116,779 222,160
-------- ---------
Commitments and contingencies (Notes G and M)
Exchangeable preferred stock, redeemable, $.01 par value,
with a liquidation value of $1,000 per share;
500,000 shares authorized; 42,293 shares issued and
outstanding (Note L) - 42,293
-------- ---------
STOCKHOLDERS' EQUITY (Note L)
Common stock, $.01 par value, 30,000,000 and
19,000,000 shares authorized, 8,008,665 and
7,261,332 shares issued and outstanding, respectively 80 146
Additional paid-in capital 48,440 204,607
Less common stock in treasury, at cost, 7,349,832 shares - (183,746)
Retained earnings (deficit) 3,263 (20,924)
-------- ---------
Total stockholders' equity 51,783 83
-------- ---------
Total liabilities and stockholders' equity $168,562 $ 264,536
======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-26-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Total net revenues $165,412 $221,777 $311,044
-------- -------- --------
Expenses:
Facility operating 132,207 176,404 246,000
General and administrative 7,811 10,953 15,422
Service charges paid to affiliate
(Note O) 700 708 1,291
Amortization of prepaid management fee
(Note O) - - 500
Special compensation and other (Note L) 1,716 - -
Depreciation and amortization 3,029 4,074 6,350
Facility rent 10,223 12,446 22,412
Merger costs (Note B) - - 37,172
-------- -------- --------
Total expenses 155,686 204,585 329,147
-------- -------- --------
Income (loss) from operations 9,726 17,192 (18,103)
Other:
Interest expense, net 4,634 5,853 11,271
Other expense (income) 263 189 (167)
-------- -------- --------
Income (loss) before income taxes and
extraordinary loss 4,829 11,150 (29,207)
Income tax expense (benefit) 809 4,347 (5,020)
Income (loss) before extraordinary loss 4,020 6,803 (24,187)
Extraordinary loss on early retirement of
debt, net of taxes of $843 (Note H) (1,318) - -
-------- -------- --------
Net income (loss) $ 2,702 $ 6,803 $(24,187)
======== ======== ========
Earnings available per common share (Note L):
Basic $ .85 $ (3.42)
======== ========
Diluted $ .84 $ (3.42)
======== ========
Pro forma data (unaudited - Notes B and L):
Historical income before income taxes and
extraordinary loss $ 4,829
Pro forma income taxes (799)
--------
Pro forma income before extraordinary loss 4,030
Extraordinary loss, net (1,318)
--------
Pro forma net income $ 2,712
========
Pro forma earnings (loss) available
per common share (basic and diluted):
Pro forma income before extraordinary loss $0.63
Extraordinary loss, net 0.21
--------
Pro forma earnings per common share $0.42
========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-27-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
For the years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Additional Retained
Common Paid-in Treasury Earnings
Stock Capital Stock (Deficit) Total
------ ------- ----- --------- -----
<S> <C> <C> <C> <C> <C>
Stockholders' equity, December 31, 1995 $ 44 $ 10,328 $ - $ (6,242) $ 4,130
Net income for the year ended December 31, 1996 - - - 2,702 2,702
Purchase of equity interests - 1,028 - - 1,028
Distributions - (140) - - (140)
Proceeds of initial public offering, net 36 37,124 - - 37,160
------ -------- --------- -------- ---------
Stockholders' equity, December 31, 1996 80 48,340 - (3,540) 44,880
Net income for the year ended December 31, 1997 - - - 6,803 6,803
Exercise of stock options - 100 - - 100
------ -------- --------- -------- ---------
Stockholders' equity, December 31, 1997 80 48,440 - 3,263 51,783
Net loss for the year ended December 31, 1998 - - - (24,187) (24,187)
Exercise of stock options - 29 - - 29
Issuance of common stock, net (6,600,000 shares) 66 158,434 - - 158,500
Purchase of treasury stock (7,349,832 shares) - - (183,746) - (183,746)
Preferred stock dividends - (2,296) - - (2,296)
------ -------- --------- -------- ---------
Stockholders' equity, December 31, 1998 $146 $204,607 $(183,746) $(20,924) $ 83
====== ======== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-28-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 2,702 $ 6,803 $ (24,187)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Minority interest 234 - -
Loss on refinancing of debt 1,318 - -
Depreciation of property and equipment 2,681 3,589 4,973
Amortization of intangible assets 348 485 1,377
Amortization of prepaid management fee - - 500
Amortization of deferred income (369) (449) (550)
Prepayment of management fees - - (6,000)
Loss (income) from investment in limited partnership 263 189 (167)
Accretion of senior subordinated discount notes - - 4,583
Amortization of loan costs and fees (included in interest expense) 103 257 56
Accretion of interest on capital lease obligation 1,419 2,952 3,185
Deferred interest (114) - -
Merger costs not requiring cash - - (350)
Common stock grant 225 - -
-------- -------- --------
8,810 13,826 (16,580)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (13,017) (9,432) (17,530)
(Increase) in prepaid expenses and other (1,780) (3,074) (3,035)
(Increase) in deferred income taxes (1,956) (265) (4,092)
Increase in accounts payable 1,977 1,264 126
Increase in employee compensation and benefits 4,144 2,102 2,479
Increase (decrease) in accrued interest (6) 232 (189)
Increase in other accrued liabilities 1,118 2,240 3,068
Increase (decrease) in income taxes payable 2,115 (1,272) (3,694)
-------- -------- --------
Net cash provided (used) by operating activities 1,405 5,621 (39,447)
-------- -------- --------
Investing activities:
Additions to property and equipment (5,104) (5,274) (68,605)
Facility acquisition deposits 3,000 - -
Additions to intangibles (950) (6,301) (13,494)
Transfers to restricted cash, net (996) (1,794) 3,435
Receipt of note receivable - (7,487) -
Repayment of demand note from limited partnership - 1,369 -
-------- -------- --------
Net cash (used) by investing activities (4,050) (19,487) (78,664)
-------- -------- --------
Financing activities:
Borrowings under revolving line of credit - 15,600 17,150
Repaid on revolving line of credit - - (20,000)
Payment of long-term debt (25,288) (166) (191)
Proceeds from issuance of senior subordinated discount notes - - 99,493
Proceeds from issuance of exchangeable preferred stock - - 40,000
Purchase of treasury stock - - (183,746)
Proceeds from sale of common stock 37,160 - 158,500
Principal payments of capital lease obligation (6,766) (3,944) (3,939)
Debt prepayment penalty (1,517) - -
Note payable to an affiliate (2,000) - -
Receipt of cash in connection with lease 3,685 1,301 2,964
Dividend distribution (140) - -
Distributions to minority interest (33,727) - -
Purchase of equity interests and other contributions 803 - -
Exercise of stock options - 100 29
-------- -------- --------
Net cash provided (used) by financing activities (27,790) 12,891 110,260
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (30,435) (975) (7,851)
Cash and cash equivalents, beginning of year 40,157 9,722 8,747
-------- -------- --------
Cash and cash equivalents, end of year $ 9,722 $ 8,747 $ 896
======== ======== ========
Supplemental Disclosure:
Interest paid $ 4,060 $ 3,371 $ 3,636
Income taxes paid $ 760 $ 5,783 $ 3,047
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.
-29-
<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, 1998, the Company owned twenty two facilities, operated twenty
seven additional facilities under various leases, managed one facility and owned
a rehabilitation therapy services company. The Company accounts for its
investment in one 75% owned facility using the equity method.
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 "IPO"), 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
IPO, the Company executed an agreement (the "Reorganization Agreement") which
resulted in the transfer of ownership of the Predecessor Entities (the
"Reorganization") 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 IPO 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 IPO, resulting in net proceeds to the Company (after deducting
underwriters' commissions and other IPO 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 H).
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.
The Company's financial statements prior to the date of the IPO 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 1996, as if the Company had always
owned the Predecessor Entities (see Note K).
On April 15, 1998, the Company entered into a Merger Agreement (the "Merger")
with HH Acquisition Corp. ("MergerCo"), an entity organized for the sole purpose
of effecting a merger on behalf of Investcorp S.A., certain of its affiliates
and certain other international investors (the "New Investors"). The New
Investors made common equity cash contributions totaling $165 million
($158.5 million, net of issuance costs). On August 11, 1998, MergerCo merged
with and into the Company, with Harborside Healthcare Corporation as the
surviving corporation. As a result of the transaction, and pursuant to the
Merger Agreement, the New Investors acquired approximately 91% of the post-
merger common stock of the Company. The remaining 9% of the common stock was
retained by existing shareholders, including management. As a result of the
Merger, the Company's shares have been de-listed from the New York Stock
Exchange.
The Merger was approved by a majority of the Company's shareholders at a special
meeting held on August 11, 1998. Each share not retained by existing
shareholders was converted into $25 in cash, representing in the aggregate, cash
payments of approximately $184 million. The converted shares (7,349,832 shares)
were recorded at cost as treasury stock and represent a deduction from the
Company's stockholders' equity. Holders of outstanding stock options of the
Company converted the majority of their options into cash at $25 per underlying
share (less applicable exercise price and withholding taxes) with aggregate
payments of approximately $8 million.
In connection with the transaction and prior to the Merger, the New Investors
made cash common equity contributions of $158.5 million, net of issuance costs,
to MergerCo, and MergerCo obtained gross proceeds of $99.5 million through the
issuance of 11% Senior Subordinated Discount Notes ("Discount Notes") due 2008
and $40 million through the issuance of 13.5% Exchangeable Preferred Stock
("Preferred Stock") mandatorily redeemable in 2010. In connection with the
Merger, Harborside also entered into a new $250 million collateralized credit
facility. In the third quarter Harborside recorded a charge to income from
operations of $37 million ($29 million after taxes) for direct and other costs
related to the Merger transaction. In connection with the Merger and the related
refinancings, the Company exercised purchase options for seven facilities which
had been previously financed through synthetic leases.
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<PAGE>
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 also 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. and two additional facilities.
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. As of January 1, 1999
each of the Company's facilities which participates in the Medicare program
began to be reimbursed in accordance with the provisions of the Balanced Budget
Act of 1997 (the "Balanced Budget Act"). The Balanced Budget Act provides for
the reimbursement of Medicare funded skilled nursing facility services through a
Prospective Payment System which when fully implemented will reimburse the
Company's facilities based upon a per diem rate adjusted for the acuity of each
patient and the geographic location of each facility. Accounts receivable, net,
at December 31, 1997 and 1998 includes $8,296,000 and $22,388,000, respectively,
of estimated settlements due from third party payors and $6,115,000 and
$8,445,000, respectively, of estimated settlements due to third party payors.
In addition, direct and allocated indirect costs reimbursed under the Medicare
program are subject to regional limits. The Company's costs generally exceed
these limits and accordingly, the Company is required to submit exception
requests to recover such excess costs. The Company believes it will be
successful in collecting these receivables; however, the failure to recover
these costs in the future could materially and adversely affect the Company.
Total net revenues include revenue 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. Approximately 65%, 66%, and 70% of
the Company's net revenues in the years ended December 31, 1996, 1997 and 1998,
respectively, are from the Company's participation in the Medicare and Medicaid
programs. As of December 31, 1997 and 1998, $20,936,000 and $26,461,000,
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, and
include expenses associated with services rendered by Theracor to non-affiliated
facilities.
Provision for Doubtful Accounts
Provisions for uncollectible accounts receivable of $1,116,000, $1,188,000 and
$1,418,000 are included in facility operating expenses for the years ended
December 31, 1996, 1997 and 1998, 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
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<PAGE>
estimates. Estimates are used when accounting for the collectibility of
receivables, depreciation and amortization, employee benefit plans, taxes and
contingencies.
Earnings (Pro Forma Earnings) Per Common 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 earnings per share. The
Company adopted SFAS No. 128 in the fourth quarter of 1997. All earnings (loss)
per share and pro forma earnings 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 earnings (loss) per share is computed by dividing net income (loss) less
Preferred Stock dividends by the weighted average number of common shares
outstanding during 1997 and 1998. The computation of diluted earnings per share
is similar to that of basic earnings per share except that the number of common
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 earnings per share for the
year ended December 31, 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 earnings per common share as
if they were outstanding for all of 1996.
Property and Equipment
Property and equipment are stated at cost. Expenditures that extend the lives of
affected assets are capitalized, while maintenance and repairs are charged to
expense as incurred. Upon the retirement or sale of an asset, the cost of the
asset and any related accumulated depreciation are removed from the balance
sheet, and any resulting gain or loss is included in net income.
Depreciation expense includes the amortization of capital assets and is
estimated using the straight-line method. These estimates are calculated using
the following estimated useful lives:
Buildings and improvements 31.5 to 40 years
Furniture and equipment 5 to 10 years
Leasehold improvements over the life of the lease
Land improvements 8 to 40 years
Intangible Assets
Intangible assets consist of amounts identified in connection with certain
facility acquisitions accounted for under the purchase method and certain
deferred costs which were incurred in connection with various financings (see
Notes E and H).
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 were 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 (primarily loans and facility leases) are
amortized 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.
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<PAGE>
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.
Reclassification of Prior Period Amounts
Certain amounts have been reclassified to conform with the 1998 presentation.
D. PROPERTY AND EQUIPMENT
The Company's property and equipment are stated at cost and consist of the
following as of December 31:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Land $ 3,270,000 $ 7,238,000
Land improvements 3,387,000 3,538,000
Buildings and improvements 30,529,000 85,398,000
Leasehold improvements 3,157,000 4,520,000
Equipment, furnishings and fixtures 9,565,000 17,760,000
Assets under capital lease 63,532,000 63,532,000
------------ ------------
113,440,000 181,986,000
Less accumulated depreciation 16,568,000 21,482,000
------------ ------------
$ 96,872,000 $160,504,000
============ ============
</TABLE>
E. INTANGIBLE ASSETS
Intangible assets are stated at cost and consist of the following as of
December 31:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Patient lists $ 1,459,000
Assembled workforce 930,000
Covenant not to compete 1,838,000 $ 1,200,000
Goodwill 2,166,000 2,861,000
Deferred financing costs 6,574,000 16,648,000
Other 380,000 380,000
------------ ------------
13,347,000 21,089,000
Less accumulated amortization 4,784,000 2,916,000
------------ ------------
$ 8,563,000 $ 18,173,000
============ =============
</TABLE>
F. NOTE RECEIVABLE
In connection with the acquisition of five Connecticut facilities on December 1,
1997 (see Note G), the Company received a note receivable from the owners in the
amount of $7,487,000. Interest is earned at the rate of 9% per annum, and
payments are due monthly, in arrears, commencing January 1, 1998 and continuing
until November 30, 2010, at which time the entire principal balance is due. The
proceeds of the note were used by the owner to repay certain indebtedness. The
note is collateralized by various mortgage interests and other collateral.
G. OPERATING LEASES
In March 1993, a subsidiary of the Company entered into an agreement with a non-
affiliated entity to lease two long-term care facilities in Ohio with 289 beds
for a period of ten years. The lease agreement, which became effective in June
1993, provides for fixed annual rental payments of $900,000. At the end of the
ten-year period, the Company has the option to acquire the facilities for
$8,500,000, or to pay a $500,000 termination fee and relinquish the operation of
the facilities to the lessor. On the effective date of the lease, the subsidiary
paid $1,200,000 to the lessor for a covenant not-to-compete which remains in
force through June 2003.
Effective October 1, 1994, a subsidiary of the Company entered into an agreement
with a related party to lease a 100 bed long-term care facility in Florida for a
period of ten years. The lease agreement provides for annual rental payments of
$551,250 in the initial twelve-month period and annual increases of 2%
thereafter. The Company has the option to exercise two consecutive five-year
lease renewals. The Company also has the right to purchase the facility at fair
market value at any time after the fifth anniversary of the commencement of the
lease. The lease agreement also required the Company to escrow funds equal to
three months' base rent.
Effective April 1, 1995, a subsidiary of the Company entered into an agreement
with Meditrust to lease a 100-bed long-term 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 Company's obligations
under the
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<PAGE>
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 with a total
of 820 beds. 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 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 Company's obligations under the lease
are collateralized by, among other things, an interest in any property
improvements made by the Company and by a second position on the related
facilities' accounts receivable. In conjunction with the lease, the Company was
granted a right of first refusal and an option to purchase the facilities as a
group, which is exercisable at the end of the eighth year of the initial term
and at the conclusion of each renewal term. The purchase option is exercisable
at the greater of 90% of the fair market value of the facilities at the time of
exercise or Meditrust's original investment. In connection with this lease, the
Company received a cash payment of $3,685,000 from Meditrust which was recorded
as deferred income and is being amortized over the ten-year initial lease term
as a reduction of rental expense.
The Meditrust leases contain cross-default and cross-collateralization
provisions. A default by the Company under one of these leases could adversely
affect a significant number of the Company's properties and result in a loss to
the Company of such properties. In addition, the leases permit Meditrust to
require the Company to purchase the facilities upon the occurrence of a default.
Effective March 1, 1997, the Company entered into an agreement with a non-
affiliated party to lease one long-term care facility with 163 beds in
Baltimore, Maryland for a period of ten years. The lease agreement provides for
fixed annual rental payments of $900,000 for the first three years and annual
increases based on changes in the consumer price index thereafter. From July 1,
1999 through August 28, 2000, the Company has the option to acquire the facility
for $10,000,000. After August 28, 2000, the purchase price escalates in
accordance with a schedule. On the effective date of the lease, the Company paid
$1,000,000 to the lessor in exchange for the purchase option. This option
payment is being amortized over the life of the lease.
As of August 1, 1997, the Company acquired four long-term care facilities with
401 beds in Massachusetts. The Company financed this acquisition through an
operating lease with a real estate investment trust (the "REIT"). The lease
provides for annual rental payments of $1,576,000 in the initial twelve-month
period and annual increases based on changes in the consumer price index
thereafter. The lease has an initial term of ten years with, at the Company's
option, eight consecutive five-year renewal terms. In conjunction with the
lease, the Company was granted a right of first refusal and an option to
purchase the facilities as a group, which option is exercisable at the end of
the initial lease term and at the conclusion of each renewal term. The purchase
option is exercisable at the fair market value of the facilities at the time of
exercise.
On August 28, 1997, the Company obtained a five-year synthetic leasing facility
(the "Leasing Facility") from the same group of banks that provided the "Credit
Facility" (see Note H). The Company used $23,600,000 of the funds available
through the Leasing Facility to acquire the Dayton, Ohio facilities in September
1997. Acquisitions made through the Leasing Facility were accounted for
financial reporting purposes as operating leases with an initial lease term
which would have expired at the expiration date of the leasing facility. Annual
rent for properties acquired through the Leasing Facility was determined based
on the purchase price of the facilities acquired and an interest rate factor
which varied with the Company's leverage ratio (as defined) and which was based
on LIBOR, or at the Company's option, the agent bank's prime rate.
As of December 1, 1997, the Company acquired five long-term care facilities with
684 beds in Connecticut. The Company financed this acquisition through an
operating lease from the seller. The lease provides for an initial annual rental
payment of $7,491,000 and, beginning in the third lease year, certain annual
rent increases based on changes in the consumer price index, but not to exceed
$30,000 per year. The lease has an initial term of ten years with, at the
Company's option, three one-year extensions. In conjunction with the lease, the
Company was granted an option to purchase the facilities as a group at
predetermined purchase prices between eight and thirteen years post the lease
commencement.
On April 1, 1998, the Company acquired two facilities with 248 beds in Ohio
through the Leasing Facility, and on May 8, 1998 the Company acquired two
facilities with 267 beds in Rhode Island through the Leasing Facility. The
Company used a total of $35,650,000 of funds available through the Leasing
Facility to acquire these four facilities.
In connection with the Merger on August 11, 1998, the Company exercised its
rights to purchase all seven of the facilities it had acquired through the
Leasing Facility for an aggregate amount equal to $59,250,000.
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.
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<PAGE>
Future minimum rent commitments under the Company's non-cancelable operating
leases as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $21,236,000
2000 21,430,000
2001 21,624,000
2002 21,819,000
2003 21,563,000
Thereafter 60,005,000
------------
$167,677,000
============
</TABLE>
H. 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 IPO, 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
calculated in accordance with a formula.
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 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 were
collateralized by patient accounts receivable and certain real estate. The
assets which collateralized the Credit Facility also collateralized the
Company's obligation under the Leasing Facility. The facility was scheduled to
mature in September 2002 and provided for prime and LIBOR interest rate options
which varied with the Company's leverage ratio (as defined).
On August 11, 1998, in connection with the Merger, the Company entered into a
new, six year $250,000,000 collateralized credit facility (the "New Credit
Facility"). The terms of the New Credit Facility provide up to $75 million on a
revolving credit basis plus an additional $175 million initially funded on a
revolving basis that convert to a term loan on an annual basis on each
anniversary of the closing. If for any year beginning after December 31, 1999,
the Company shall generate Excess Cash Flow (as defined), then, 50% of such
Excess Cash Flow shall be applied toward the repayment of outstanding borrowings
under the New Credit Facility. During the first four years of the New Credit
Facility, up to $250,000,000 may be used in connection with synthetic lease
financing. Proceeds of the loans may be used for working capital, capital
expenditures, acquisitions and general corporate purposes. The New Credit
Facility is collateralized by substantially all of the Company's patient
accounts receivable, certain real estate and a first or second priority interest
in the capital stock of certain of the Company's subsidiaries. Interest is based
on either LIBOR or prime rates of interest (plus applicable margins determined
by the leverage ratio) at the election of the Company. The New Credit Facility
requires that the Company maintain an interest/rent coverage ratio which varies
by year, and limits aggregate borrowings under the New Credit Facility to a
predetermined multiple of EBITDA. The New Credit Facility contains a number of
restrictive covenants that, among other things, restrict the Company's ability
to incur additional indebtedness, prohibit the disposition of certain assets,
limit the Company's ability to make capital expenditures in excess of pre-
determined levels and limits the ability of the Company to declare and pay
certain dividends. As of December 31, 1998, the Company had borrowed $12,750,000
in revolving loans through the New Credit Facility and had $13,700,000 in
synthetic leasing financings outstanding.
During the first quarter of 1999, the Company determined that its anticipated
financial results for that quarter would cause the Company to be out of
compliance with certain financial covenants of the New Credit Facility.
Accordingly, the Company obtained an amendment to the New Credit Facility
effective March 30, 1999 which limits borrowings under the New Credit Facility
to an aggregate of $58,500,000 (exclusive of undrawn letters of credit
outstanding as of March 30, 1999) and which modifies certain financial
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<PAGE>
covenants. Access to additional borrowings for acquisitions and general
corporate purposes under the New Credit Facility are permitted to the extent the
Company achieves certain financial targets. The amendment allows the Company
access to the entire $250 million facility if the Company's operating
performance returns to the level of compliance contemplated by the original
financial covenants. As of March 30, 1999, total borrowings under the New
Credit Facility (exclusive of undrawn letters of credit) were approximately
$33,500,000.
In connection with the Merger on August 11, 1998, the Company issued
$170,000,000 principal amount at maturity (approximately $99,500,000 gross
proceeds) of 11% Senior Subordinated Discount Notes Due 2008 (the "Discount
Notes"). Each Discount Note was issued with a principal amount at maturity of
$1,000 and an original issue price of $585.25. Interest on the Discount Notes
accretes in accordance with a predetermined formula on a semi-annual basis in
February 1, and August 1, of each year. Cash interest will not accrue on the
Discount Notes until August 1, 2003. Thereafter, interest on the Discount Notes
will be paid semi-annually in arrears in cash on February 1 and August 1, of
each year commencing February 1, 2004. The Discount Notes will be redeemable in
whole or in part, at the option of the Company on or after August 1, 2003 based
on a predetermined redemption schedule which begins on August 1, 2003 at 105.5%
and which declines incrementally to 100% on August 1, 2006. In addition, the
Company may redeem up to 35% of the aggregate outstanding accreted value of the
Discount Notes at a redemption price of 111% of accreted value at any time prior
to August 1, 2001 with the proceeds of a public offering of common stock,
provided that the redemption occurs within 60 days of the closing of the public
offering and that at least 65% of the aggregate principal amount of the Discount
Notes remains outstanding immediately after such redemption. At any time on
or prior to August 1, 2003, the Discount Notes may be redeemed in whole but not
in part at the option of the Company upon the occurrence of a Change of Control
(as defined) in accordance with the prescribed procedures and the payment of any
Applicable Premium (as defined). The Discount Notes must be redeemed in whole
on August 1, 2008.
Upon any voluntary or involuntary liquidation of the Company, holders of the
Discount Notes will be entitled to be paid In full 100% of principal and accrued
interest out of the assets available for distribution after holders of senior
debt have been paid in full. The debt evidenced by the Discount Notes is
unsecured, subordinate to existing and future senior debt of the Company, but
senior in right with all existing and future subordinated debt of the Company.
Certain of the subsidiaries of the Company have jointly and severally guaranteed
the Company's payment obligations (subject to maximum amounts per subsidiary)
under the Discount Notes (see Note Q). Each Discount Note guaranteed by such
subsidiary is subordinated to any Senior Debt of such guarantor. The Company
derives substantially all of its income from operations through its subsidiaries
and consequently, the Discount Notes are effectively subordinated to the
potential claims of creditors of all of the subsidiaries of the Company
irrespective of subsidiary guarantees. The Discount Notes also contain certain
restrictive covenants which limit the ability of the Company to incur debt,
issue preferred stock, merge or dispose of substantially all of its assets.
Interest expense charged to operations for the years ended December 31, 1996,
1997 and 1998 was $5,576,000, $6,681,000 and $12,447,000, respectively.
As of December 31, 1997 and 1998, the Company's long-term debt, excluding the
current portion, consisted of the following:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Senior subordinated discount notes $104,076,000
Mortgages payable $ 17,856,000 17,647,000
Credit facility 15,600,000 12,750,000
------------ ------------
$ 33,456,000 $134,473,000
============ ============
</TABLE>
As of December 31, 1998, future long-term debt maturities associated with the
Company's debt are as follows:
<TABLE>
<S> <C>
1999 $ 207,000
2000 225,000
2001 248,000
2002 13,024,000
2003 302,000
Thereafter $120,674,000
------------
$134,680,000
============
</TABLE>
Substantially all of the Company's assets are subject to liens under long-term
debt or operating lease agreements.
I. CAPITAL LEASE OBLIGATION
On July 1, 1996, a subsidiary of the Company began leasing four long-term care
facilities in Ohio (the "1996 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 1996 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.
-36-
<PAGE>
The Company agreed to pay $8,000,000 for the option to purchase these
facilities. Of this amount, $5,000,000 was paid prior to the closing on July 1,
1996, and the remainder, $3,000,000, is due at the end of the initial lease term
whether or not the Company exercises its purchase option. The following is a
schedule of future minimum lease payments required by this lease together with
the present value of the minimum lease payments:
<TABLE>
<S> <C>
1999 $ 5,000,000
2000 5,000,000
2001 57,625,000
------------
67,625,000
Less amount representing interest (12,094,000)
------------
55,531,000
Less current portion (4,278,000)
------------
Long-term portion of capital lease obligation $ 51,253,000
============
</TABLE>
J. 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 $180,000, $365,000 and $475,000 to the plan
in 1996, 1997 and 1998, 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.
K. INCOME TAXES
Significant components of the Company's deferred tax assets as of December 31,
1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Deferred tax assets:
Reserves $1,755,000 $ 4,024,000
Rental payments 79,000 703,000
Interest payments 376,000 1,578,000
Other 11,000 8,000
---------- -----------
Total deferred tax asset $2,221,000 $ 6,313,000
========== ===========
</TABLE>
Significant components of the provision for income taxes for the years ended
December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Current:
Federal $3,893,000 $ (781,000)
State 719,000 (146,000)
---------- -----------
Total current 4,612,000 (927,000)
---------- -----------
Deferred:
Federal (223,000) (3,447,000)
State (42,000) (646,000)
---------- -----------
Total deferred (265,000) (4,093,000)
---------- -----------
Total income tax expense (benefit) $4,347,000 $(5,020,000)
========== ===========
</TABLE>
The reconciliation of income tax computed at statutory rates to income tax
expense for the years ended December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C> <C> <C>
Statutory rate $3,903,000 35.0% $(10,222,000) (35.0)%
State income tax, net of federal benefit 440,000 3.9 (515,000) (1.8)
Permanent differences 4,000 0.1 59,000 0.2
Nondeductible merger costs - permanent - - 5,658,000 19.4
---------- ---- ----------- -----
$4,347,000 39.0% $(5,020,000) (17.2)%
========== ==== =========== =====
</TABLE>
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, 1996, a pro forma provision for
income taxes has been
-37-
<PAGE>
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".
L. CAPITAL STOCK
Common Stock
On June 14, 1996, the Company completed its initial public offering (the
"IPO"). Through the IPO 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 IPO 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 H)
and the remainder to fund acquisitions.
As a result of the merger, the Company is authorized to issue 500,000 shares
of preferred stock with a par value of $.01 per share (the "Preferred Stock")
and 19,000,000 shares comprised of five classes of common stock, each with a par
value of $.01 per share, consisting of Harborside Class A Common Stock,
Harborside Class B Common Stock, Harborside Class C Common Stock, Harborside
Class D Common Stock and Common Stock (collectively "Harborside Common Stock").
The numbers of shares of Harborside Common Stock authorized and outstanding as
of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Title Authorized Shares Outstanding Shares
- ----- ----------------- ------------------
<S> <C> <C>
Harborside Class A Common Stock 1,200,000 661,332
Harborside Class B Common Stock 6,700,000 5,940,000
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 7,261,332
========== =========
</TABLE>
Holders of shares of Harborside Class A Common Stock and Common Stock will be
entitled to one vote per share on all matters as to which stockholders may be
entitled to vote pursuant to Delaware General Corporate Law ("the DGCL").
Holders of shares of Harborside Class D Common Stock will be entitled to 330
votes per share on all matters as to which stockholders may be entitled to vote
pursuant to the DGCL. This number of votes per share results in holders of
Harborside Class D Common Stock, as of December 31, 1998, being 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 December 31, 1998. Holders of Harborside
Class B Common Stock or Harborside Class C Common Stock will not have any voting
rights, except that the holders of the Harborside Class B Common Stock and
Harborside Class C Common Stock will have the right to vote as a class to the
extent required under the laws of the State of Delaware.
Upon the occurrence of a sale of 100% of the outstanding equity securities or
substantially all of the assets of the Company, a merger as a result of which
the ownership of the Harborside Common Stock is changed to the extent of 100% 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 will convert into one
share of Common Stock of the Company.
Preferred Stock
In connection with the Merger on August 11, 1998, the Company issued 40,000
shares of 13.5% Exchangeable Preferred Stock (the "Preferred Stock"). The
holders of the Preferred Stock are entitled to receive quarterly dividend
payments in arrears beginning November 1, 1998. Dividends are payable in cash or
in additional shares of Preferred Stock, at the option of the Company, until
August 1, 2003. After August 1, 2003, dividends may be paid only in cash. During
the year ended December 31, 1998, all dividends except for fractional shares
amounting to $3,000 were paid in additional shares. The Preferred Stock may be
redeemed for cash by the Company, in whole or in part, at the option of the
Company, in accordance with a predetermined redemption premium schedule which
begins on August 1, 2003 at 106.75% of the liquidation preference of the
Preferred Stock at the date of redemption and which declines to 100% on August
1, 2006. In addition, at any time prior to August 1, 2001 the Company may
redeem up to 35% of the Preferred Stock at a redemption price equal to 113.5% of
the liquidation preference of the Preferred Stock at the date of redemption with
the proceeds of a public offering of common stock, provided that the redemption
occurs within 60 days of the closing of such offering. At any time prior to
August 1, 2003, the Preferred Stock may be redeemed by the Company, as a whole
but not in part, upon the occurrence of a change in control (as defined) and in
accordance with prescribed procedures and the payment of a premium based upon a
formula. The Exchangeable Preferred Stock is exchangeable in whole but not in
part, on any dividend date, at the option of the Company, into 13.5% Exchange
Debentures due in 2010 subject to such exchange being permitted by (1) the terms
of the Indenture and (2) the terms of the Company's Credit Facility. The
Company is required to redeem the Preferred Stock in whole on August 1, 2010.
Upon any voluntary or involuntary liquidation of the Company, holders of the
Preferred Stock will be entitled to be paid out of the assets available for
distribution, the liquidation preference per share plus an amount equal to all
accumulated and unpaid dividends,
-38-
<PAGE>
before any distribution is made to the holders of Harborside Common Stock.
Holders of the Preferred Stock will have no voting rights except those provided
by law and as set forth in the Certificate of Designation (the "Certificate").
The Certificate provides that if the Company fails to meet certain obligations
associated with the Preferred Stock, then the Board of Directors shall be
adjusted to allow the holders of a majority of the then outstanding Preferred
Stock, voting separately as a class, to elect two directors. Voting rights
associated with the failure to meet Preferred Stock obligations will continue
until either the obligation is satisfied or a majority of the holders of the
then outstanding Preferred Stock waive the satisfaction of the obligation. The
Certificate also contains certain restrictive covenants that limit the Company's
restricted subsidiaries from making certain payments or investments and which
limit the Company's ability to incur debt, issue preferred stock, merge or
dispose of substantially all of its assets.
As of December 31, 1998, Preferred Stock dividends accrete based on the
following schedule:
<TABLE>
<S> <C>
1999 $6,004,000
2000 6,857,000
2001 7,830,000
2002 8,942,000
2003 5,782,000
</TABLE>
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
IPO, payments totaling $861,000 were made to the personnel who participated
in the Executive Plan and that plan was terminated. Additionally, the Company
made a bonus payment in the form of common stock valued at $225,000 to an
officer of the Company in connection with his employment agreement. These
expenses are included in the Statement of Operations for the year ended December
31, 1996, in the line "Special Compensation and Other."
On December 31, 1995, certain of the Predecessor Entities (the "S
Corporations") issued a 6% equity interest in the S Corporations to the
president of the Company amounting to $438,000 and a 5% equity interest in the S
Corporations to the president of an affiliate amounting to $365,000. The
issuance amounts represented the fair market value of these interests at the
date of issuance based on an independent appraisal obtained by the Company.
Payment for the issuance of these shares was due within 90 days; and
accordingly, the amounts receivable from these individuals were reflected as a
contra-equity subscription receivable with no net increase to stockholders'
equity at December 31, 1995. Subsequent to year-end and in connection with the
execution of the 1996 employment agreement of the Company's president, the
Company granted a special bonus to the president equal to the cost of the shares
issued. This expense is included in the Statement of Operations for the year
ended December 31, 1996 in the line "Special Compensation and Other."
In February 1996, one of the Predecessor Entities, Harborside Healthcare
Limited Partnership ("HHLP"), granted an option to purchase a 1.36% limited
partnership interest in HHLP to each of two members of senior management. The
exercise price per percentage limited partnership interest under each such
option was $239,525 per percentage interest, which represented the fair market
value of a 1% limited partnership interest in HHLP at the date of grant based on
an independent appraisal obtained by the Company. The options vested in equal
one-third portions on each anniversary of the date of grant over a three-year
period and expired ten years from the date of grant. With the completion of the
IPO, 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 were
not employees, or affiliates of the Company, were eligible to participate in the
Director Plan. On the date of the IPO, each of the four non-employee directors
was granted options to acquire 15,000 shares of the Company's common stock at
the IPO price. On January 1 of each year, each non-employee director received
an additional grant for 3,500 shares at the fair market value on the date of
grant. Options issued under the Director Plan became exercisable on the first
anniversary of the date of grant and terminated 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 could
also elect to receive all or a portion of their director fees in shares of the
Company's common stock. The Stock Plan was administered by the Stock Plan
Committee of the Board of Directors which was composed of outside directors who
were not eligible to participate in this plan. The Stock Plan authorized 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
vested over a three-year period and had a maximum term of ten years. A maximum
of 800,000 shares of common stock were reserved for issuance in connection with
these plans. Information with respect to options granted under these plans is
as follows:
In connection with the Merger, all holders of options issued through the
Director Plan and the Stock Plan had the right to retain their options or to
have their options converted into cash at $25.00 per underlying share less the
applicable exercise price (and taxes required to be withheld by the Company).
Holders of options representing options to purchase 109,994 shares of stock
retained their options while the remainder (representing 648,923 options)
exercised their right to convert their options into cash. The Company
recognized a
-39-
<PAGE>
compensation charge of $8,011,066 in connection with the exercise of these
options into cash. This charge is included as part of the Merger Costs recorded
by the Company in 1998 (see Note B).
In connection with the Merger, the Company adopted the Harborside Healthcare
Corporation Stock Incentive Plan (the "Stock Option Plan"). The Stock Option
Plan is administered by the Board of Directors of the Company. The Board of
Directors designates 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 expire on the date determined
by the Board of Directors, which will not be later than 30 days after the
seventh anniversary of the grant date. Optionees will have certain rights to put
to the Company, and the Company will have certain rights to call from the
optionee, vested stock options upon termination of the optionee's employment
with the Company prior to an initial public offering. All options granted under
the Stock Option Plan during 1998 were granted with an exercise price equal to
$25.00, equal to the fair market value of the stock on the date of grant.
Options granted under the Stock Option Plan during 1998 vest at the end of a
seven year period or earlier if certain financial performance criteria are met.
In the case of a public offering of the Company's common stock, unvested options
as of the date of such a public offering would continue to vest ratably over a
three year period. A maximum of 806,815 shares have been reserved for issuance
in connection with the Stock Option Plan.
Information with respect to options granted under the Director Plan, the Stock
Plan and the Stock Option Plan is as follows:
<TABLE>
<CAPTION>
Options Outstanding: Number Exercise Price Weighted-Average
of 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
- --------------------------------------------------------------------------------------------
Granted 704,246 $19.50 - $25.00 $21.41
Exercised (651,422) $ 8.15 - $21.69 $12.87
Cancelled (42,826) $11.75 - $25.00 $23.35
Balance at December 31, 1998 675,499 $ 8.15 - $25.00 $23.06
============================================================================================
</TABLE>
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. As of
December 31, 1998 there were 109,994 exercisable options at a weighted-average
exercise price of $13.07.
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, 1997 and 1998 would have been reduced to the amounts
indicated below:
<TABLE>
<CAPTION>
1996 1996 1997 1997 1998 1998
---- ---- ---- ---- ---- ----
Pro Forma Pro Forma Earnings Earnings (loss)
Earnings Earnings Earnings Available Earnings (loss) Available
Available Per Per Common Available for Per Common Available for Per Common
Common Shares Share Diluted Common Shares Share Diluted Common Shares Share Diluted
------------- ------------- ------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
As
Reported $2,712,000 $0.42 $6,803,000 $0.84 $(26,483,000) $(3.42)
Pro
forma $2,372,000 $0.37 $5,733,000 $0.70 $(29,300,000) $(3.78)
</TABLE>
The weighted average fair value of options granted was $4.72, $5.63 and $6.28
during 1996, 1997 and 1998 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, no dividend yield, and a risk-free interest rate of 6.5%, 6.2% and 5.4%
for 1996, 1997 and 1998 respectively. Expected volatility of 40%, 40% and 0%
(except for 109,994 in options held by senior management; such options have an
assumed volatility of 40%) was assumed for the years ended December 31, 1996,
1997 and 1998, respectively.
-40-
<PAGE>
The following table sets forth the computation of basic and diluted earnings
per share for the year ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Numerator:
Net Income (loss) $6,803,000 (24,187,000)
Preferred Stock dividends - (2,296,000)
---------- ------------
Earning (loss) available for Common Shares $6,803,000 (26,483,000)
========== ============
Denominator:
Denominator for basic earnings (loss) per Common Share -
weighted average shares 8,037,026 7,742,000
Effect of dilutive securities - employee stock options 101,767 -
---------- ------------
Denominator for diluted earnings (loss) per Common Share -
adjusted weighted - average shares and assumed conversions 8,138,793 7,742,000
========== ============
Basic earnings (loss) per Common Share $ 0.85 $ (3.42)
Diluted earnings (loss) per Common Share $ 0.84 $ (3.42)
</TABLE>
The denominator for basic earnings (loss) per Common Share includes 35,000 and
25,000 shares for the year ended December 31, 1997 and 1998, respectively,
resulting from stock options issued within one year of the Company's public
offering.
M. 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.
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.
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.
The Company owns a 75% interest in a partnership which owns one facility. The
Company accounts for its investment in this partnership using the equity method.
The Company has guaranteed a loan of approximately $6,400,000 made to this
partnership to refinance a loan which funded the construction of the facility
and provided working capital. The loan is also collateralized by additional
collateral pledged by the non-affiliated partner. The 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 partners each bear their proportionate share of any liability based on
their percentage ownership of the partnership.
N. 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 and 1998, 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 fixed rate long-term debt is estimated based
on the quoted market prices for the same or similar issues or on the current
rates offered to the Company for debt of the same remaining maturities. At
December 31, 1998, the fair market value of the Company's Senior Subordinated
Debt was approximately $81,600,000. The book value of the Company's Senior
Subordinated Debt was $104,076,000. The Company estimates that the fair value of
its remaining fixed rate debt approximates its fair value.
O. RELATED PARTY TRANSACTIONS
A former 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,
$708,000 and $1,291,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
At the time of the Merger, Investcorp International Inc. received a $6,000,000
management advisory and consulting service fee which is being expensed on a
straight line basis over the life of the related five year agreement. The
expense recognized by the Company in connection with this management agreement
during the year ended December 31, 1998 was $500,000. As of December 31, 1998,
$1,200,000 of the unamortized fee is classified in Prepaid and other expenses
while $4,300,000 is classified as Other assets, net.
-41-
<PAGE>
P. RECENT ACQUISITIONS (Unaudited)
The following unaudited pro forma financial information gives effect to all
1997 and 1998 acquisitions, as well as the August 11, 1998 Merger as if they had
occurred on January 1, 1997, accordingly Merger Costs have been eliminated from
this presentation. 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,
--------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
Total net revenues $313,262,000 $324,148,000
Income before income taxes 2,908,000 578,000
Net income 1,774,000 353,000
Preferred stock dividends (5,680,000) (6,487,000)
Loss available for common shares (3,906,000) (6,134,000)
Loss per common share using
8,139,000 and 7,742,000 common and
common equivalent shares, respectively $ (0.48) $ (0.79)
</TABLE>
Q. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Certain of the Company's subsidiaries are precluded from guaranteeing the debt
of the parent company (the "Non-Guarantors"), based on current agreements in
effect. The Company's remaining subsidiaries (the "Guarantors") are not
restricted from serving as guarantors of the parent company debt. The Guarantors
are comprised of Harborside Healthcare Limited Partnership, Belmont Nursing
Center Corp., Orchard Ridge Nursing Center Corp., Oakhurst Manor Nursing Center
Corp., Riverside Retirement Limited Partnership, Harborside Toledo Limited
Partnership, Harborside Connecticut Limited Partnership, Harborside of Florida
Limited Partnership, Harborside of Ohio Limited Partnership, Harborside
Healthcare Baltimore Limited Partnership, Harborside of Cleveland Limited
Partnership, Harborside of Dayton Limited Partnership, Harborside Massachusetts
Limited Partnership, Harborside of Rhode Island Limited Partnership, Harborside
North Toledo Limited Partnership, Harborside Healthcare Advisors Limited
Partnership, Harborside Toledo Corp., KHI Corporation, Harborside Danbury
Limited Partnership, Harborside Acquisition Limited Partnership V, Harborside
Acquisition Limited Partnership VI, Harborside Acquisition Limited Partnership
VII, Harborside Acquisition Limited Partnership VIII, Harborside Acquisition
Limited Partnership IX, Harborside Acquisition Limited Partnership X, Sailors,
Inc., New Jersey Harborside Corp., Bridgewater Assisted Living Limited
Partnership, Maryland Harborside Corp., Harborside Homecare Limited Partnership,
Harborside Rehabilitation Limited Partnership, Harborside Healthcare Network
Limited Partnership and Harborside Health I Corporation.
The information which follows presents the condensed consolidating financial
position as of December 31, 1997 and 1998; the condensed consolidating results
of operations for the years ended December 31, 1997 and 1998; and the
consolidating cash flows for the years ended December 31, 1997 and 1998 of (a)
the parent company only ("the Parent"), (b) the combined Guarantors, (c) the
combined Non-Guarantors, (d) eliminating entries and (e) the Company on a
consolidated basis.
-42-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
As of December 31,1997
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminations Consolidated
------ ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 698 $ 4,383 $ 3,666 $ - $ 8,747
Receivables, net of allowance - 24,845 9,321 (1,750) 32,416
Intercompany receivable 31,289 - - (31,289) -
Prepaid expenses and other 4,696 4,604 1,761 (4,529) 6,532
Prepaid income taxes 179 - - - 179
Deferred income taxes - 1,847 303 - 2,150
------- -------- ------- -------- --------
Total current assets 36,862 35,679 15,051 (37,568) 50,024
Restricted cash - 2,374 3,001 170 5,545
Investment in limited partnership 11,032 28,335 4,046 (43,413) -
Property and equipment, net - 79,529 17,343 - 96,872
Intangible assets, net 271 6,409 1,883 - 8,563
Note receivable - 7,487 - - 7,487
Deferred income taxes 71 - - - 71
------- -------- ------- -------- --------
Total assets $48,236 $159,813 $41,324 $(80,811) $168,562
======= ======== ======= ======== ========
LIABILITIES
Current liabilities:
Current maturities of long-term debt - 20 166 - 186
Current portion of capital lease
obligation - 3,924 - - 3,924
Accounts payable - 6,209 3,176 (2,110) 7,275
Intercompany payable - 38,424 4,630 (43,054) -
Employee compensation and benefits 280 7,075 3,386 - 10,741
Other accrued liabilities - 2,216 2,024 177 4,417
Accrued interest - 251 - - 251
Current portion of deferred income - 240 369 - 609
------- -------- ------- -------- --------
Total current liabilities 280 58,359 13,751 (44,987) 27,403
Long-term portion of deferred income - 980 2,579 - 3,559
Long-term debt - 17,162 16,294 - 33,456
Long-term portion of capital lease obligation - 52,353 8 - 52,361
------- -------- ------- -------- --------
Total liabilities 280 128,854 32,632 (44,987) 116,779
------- -------- ------- -------- --------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 30,000,000
shares authorized, 8,008,665 shares issued
and outstanding 80 2,569 3,885 (6,454) 80
Additional paid-in capital 48,213 - - 227 48,440
Retained earnings (deficit) (337) 4,175 (2,267) 1,692 3,263
Partners' equity - 24,215 7,074 (31,289) -
------- -------- ------- -------- --------
Total stockholders' equity 47,956 30,959 8,692 (35,824) 51,783
------- -------- ------- -------- --------
Total liabilities and stockholders'
equity $48,236 $159,813 $41,324 $(80,811) $168,562
======= ======== ======= ======== ========
</TABLE>
-43-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
As of December 31,1998
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminations Consolidated
------ ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 51 $ 99 $ 746 $ - $ 896
Receivables, net of allowance - 36,485 15,733 (2,272) 49,946
Intercompany receivable 116,555 - - (116,555) -
Prepaid expenses and other 1,268 7,291 2,804 (429) 10,934
Prepaid income taxes 3,873 - - - 3,873
Deferred income taxes 2,150 1,934 - - 4,084
------- -------- ------- -------- --------
Total current assets 123,897 45,809 19,283 (119,256) 69,733
Restricted cash - 2,162 472 (524) 2,110
Investment in limited partnership 15,584 - 4,044 (19,628) -
Property and equipment, net - 142,383 18,595 (474) 160,504
Intangible assets, net 10,532 6,176 1,642 (177) 18,173
Other assets, net 4,300 - - - 4,300
Note receivable - 7,487 - - 7,487
Deferred income taxes 71 2,158 - - 2,229
------- -------- ------- -------- --------
Total assets $154,384 $206,175 $44,036 $(140,059) $264,536
======= ======== ======= ======== ========
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ - $ 22 $ 185 $ - $ 207
Current portion of capital lease
obligation - 4,278 - - 4,278
Accounts payable - 5,010 3,159 (768) 7,401
Intercompany payable - 90,284 8,923 (99,207) -
Employee compensation and benefits - 9,853 3,367 - 13,220
Other accrued liabilities 3,254 3,306 925 - 7,485
Accrued interest 1,385 3,260 - (4,583) 62
Current portion of deferred income - - - 677 677
------- -------- ------- -------- --------
Total current liabilities 4,639 116,013 16,559 (103,881) 33,330
Long-term portion of deferred income - 1,202 2,579 (677) 3,104
Long-term debt 112,243 2,721 16,109 3,400 134,473
Long-term portion of capital lease obligation - 54,348 - (3,095) 51,253
------- -------- ------- -------- --------
Total liabilities 116,882 174,284 35,247 (104,253) 222,160
------- -------- ------- -------- --------
Exchangeable preferred stock, redeemable,
$.01 par value, with a liquidating value
of $1,000 per share; 500,000 shares
authorized; 42,293 shares issued and
outstanding 42,293 - - - 42,293
------- -------- ------- -------- --------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 19,000,000
shares authorized, 7,261,332 shares issued
and outstanding 146 2,569 3,885 (6,454) 146
Additional paid-in capital 204,381 - - 226 204,607
Treasury stock (183,746) - - - (183,746)
Retained earnings (deficit) (25,572) 4,567 (2,170) 2,251 (20,924)
Partners' equity - 24,755 7,074 (31,829) -
------- -------- ------- -------- --------
Total stockholders' equity (4,791) 31,891 8,789 (35,806) 83
------- -------- ------- -------- --------
Total liabilities and stockholders'
equity $154,384 $206,175 $44,036 $(140,059) $264,536
======= ======== ======= ======== ========
</TABLE>
-44-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Operations
For the year ended December 31, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminations Consolidated
------ ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total net revenues $ - $152,476 $101,480 $(32,179) $221,777
------- -------- -------- -------- --------
Expenses:
Facility operating - 113,686 83,595 (20,877) 176,404
General and administrative 612 9,499 37 805 10,953
Service charges paid to affiliate - 708 - - 708
Depreciation and amortization 70 2,599 1,405 - 4,074
Facility rent - 4,209 8,237 - 12,446
Management fees paid to affiliates - 6,039 6,085 (12,124) -
------- -------- -------- -------- --------
Total expenses 682 136,740 99,359 (32,196) 204,585
------- -------- -------- -------- --------
Income (loss) from operations (682) 15,736 2,121 17 17,192
Other:
Interest expense, net (108) 5,488 473 - 5,853
Other expense (income) - 189 - - 189
------- -------- -------- -------- --------
Income (loss) before income taxes (574) 10,059 1,648 17 11,150
Income tax expense (benefit) (224) 3,927 644 - 4,347
------- -------- -------- -------- --------
Net income (loss) $ (350) $ 6,132 $ 1,004 $ 17 $ 6,803
======= ======== ======== ======== ========
</TABLE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Operations
For the year ended December 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminations Consolidated
------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total net revenues $ $234,672 $104,280 $(27,908) $311,044
------- -------- -------- -------- --------
Expenses:
Facility operating - 187,849 86,059 (27,908) 246,000
General and administrative 150 15,272 - - 15,422
Service charges paid to affiliate - 1,291 - - 1,291
Amortization of prepaid management fee 500 - - - 500
Depreciation and amortization 624 4,150 1,576 - 6,350
Facility rent - 14,110 8,302 - 22,412
Merger costs 27,047 9,874 251 - 37,172
Management fees paid to affiliates - (6,203) 6,203 - -
------- -------- ------- -------- --------
Total expenses 28,321 226,343 102,391 (27,908) 329,147
------- -------- ------- -------- --------
Income (loss) from operations (28,321) 8,329 1,889 - (18,103)
Other:
Interest expense, net 2,015 7,687 1,569 - 11,271
Other expense (income) - - - (167) (167)
------- -------- ------- -------- --------
Income (loss) before income taxes (30,336) 642 320 167 (29,207)
Income tax expense (benefit) (5,101) 250 223 (392) (5,020)
------- -------- ------- -------- --------
Net income (loss) $(25,235) $ 392 $ 97 $ 559 $(24,187)
======= ======== ======= ======== ========
</TABLE>
-45-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
For the year ended December 31, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminations Consolidated
------ ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net cash provided (used) by operating activities $ 455 $ 6,102 $(1,135) $ 199 $ 5,621
------- -------- ------- -------- --------
Investing activities:
Additions to property and equipment - (3,543) (1,731) - (5,274)
Additions to intangibles (341) (5,884) (20) (56) (6,301)
Receipt of note receivable - (7,487) - - (7,487)
Transfers to restricted cash, net - (1,588) (34) (172) (1,794)
Repayment of demand note from limited
partnership - 1,369 - - 1,369
------- -------- ------- -------- --------
Net cash (used) by investing activities (341) (17,133) (1,785) (228) (19,487)
------- -------- ------- -------- --------
Financing activities:
Borrowing under the revolving line of
credit - 15,600 - - 15,600
Payment of long-term debt - (22) (144) - (166)
Principal payments of capital lease obligation - (3,952) 8 - (3,944)
Receipt of cash in connection with lease - 1,301 - - 1,301
Exercise of stock options 100 - - - 100
Other 21 - - (21) -
------- -------- ------- -------- --------
Net cash provided (used) by financing activities 121 12,927 (136) (21) 12,891
------- -------- ------- -------- --------
Net increase (decrease) in cash and cash equivalents 235 1,896 (3,056) (50) (975)
Cash and cash equivalents, beginning of year 463 2,482 6,727 50 9,722
------- -------- ------- -------- --------
Cash and cash equivalents, end of year $ 698 $ 4,378 $ 3,671 $ - $ 8,747
======= ======== ======= ======== ========
Supplemental Disclosure:
Interest paid $ $ 3,104 $ 267 $ - $ 3,371
======= ======== ======= ======== ========
Income taxes paid $ 5,783 $ - $ - $ - $ 5,783
======= ======== ======= ======== ========
</TABLE>
-46-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
For the year ended December 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminations Consolidated
------ ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net cash provided (used) by operating activities $(110,038) $ 77,121 $(3,033) $(3,497) $ (39,447)
--------- -------- ------- -------- --------
Investing activities:
Additions to property and equipment - (68,817) (2,591) 2,803 (68,605)
Additions to intangibles (4,885) (8,613) 4 - (13,494)
Transfers to restricted cash, net - 212 2,529 694 3,435
--------- -------- ------- -------- --------
Net cash provided (used) by investing activities (4,885) (77,218) (58) 3,497 (78,664)
--------- -------- ------- -------- --------
Financing activities:
Borrowings under the revolving line of credit - 17,150 - - 17,150
Repaid on revolving line of credit - (20,000) - - (20,000)
Payment of long-term debt - (357) 166 - (191)
Issuance of bonds payable 99,493 - - - 99,493
Issuance of Preferred Stock 40,000 - - - 40,000
Purchase of Treasury stock (183,746) - - - (183,746)
Proceeds from sale of common stock 158,500 - - - 158,500
Principal payments of capital lease obligation - (3,939) - - (3,939)
Receipt of cash in connection with lease - 2,964 - - 2,964
Exercise of stock options 29 - - - 29
--------- -------- ------- -------- --------
Net cash provided (used) by financing activities 114,276 (4,182) 166 - 110,260
--------- -------- ------- -------- --------
Net increase (decrease) in cash and cash equivalents (647) (4,279) (2,925) - (7,851)
Cash and cash equivalents, beginning of year 698 4,378 3,671 - 8,747
--------- -------- ------- -------- --------
Cash and cash equivalents, end of year $ 51 $ 99 $ 746 $ - $ 896
========= ======== ======= ======== ========
Supplemental Disclosure:
Interest paid $ 650 $ 2,480 $ 506 $ - $ 3,636
========= ======== ======= ======== ========
Income taxes paid $ 3,047 $ - $ - $ - $ 3,047
========= ======== ======= ======== ========
</TABLE>
-47-
<PAGE>
R. SUMMARY QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The Company's unaudited quarterly financial information follows:
Year Ended December 31, 1998
----------------------------
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total net revenues $72,454,000 $76,186,000 $ 78,697,000 $83,707,000
Income (loss) from operations 4,754,000 4,869,000 (32,786,000) 5,060,000
Income (loss) before
income taxes 3,073,000 3,276,000 (36,360,000) 804,000
Income taxes (benefit) 1,198,000 1,278,000 (7,460,000) (36,000)
Net income (loss) 1,875,000 1,998,000 (28,900,000) 840,000
Preferred stock dividends -- -- (915,000) (1,381,000)
Earning available for common shares 1,875,000 1,998,000 (29,815,000) (541,000)
Earnings (loss) per common share
Basic $ 0.23 $ 0.25 $ (3.93) $ (0.07)
Diluted $ 0.23 $ 0.24 $ (3.93) $ (0.07)
</TABLE>
Year Ended December 31, 1997
----------------------------
<TABLE>
<CAPTION>
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 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
Earnings per common 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
income taxes and
extraordinary loss 205,000 (229,000) 2,312,000 2,541,000
Income taxes (benefit) -- (400,000) 902,000 307,000
Income before
extraordinary loss 205,000 171,000 1,410,000 2,234,000
Extraordinary loss -- (1,318,000)(2) -- --
Net income (loss) 205,000 (1,147,000) 1,410,000 2,234,000
Earnings (loss) per share-
basic and diluted $ 0.18 $ 0.28
Pro forma income taxes
(benefit) 80,000 (489,000)
Pro forma income before
extraordinary loss 125,000 260,000
Pro forma net income (loss) 125,000 (1,058,000)
Pro forma earnings before
extraordinary loss
per common share
basic and diluted $ 0.03 $ 0.05
Pro forma earnings (loss)
per common share - basic and diluted $ 0.03 $ (0.21)
</TABLE>
(1) Includes $1,716,000 of special compensation and other expenses incurred
primarily as a result of the IPO (see Note L)
(2) A portion of the proceeds of the IPO 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 H)
-48-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The Company pays no remuneration to its employees or to executives of
Investcorp for serving as directors.
The following table sets forth the names and ages of each Director of the
Company, their principal offices with the company, their term of office as a
Director and any periods during which they have served as such:
Name and Principal Offices with the Company
<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, Chief Operating Officer and Director
William H. Stephan 42 Senior Vice President, Chief Financial Officer and Director
Christopher J. O'Brien 40 Director
Charles J. Philippin 47 Director
Lars C. Haegg 33 Director
Robert G. Sharp 33 Director
Edward G. Lord III 50 Director
James O. Egan 50 Director
Charles J. Marquis 56 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 25 years of experience in the long-term care industry and is a licensed
Nursing Home Administrator.
Damian N. Dell'Anno has served as Executive Vice President of Operations of
the Company since March 21, 1996 and its predecessors since 1994. From 1993 to
1994, he served as the head of the specialty services group for the predecessors
of the Company and was instrumental in developing the Company's rehabilitation
therapy business. From 1989 to 1993, Mr. Dell'Anno was Vice President of
Reimbursement for the predecessors of the Company. From 1988 to 1989, Mr.
Dell'Anno served as Director of Budget, Reimbursement and Cash Management for
The Mediplex Group, Inc. ("Mediplex"), a long-term care company. Mr. Dell'Anno
has a total of 15 years of experience in the long-term care industry.
William H. Stephan has served as Senior Vice President and Chief Financial
Officer since March 21, 1996 and its predecessors since joining the Company in
1994. From 1986 to 1994, Mr. Stephan was a Manager in the health care practice
of Coopers & Lybrand L.L.P. His clients there included long-term care
facilities, continuing care retirement centers, physician practices and acute
care hospitals. Mr. Stephan is a Certified Public Accountant and a member of the
Healthcare Financial Management Association.
Christopher J. O'Brien has been an executive of Investcorp, its predecessor or
one or more 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, Star Markets Holdings, Inc., Stratus
Computer System International, Carvel Corporation and The William Carter
Company.
Lars C. Haegg has been an executive of Investcorp, its predecessor or one or
more of its wholly-owned subsidiaries since February 1998. Prior to joining
Investcorp, he was employed by McKinsey & Company, Inc., a consulting firm, as
an Engagement Manager; and Strategic Planning Associates (now Mercer Management
Consulting), a consulting firm, as a Senior Associate.
Robert G. Sharp has been and executive of Investcorp, its predecessor or one
or more of its wholly-owned subsidiaries since May 1996. Prior to joining
Investcorp, he was a Vice President of Bankers Trust Securities Corporation, an
investment banking firm.
Edward G. Lord III has been an executive of Investcorp, its predecessor or one
or more of its wholly-owned subsidiaries since November 1994. Prior to joining
Investcorp, he was a Director and Chief Operating Officer of Kettaneh Group, a
real estate investment firm. He is a director of CSK Auto Corporation.
-49-
<PAGE>
James O. Egan has been an executive of Investcorp, its predecessor or one or
more of its wholly-owned subsidiaries since January 1999. Prior to joining
Investcorp, he was employed by KPMG, an accounting firm, as a Partner; Riverwood
International, a paperboard, packaging and machinery company, as Senior Vice
President and Chief Financial Officer; and Coopers & Lybrand LLP (now
PricewaterhouseCoopers LLP), an accounting firm, as a Partner. He is a
director of Falcon Building Products, Inc., Werner Holding Co. (DE), Inc. and
Stratus Computer System International.
Charles J. Marquis has been an executive of Investcorp, its predecessor or one
or more of its wholly-owned subsidiaries since January 1999. Prior to joining
Investcorp, he was a partner of Gibson, Dunn & Crutcher LLP, a law firm. He is a
director of Falcon Building Products, Inc. and Stratus Computer System
International.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers of the Company:
<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, Chief Operating Officer and Director
William H. Stephan 42 Senior Vice President, Chief Financial Officer and Director
Bruce J. Beardsley 35 Senior Vice President of Acquisitions
Michael E. Gomez, R.P.T. 37 Senior Vice President of Rehabilitation Services
Steven Raso 34 Senior Vice President of Operations
</TABLE>
Information on Mr. Guillard, Mr. Dell'Anno and Mr. Stephan appears above.
Bruce J. Beardsley has served as Senior Vice President of Acquisitions since
March 21, 1996 and its predecessors since 1994. From 1992 to 1994, he was Vice
President of Planning and Development of the Company with responsibility for the
development of specialized services, planning and engineering. From 1990 to
1992, he was an Assistant Vice President of the Company responsible for risk
management and administrative services. From 1988 to 1990, Mr. Beardsley served
as Special Projects Manager of the Company. Prior to joining the Company in
1988, Mr. Beardsley was a commercial and residential real estate appraiser.
Michael E. Gomez, R.P.T. has served as the Company's Senior Vice President of
Rehabilitation Services since March 21, 1996 and its predecessors since 1994.
From 1993 to 1994, Mr. Gomez served as Director of Therapy Services for the
Company with responsibility for overseeing the coordination and direction of
physical, occupational and speech therapy services. From 1991 to 1993, Mr. Gomez
was Director of Rehabilitation Services at Mary Washington Hospital in
Fredericksburg, Virginia. From 1988 to 1990, he was Physical Therapy State
Manager for Pro-Rehab, a contract therapy company based in Boone, North
Carolina. Mr. Gomez is a licensed physical therapist.
Steven V. Raso has served as Senior Vice President of Operations since 1998.
From 1994 to 1998, 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 various aspects of Company
Operations, including 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.
-50-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Awards Payouts
Other Securities
Annual Restricted Underlying All Other
Name and Salary Bonus Compen- Stock Options/ LTIP Compen-
Principal Position Year ($) ($)(1) sation ($)(2) Award(s) SARs # Payouts sation ($)(3)(4)
- ------------------ ---- ------ ------ ------------- ---------- ---------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen L. Guillard 1998 348,579 300,000 1,854,500 0 184,904 0 761,419
Chairman, President 1997 300,300 232,500 0 0 55,000 0 16,250
And Chief Executive 1996 310,802 548,000 0 0 80,000 0 15,927
Officer
Damian N. Dell'Anno 1998 225,344 100,000 916,643 0 117,666 0 349,150
Executive Vice 1997 192,115 117,000 0 0 27,000 0 7,578
President of 1996 176,371 266,000 0 0 50,000 0 5,152
Operations
Bruce J. Beardsley 1998 195,227 40,000 435,370 0 80,641 0 210,195
Senior Vice 1997 151,153 70,000 0 0 17,000 0 8,178
President of 1996 131,905 237,333 0 0 40,000 0 7,385
Acquisitions
William H. Stephan 1998 186,230 40,000 432,505 0 80,641 0 199,007
Senior Vice 1997 146,154 60,000 0 0 16,000 0 7,346
President and 1996 127,605 180,250 0 0 40,000 0 6,423
Chief Financial
Officer
Steven V. Raso 1998 138,462 20,000 278,780 0 55,771 0 147,442
Senior Vice 1997 111,153 35,000 0 0 18,000 0 5,923
President of 1996 93,187 95,000 0 0 20,000 0 5,648
Operations
</TABLE>
(1) 1996 amounts includes special bonuses paid to Messrs. Guillard and Dell'Anno
of $438,000 and $212,000, respectively and payments to Messrs. Beardsley,
Stephan and Montgomery in the amounts of $185,250, $150,250 and $67,000,
respectively, under the Executive Plan. See "Employment Agreements and
Change of Control Arrangements", below.
(2) Includes stock options exercised on August 11, 1998 in connection with the
Merger.
(3) Includes matching contributions made by the Company under its Supplemental
Executive Retirement Plan and 401(k) Plan.
(4) Includes "Change in Control" payments made and forgiveness of loans used to
purchase stock, as provided in the Employee Agreements referred to below.
-51-
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
NUMBER OF PERCENT OF TOTAL GRANT
SECURITIES OPTIONS/SARS DATE
UNDERLYING GRANTED TO EXERCISE OR PRESENT
OPTION/SARS EMPLOYEES IN BASE PRICE EXPIRATION VALUE
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE ($)(3)
---- ----------- ---------------- ----------- ------------------ ---------
<S> <C> <C> <C> <C> <C>
Stephen L. Guillard (1) 24,000 3.5 21.69 April 2, 2008 226,944
(2) 160,904 23.3 25.00 September 11, 2008 927,129
Damian N. Dell'Anno (1) 13,000 1.9 21.69 April 2, 2008 122,928
(2) 104,666 15.2 25.00 September 11, 2008 603,085
Bruce J. Beardsley (1) 8,000 1.2 21.69 April 2, 2008 75,648
(2) 72,641 10.5 25.00 September 11, 2008 418,557
William H. Stephan (1) 8,000 1.2 21.69 April 2, 2008 75,648
(2) 72,641 10.5 25.00 September 11, 2008 418,557
Steven V. Raso (1) 5,000 0.7 21.69 April 2, 2008 47,280
(2) 50,771 7.4 25.00 September 11, 2008 292,543
</TABLE>
(1) Messrs. Guillard, Dell'Anno, Beardsley, Stephan and Raso received options to
purchase shares of Harborside Common Stock on April 2, 1998. All of these
options became exercisable on August 11, 1998 in connection with the Merger.
The options terminate (with certain exceptions) on the tenth anniversary of
their date of grant.
(2) Messrs. Guillard, Dell'Anno, Beardsley, Stephan and Raso received options
to purchase shares of Harborside Class C Common Stock on August 11, 1998.
These options become exercisable on the seventh anniversary of their grant
or earlier if certain financial performance criteria are met. The options
terminate (with certain exceptions) thirty days after the seventh
anniversary of their date of grant.
(3) The fair value of each stock option granted on April 2, 1998 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, no
dividend yield, expected volatility of 40%, and a risk-free interest rate of
6.2%. The fair value of each stock option granted on August 11, 1998 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,
no dividend yield, expected volatility of 0%, 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
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR END FISCAL YEAR END ($)
SHARES
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)
--------- ------------ ----------- --------------- -----------------
<S> <C> <C> <C> <C>
Stephen L. Guillard 159,000 1,854,500 0/160,904 0
Damian N. Dell'Anno 79,440 916,643 10,560/104,666 0
Bruce J. Beardsley 25,838 435,370 39,162/72,641 0
William H. Stephan 25,668 432,505 38,332/72,641 0
Steven V. Raso 21,060 278,780 21,940/50,771 0
</TABLE>
(1) Underlying shares are not publicly traded and are subject to repurchase by
the Company under certain circumstances at the employee's cost or at the then
current value of the underlying share, as determined by the Company's Board of
Directors upon the termination of the employee's employment with the Company.
None of these options are classified as in-the-money for purposes of this table.
The Company has not established any recent valuations for such shares.
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<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Guillard,
Dell'Anno, Stephan, Beardsley and Raso (collectively, the "Employment
Agreements"). Under the terms of the Employment Agreements, Mr. Guillard serves
as President and Chief Executive Officer of the Company and receives a minimum
base salary payable at an annual rate of $345,000, Mr. Dell'Anno serves as
Executive Vice President and Chief Operating Officer of the Company and receives
a minimum base salary payable at an annual rate of $225,000, Mr. Stephan serves
as Senior Vice President and Chief Financial Officer of the Company and receives
a minimum base salary payable at an annual rate of $190,000, Mr. Beardsley
serves as Senior Vice President of Acquisitions of the Company and receives a
minimum base salary payable at an annual rate of $200,000 and Mr. Raso serves as
Senior Vice President of Operations of the Company and receives a minimum base
salary payable at an annual rate of $140,000. The salaries of Messrs. Guillard,
Dell'Anno, Stephan, Beardsley and Raso were to be increased to $375,000,
$240,000, $200,000, $215,000 and $150,000, respectively, effective April 1,
1999. As of April 1, 1999 Messrs. Guillard, Dell'Anno, Stephan, Beardsley and
Raso have, at least temporarily, elected to forgo the scheduled compensation
adjustments. 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 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 achievement of specific performance targets and part of which will be
discretionary, in maximum amounts of 120% of base salary in the case of Mr.
Guillard, 96% of base salary in the case of Mr. Dell'Anno and 78% of base salary
in the cases of Messrs. Stephan, Beardsley and Raso, 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 Common 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 has the right to terminate his Employment Agreement on 30 days
notice. The Company has the right to terminate an Employment Agreement without
obligation for severance only for Good Cause (as defined in the Employment
Agreements). The Employment Agreements 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 (as defined in the Employment
Agreements). 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 cases 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.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective September 15, 1995, Harborside established a Supplemental Executive
Retirement Plan ("SERP") to provide benefits for key employees of Harborside.
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. Harborside matches
50% of amounts contributed until 10% of base salary has been contributed.
Matching contributions made by Harborside 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 Harborside 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
Harborside. 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 Harborside becomes insolvent, the
rights of participants in the SERP would be those of an unsecured general
creditor of Harborside.
STOCK INCENTIVE PLAN
Immediately following the Merger, the Company adopted the Harborside
Healthcare Corporation Stock Incentive Plan (the "Stock Option Plan").
Initially, 806,815 shares were made available to be awarded under the Stock
Option Plan, representing 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) were granted to members of the Company's management upon
consummation of the Merger. Options for the remaining approximately 2.3% of the
shares of capital stock of the Company (determined on such basis) have been
reserved for grant to current or future officers and employees of the Company.
The Stock Option Plan is administered by the Company's Board of Directors. The
Board designates which employees of the Company are eligible to receive awards
under the Stock Option Plan, and the amount, timing and other terms and
conditions applicable to such awards. Future options will be exercisable in
accordance with the terms established by the Board and 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.
-53-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The Company is authorized to issue shares of five classes of common stock,
each with a par value of $0.01, consisting 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") (collectively "Harborside Common Stock"). Harborside Class A Common
Stock, Harborside Class D Common Stock and Common Stock are the only classes of
the Company's common stock that have the power to vote. Holders of Harborside
Class B Common Stock and Harborside Class C Common Stock do not have any voting
rights, except that the holders of Harborside Class B Common Stock and
Harborside Class C Common Stock have the right to vote as a class to the extent
required under the laws of the State of Delaware.
As of March 31, 1999, there were 661,332 shares of Harborside Class A Common
Stock, 20,000 shares of Harborside Class D Common Stock and no shares of Common
Stock outstanding. Holders of shares of Harborside Class A Common Stock and
Common Stock of the Company are 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 are entitled to 330
votes per share on all matters as to which stockholders may be entitled to vote
pursuant to the DGCL.
As a result of the consummtion of the Merger, the New Investors beneficially
own all of the outstanding Harborside Class D Common Stock, constituting
approximately 91% of the outstanding voting stock of the Company, and pre-Merger
stockholders, including certain members of management, beneficially own all of
the outstanding Harborside Class A Common Stock, constituting approximately 9%
of the outstanding voting stock of the Company. In addition, the New Investors
own 5,940,000 shares of Harborside Class B Common Stock and 640,000 shares of
Harborside Class C Common Stock.
The following table sets forth certain information regarding the beneficial
ownership of the voting stock of the Company as of March 31, 1999. The table
sets forth, as of that date, (i) each person known by the Company to be the
beneficial owner of more than 5% of any class of voting stock of the Company,
(ii) each person who was a director of the Company or a named executive officer
of the Company who beneficially owned shares of voting stock of the Company and
(iii) all directors of the Company and executive officers of the Company as a
group. None of the Company's directors or officers own shares of Harborside
Class D Common Stock. Unless otherwise indicated, each of the stockholders shown
in the table below has sole voting and investment power with respect to the
shares beneficially owned.
HARBORSIDE CLASS A COMMON STOCK
(9% Of Voting Power)
<TABLE>
<CAPTION>
Name and address Number of Number of Percent of
Beneficial Owner (1) Shares (2) Options (3) Total Class (4)
- --------------------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
George Krupp (5)......................... 194,162 -- 194,162 29.4
Douglas Krupp (5)........................ 194,163 -- 194,163 29.4
Stephen L. Guillard...................... 177,688 -- 177,688 26.9
Damian N. Dell'Anno...................... 47,563 10,560 58,123 8.7
Bruce J. Beardsley....................... -- 39,162 39,162 5.6
William H. Stephan....................... 400 38,332 38,732 5.5
Steven V. Raso........................... -- 21,940 21,940 3.2
All directors and executive officers as
a group, including certain of the
persons named above (10 persons)......... 225,561 109,994 335,555 43.5
</TABLE>
HARBORSIDE CLASS D COMMON STOCK
(91% Of Voting Power)
<TABLE>
<CAPTION>
Number of Percent
Name and address of Beneficial Owner Shares (2) of Class
- ------------------------------------ ---------- --------
<S> <C> <C>
INVESTCORP S.A. (6)(7).................... 20,000 100.0
SIPCO Limited (8)......................... 20,000 100.0
CIP Limited (9)(10)....................... 18,400 92.0
Ballet Limited (9)(10).................... 1,840 9.2
Denary Limited (9)(10).................... 1,840 9.2
Gleam Limited (9)(10)..................... 1,840 9.2
Highlands Limited (9)(10)................. 1,840 9.2
Nobel Limited (9)(10)..................... 1,840 9.2
</TABLE>
-54-
<PAGE>
<TABLE>
<S> <C> <C>
Outrigger Limited (9)(10)................. 1,840 9.2
Quill Limited (9)(10)..................... 1,840 9.2
Radial Limited (9)(10).................... 1,840 9.2
Shoreline Limited (9)(10)................. 1,840 9.2
Zinnia Limited (9)(10).................... 1,840 9.2
INVESTCORP Investment Equity Limited (7).. 1,600 8.0
</TABLE>
(1) The address of each person listed in the table as a holder of Harborside
Class A Common Stock is c/o Harborside Healthcare Corporation, One Beacon
Street, Boston, Massachusetts 02108.
(2) As used in the table above, a beneficial owner of a security includes any
person who, directly or indirectly, through contract, arrangement,
understanding, relationship, or otherwise has or shares (i) the power to
vote, or direct the voting of, such security or (ii) investment power which
includes the power to dispose, or to direct the disposition of, such
security.
(3) Includes shares of stock that are subject to options exercisable within 60
days of March 31, 1999. The options granted upon consummation of the Merger
pursuant to the Issuer's new Stock Option Plan are not included in this
table because they are not exercisable within 60 days of March 31, 1999.
(4) Reflects the percentage such shares and options represent of the number of
outstanding shares of such class of the Issuer's common stock after giving
effect to the exercise of options owned by such person or persons.
(5) The shares beneficially owned by George Krupp are owned of record by The
George Krupp 1994 Family Trust ("GKFT"). The shares beneficially owned by
Douglas Krupp are owned of record by The Douglas Krupp 1994 Family Trust
("DKFT"). 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 shares held by GKFT and DKFT;
however, each of the Trustees disclaims beneficial ownership of all of such
shares.
(6) Investcorp does not directly own any stock in the Issuer. The number of
shares shown as owned by Investcorp includes all of the shares owned by
INVESTCORP Investment Equity Limited (see note (7) below). Investcorp
owns no stock in Ballet Limited, Denary Limited, Gleam Limited, Highlands
Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial Limited,
Shoreline Limited, Zinnia Limited, or in the beneficial owners of these
entities (see note (10) 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
such entities has granted such affiliate the authority to direct the voting
and disposition of the Issuer 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.
(7) 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. 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. CIP Limited ("CIP")
owns no stock in the Issuer. 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 note (10) below). CIP may be
deemed to share beneficial ownership of the shares of voting stock of the
Issuer 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 the Issuer's voting stock. Each of CIP
Limited, Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited,
Noble Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline
Limited and Zinnia Limited is a Cayman Islands corporation with its address
at P.O. Box 2197, West Wind Building, GeorgeTown, Grand Cayman, Cayman
Islands.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On the date of the Merger, the Company received $165.0 million of common
equity capital provided by the New Investors. An affiliate of Investcorp was
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 paid III, an
affiliate of the Company and of Investcorp, a loan finance advisory fee of $4.0
million and Invifin S.A., an affiliate of Investcorp, a fee of $1.5 million for
providing a standby commitment to fund the $99.5 million of Old Notes. In
connection with the closing of the Merger, the Company entered into an agreement
for management advisory and consulting services for a five-year term with III,
pursuant to which the Company prepaid III $6.0 million upon such closing.
Pursuant to the Merger Agreement, at the date of the Merger the Company
entered into a master rights agreement for the benefit of The Berkshire
Companies Limited Partnership, a Massachusetts limited partnership that was
affiliated with Harborside prior to the date of the Merger ("BCLP"), certain of
its affiliates (BCLP and such affiliates collectively, the "Berkshire
Stockholders") and the New Investors, which agreement provides, among other
things, for the following: (i) the New Investors have demand and "piggyback"
registration rights; (ii) the Berkshire Stockholders have "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 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 are entitled to
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<PAGE>
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.
Pursuant to the Merger Agreement, the Company has agreed that for six years
after the date of the Merger, 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.
Harborside entered into a Non-Compete Agreement, dated as of April 15, 1998,
with each of Douglas Krupp, a director of Harborside prior to the Merger and a
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 date of the Merger 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,
Harborside paid $250,000 to each of such individuals at the date of the Merger.
In 1995, Mr. Guillard subscribed for equity interests in certain of
Harborside's predecessors. The aggregate subscription price of $438,000, equal
to the fair market value of such equity 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 equity
interests and this bonus, Mr. Guillard received a loan from Harborside,
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 IPO (with a value of $212,000). Mr. Dell'Anno
also received a loan from Harborside at an interest rate of prime plus 1% to pay
income tax liabilities that resulted from such bonus payment.
In connection with the IPO, Harborside entered into a Reorganization Agreement
(the "Reorganization Agreement") with certain individuals, including but not
limited to Messrs. Guillard and Dell'Anno (the "Contributors"), pursuant to
which the Contributors received 4,400,000 shares of Harborside Common Stock in
exchange for their ownership interests in Harborside's predecessors. The
reorganization contemplated by the Reorganization Agreement was completed
immediately prior to completion of the IPO.
Harborside adopted an Executive Long-Term Incentive Plan (the "Executive
Plan") effective July 1, 1995. Eligible participants, consisting of Harborside's
department heads and regional directors, were entitled to receive payment upon
an initial public offering or sale of Harborside 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 IPO. The payments to Messrs. Beardsley,
Stephan and Raso totaled $185,250, $150,250 and $75,000, respectively.
Pursuant to certain Change In Control Agreements dated as of January 15, 1998
between Harborside and each of Messrs. Guillard, Dell'Anno, Stephan, Beardsley
and Raso, which were entered into prior to the execution of the Merger
Agreement, at the date of the Merger, each of such officers received a payment
equal to his annual salary, except for Mr. Guillard who received a payment equal
to 1.5 times his annual salary. The amounts of such payments were as follows:
Mr. Guillard, $517,500; Mr. Dell'Anno, $225,000; Mr. Stephan, $190,000; Mr.
Beardsley, $200,000; and Mr. Raso, $140,000. In addition, pursuant to these
agreements, all outstanding loans made by Harborside to such officers for the
purchase of stock were forgiven as of the date of the Merger. The forgiven loans
were to Messrs. Guillard and Dell'Anno and had a remaining balance of $229,350
and $112,520, respectively, as of the date of the Merger. The purpose of the
Change In Control Agreements was to induce such officers to remain in the employ
of Harborside and to assure them of fair severance should their employment
terminate in specified circumstances following a change in control of
Harborside. Such officers were entitled to the payments and loan forgiveness
described above because the Merger constituted a "change in control" under the
terms of the Change In Control Agreements. The Change In Control Agreements also
provided for certain payments if the employment with Harborside of any of such
officers is terminated by Harborside for any reason other than cause within 12
months following a change in control. The Change In Control Agreements were
terminated by mutual agreement of the parties as of the date of the Merger,
except that Harborside complied with its obligations under the provisions
described in the first sentence of this paragraph.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)
1. Financial Statements:
See Index to Consolidated Financial Statements in Item 8 of this
annual report.
2. Financial Statement Schedules:
None.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are incorporated by
reference herein or are filed as part of this annual report.
Exhibit
Number Description of Exhibit
2.1** Agreement and Plan of Merger dated as of April 15, 1998
2.2** Stockholder Agreement dated as of April 15, 1998
3.1(a)****# Amended and Restated Certificate of Incorporation of the
Registrant
3.1(b)**** Certificate of Designation of the Registrant with respect to the
Exchangeable Preferred Stock
3.1(c)** Amended and Restated By-laws of the Registrant
3.1(d)**** Form of Certificate of Incorporation of certain registrants, as
amended
3.2(a)**** Certificate of Incorporation of Sailors, Inc.
3.2(b)**** Form A of Articles of Organization, Articles of Amendment and
Articles of Merger of certain registrants
3.2(c)**** Form B of Articles of Organization of certain registrants
3.2(d)**** Form of First Amendment to and Restatement of Agreement of
Limited Partnership of certain registrants
3.2(e)**** Form of Agreement of Limited Partnership of certain registrants
3.2(f)**** Amended and Restated Agreement of Limited Partnership of
Harborside Healthcare Limited Partnership, dated as of May 12,
1987, as amended and restated as of July 1, 1995
3.2(g)**** Agreement of Limited Partnership of KHC Partners, Limited
Partners, dated as of May 28, 1987, as amended
3.2(h)**** Form A of Certificate of Limited Partnership of certain
registrants
3.2(i)**** Form B of Certificate of Limited Partnership of certain
registrants
3.2(j)**** Certificate of Limited Partnership of Bridgewater Assisted
Living Limited Partnership
3.2(k)**** First Amendment to and Restatement of Certificate of Limited
Partnership of KHC Partners Limited Partnership (now known as
Harborside Healthcare Advisors Limited Partnership)
3.2(l)**** First Amendment to and Restatement of Certificate of Limited
Partnership of Harborside Acquisition Limited Partnership IV
(now known as Harborside Danbury Limited Partnership)
3.2(m)**** Certificate of Formation and Agreement of Limited Partnership
of Riverside Retirement Limited Partnership, as amended
3.2(n)**** Certificate of Limited Partnership of Harborside Healthcare
Limited Partnership
3.2(o)**** Form A of By-laws of certain registrants
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<PAGE>
3.2(p)**** Form B of By-laws of certain registrants
4.1**** Indenture between MergerCo and the Trustee, dated as of July 31,
1998, with respect to the Notes
4.2**** Supplemental Indenture between the Registrant, the Guarantors
and the Trustee, dated as of August 11, 1998
4.3****# Form of New Note
4.4**** Registration Rights Agreement, dated July 31, 1998, between the
Registrant (as successor to MergerCo) and the Placement Agents,
relating to the Old Notes
4.5**** Certificate of Designation of the Registrant with respect to the
Exchangeable Preferred Stock (filed as Exhibit 3.1.2)
4.6**** Form of Stock Certificate representing New Preferred Stock
4.7**** Registration Rights Agreement, dated July 31, 1998, between the
Registrant (as successor to MergerCo) and the Placement Agents,
relating to the Old Preferred Stock (filed as Exhibit 1.3)
4.8**** Form of Letter of Transmittal (filed as Exhibit 1.4)
10.1(a)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust Tri-States, Inc. and HHCI Limited Partnership (New
Haven Facility)
10.1(b)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust Tri-States, Inc. and HHCI Limited Partnership
(Indianapolis Facility)
10.1(c)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust of Ohio, Inc. and HHCI Limited Partnership (Troy
Facility)
10.1(d)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust of Florida, Inc. and HHCI Limited Partnership
(Sarasota Facility)
10.1(e)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust of Florida, Inc. and HHCI Limited Partnership
(Pinebrook Facility)
10.1(f)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust of Florida, Inc. and HHCI Limited Partnership (Naples
Facility)
10.1(g)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust of New Jersey, Inc. and HHCI Limited Partnership
(Woods Edge Facility)
10.1(h)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust Tri-States, Inc. and HHCI Limited
Partnership (New Haven Facility)
10.1(i)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust Tri-States, Inc. and HHCI Limited
Partnership (Indianapolis Facility)
10.1(j)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of Ohio, Inc. and HHCI Limited
Partnership (Troy Facility)
10.1(k)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of Florida, Inc. and HHCI Limited
Partnership (Sarasota Facility)
10.1(l)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of Florida, Inc. and HHCI Limited
Partnership (Pinebrook Facility)
10.1(m)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of Florida, Inc. and HHCI Limited
Partnership (Naples Facility)
10.1(n)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Jersey, Inc. and HHCI
Limited Partnership (Woods Edge Facility)
10.2(a)* Loan Agreement, dated October 13, 1994, among Meditrust Mortgage
Investments, Inc. and Bay Tree Nursing Center Corporation,
Belmont Nursing Center Corporation, Countryside Care Center
Corporation, Oakhurst Manor Nursing Center Corporation, Orchard
Ridge Nursing Center Corporation, Sunset Point Nursing Center
Corporation, West Bay Nursing Center Corporation and Harborside
Healthcare Limited Partnership.
-58-
<PAGE>
10.2(b)* Guaranty, dated October 14, 1994, to Meditrust Mortgage
Investments, Inc. from Harborside Healthcare Limited Partnership
10.2(c)* Environmental Indemnity Agreement, dated October 13, 1994, by
and among Bay Tree Nursing Center Corporation, Belmont Nursing
Center Corporation, Countryside Care Center Corporation, Oakhurst
Manor Nursing Center Corporation, Orchard Ridge Nursing Center
Corporation, Sunset Point Nursing Center Corporation, West Bay
Nursing Center Corporation and Harborside Healthcare Limited
Partnership and Meditrust Mortgage Investments, Inc.
10.2(d)* Consolidated and Renewed Promissory Note, dated October 13,
1994, from Bay Tree Nursing Center Corporation, Belmont Nursing
Center Corporation, Countryside Care Center Corporation, Oakhurst
Manor Nursing Center Corporation, Orchard Ridge Nursing Center
Corporation, Sunset Point Nursing Center Corporation, West Bay
Nursing Center Corporation and Harborside Healthcare Limited
Partnership and Meditrust Mortgage Investments, Inc.
10.2(e)* Negative Pledge Agreement, dated October 13, 1994, by and among
Douglas Krupp, George Krupp, Bay Tree Nursing Center Corporation,
Belmont Nursing Center Corporation, Countryside Care Center
Corporation, Oakhurst Manor Nursing Center Corporation, Orchard
Ridge Nursing Center Corporation, Sunset Point Nursing Center
Corporation, West Bay Nursing Center Corporation and Harborside
Healthcare Limited Partnership and Meditrust Mortgage
Investments, Inc.
10.2(f)* Affiliated Party Subordination Agreement, dated October 13,
1994, by and among Bay Tree Nursing Center Corporation, Belmont
Nursing Center Corporation, Countryside Care Center Corporation,
Oakhurst Manor Nursing Center Corporation, Orchard Ridge Nursing
Center Corporation, Sunset Point Nursing Center Corporation, West
Bay Nursing Center Corporation and Harborside Healthcare Limited
Partnership and Meditrust Mortgage Investments, Inc.
10.2(g)* First Amendment to Loan Agreement, dated May 17, 1996, by and
among Meditrust Mortgage Investments, Inc. and Bay Tree Nursing
Center Corporation, Belmont Nursing Center Corporation,
Countryside Care Center Corporation, Oakhurst Manor Nursing
Center Corporation, Orchard Ridge Nursing Center Corporation,
Sunset Point Nursing Center Corporation, West Bay Nursing Center
Corporation and Harborside Healthcare Limited Partnership
10.2(h)* Credit Agreement, dated as of April 14, 1997, among Harborside
Healthcare Corporation and the other Borrowers specified therein,
the Lenders party thereto and the Chase Manhattan Bank, as
Administrative Agent
10.2(i)*** First Amendment to Revolving Credit Agreement, dated as of
August 1, 1997, among Harborside Healthcare and other borrowers
specified therein, the Lenders party thereto and Chase Manhattan
Bank, Administrative Agent
10.2(j)*** Second Amendment to Revolving Credit Agreement, dated as of
August 28, 1997, among Harborside Healthcare and other borrowers
specified therein, the Lenders party thereto and Chase Manhattan
Bank, Administrative Agent
10.3(a)* Facility Lease Agreement, dated as of January 1, 1996, between
Meditrust of New Hampshire Inc. and Harborside New Hampshire
Limited Partnership (Westwood Facility)
10.3(b)* Facility Lease Agreement, dated as of January 1, 1996, between
Meditrust of New Hampshire Inc. and Harborside New Hampshire
Limited Partnership (Pheasant Wood Facility)
10.3(c)* Facility Lease Agreement, dated as of January 1, 1996, between
Meditrust of New Hampshire Inc. and Harborside New Hampshire
Limited Partnership (Crestwood Facility)
10.3(d)* Facility Lease Agreement, dated as of January 1, 1996, between
Meditrust of New Hampshire Inc. and Harborside New Hampshire
Limited Partnership (Milford Facility)
10.3(e)* Facility Lease Agreement, dated as of January 1, 1996, between
Meditrust of New Hampshire Inc. and Harborside New Hampshire
Limited Partnership (Applewood Facility)
10.3(f)* Facility Lease Agreement, dated as of December 31, 1996, between
Meditrust of New Hampshire Inc. and Harborside New Hampshire
Limited Partnership (Northwood Facility)
10.3(g)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and
Harborside New Hampshire Limited Partnership (Westwood Facility)
10.3(h)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and
Harborside New Hampshire Limited Partnership (Pheasant Wood
Facility)
10.3(i)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and
Harborside New Hampshire Limited Partnership (Crestwood Facility)
-59-
<PAGE>
10.3(j)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and
Harborside New Hampshire Limited Partnership (Milford Facility)
10.3(k)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and
Harborside New Hampshire Limited Partnership (Applewood Facility)
10.3(l)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and
Harborside New Hampshire Limited Partnership (Northwood Facility)
10.4(a)* Facility Lease Agreement, dated as of March 31, 1995, between
Meditrust of Ohio, Inc. and Harborside of Toledo Limited
Partnership (Swanton Facility)
10.4(b)* First Amendment to Facility Lease Agreement, dated as of
December 31, 1995, by and between Harborside Toledo Limited
Partnership and Meditrust of Ohio, Inc. (Swanton Facility)
10.4(c)* Second Amendment to Facility Lease Agreement, dated as of May
17, 1996, by and between Meditrust of Ohio, Inc. and Harborside
Toledo Limited Partnership (Swanton Facility)
10.5* Amended and Restated Agreement of Limited Partnership of Bowie
Center Limited Partnership, dated April 7, 1993
10.6* Agreement of Lease, dated March 16, 1993, between Bryan Nursing
Home, Inc. and Harborside of Ohio Limited Partnership (Defiance
and Northwestern Ohio Facilities)
10.7* First Amendment to Agreement of Lease, dated June 1, 1993, by
and between Bryan Nursing Home, Inc. and Harborside Ohio Limited
Partnership
10.8* Option to Purchase Agreement, dated March 16, 1993, by and
between Bryan Nursing Home, Inc. and Harborside Ohio Limited
Partnership
10.9(a)* Lease, dated September 30, 1994, between Rockledge T. Limited
Partnership and Harborside of Florida Limited Partnership
(Brevard Facility)
10.9(b)* Lease Guaranty, dated September 30, 1994, to Rockledge T.
Limited Partnership from Harborside Healthcare Limited
Partnership
10.9(c)* Indemnity Agreement, dated September 30, 1994, between Rockledge
T. Limited Partnership, Harborside of Florida Limited
Partnership, Harborside Healthcare Limited Partnership and
Southtrust Bank of Alabama
10.9(d)* Assignment and Security Agreement, dated September 30, 1994,
to Rockledge T. Limited Partnership, Harborside of Florida
Limited Partnership and Southtrust Bank of Alabama
10.9(e)* Subordination Agreement (Lease), dated September 30, 1994,
between Rockledge T. Limited Partnership, Harborside of Florida
Limited Partnership and Southtrust Bank of Alabama
10.9(f)* Subordination Agreement (Management), dated September 30, 1994,
by and among Rockledge T. Limited Partnership, Harborside of
Florida Limited Partnership, Harborside Healthcare Limited
Partnership and Southtrust Bank of Alabama
10.10(a)****+ Employment Agreement, dated as of August 11, 1998, between the
Registrant and Stephen L. Guillard
10.10(b)****+ Employment Agreement, dated as of August 11, 1998, between the
Registrant and Damian Dell'Anno
10.10(c)****+ Employment Agreement, dated as of August 11, 1998, between the
Registrant and Bruce Beardsley
10.10(d)****+ Employment Agreement, dated as of August 11, 1998, between the
Registrant and William Stephan
10.10(e)****+ Employment Agreement, dated as of August 11, 1998, between the
Registrant and Steven Raso
10.11(a)****+ Management Stock Incentive Plan, established by the Registrant
as of August 11, 1998
10.11(b)****+ Form of Stock Option Agreement pursuant to Management Stock
Incentive Plan
10.12(a)*+ 1996 Long-Term Stock Incentive Plan
10.12(b)*+ Form of Nonqualified Stock Option Agreement pursuant to the 1996
Long-Term Stock Incentive Plan
10.13****+ Form of Put/Call Agreement, dated August 11, 1998, between the
Registrant and each of Messrs. Guillard, Dell'Anno, Beardsley,
Stephan and Raso
-60-
<PAGE>
10.14*+ Supplemental Executive Retirement Plan of the Registrant
10.15* Administrative Services Agreement, dated April 15, 1988, between
the Registrant and The Berkshire Companies Limited Partnership
("BCLP")
10.16* Agreement to Lease, dated as of May 3, 1996, among Westbay Manor
Company, Westbay Manor II Development Company, Royal View Manor
Development Company, Beachwood Care Center Limited Partnership,
Royalview Manor Company, Harborside Health I Corporation and
Harborside Healthcare Limited Partnership
10.17* Guaranty by Harborside in favor of Westbay Manor Company,
Westbay Manor II Development Company, Royalview Manor Development
Company and Beachwood Care Center Limited Partnership
10.18**** Master Rights Agreement, dated as of August 11, 1998, by and
among the Registrant, BCLP, certain affiliates of BCLP and the
New Investors
10.19(a)**** Credit Agreement, dated as of August 11, 1998, among the
Registrant, Chase Securities, Inc., as Arranger, Morgan Stanley
Senior Funding, Inc. and BT Alex. Brown Incorporated, as Co-
Arrangers, Bankers Trust Company, as Documentation Agent, Morgan
Stanley Senior Funding, Inc., as Syndication Agent, The Chase
Manhattan Bank, as Administrative Agent, and the lenders party
thereto (the "Lenders")
10.19(b) First Amendment to Credit Agreement, dated as of March 30, 1999,
among the Registrant, Morgan Stanley Senior Funding, Inc. and BT
Alex. Brown Incorporated, as Co-Arrangers, Bankers Trust Company,
as Documentation Agent, Morgan Stanley Senior Funding Inc., as
Syndication Agent, The Chase Manhattan Bank, as Administrative
Agent, and the Lenders
10.20**** Collateral Agreement, dated as of August 11, 1998, in favor of
The Chase Manhattan Bank, as administrative agent, together with
the Lenders
10.21**** HHC 1998-1 Trust Credit Agreement, $238,125,000 Credit Facility,
dated as of August 11, 1998, among the Registrant, Chase
Securities Inc., as Arranger, Morgan Stanley Senior Funding, Inc.
and BT Alex. Brown Incorporated, as Co-Arrangers, Bankers Trust
Company, as Documentation Agent, Morgan Stanley Senior Funding,
Inc., as Syndication Agent, The Chase Manhattan Bank, as
Administrative Agent, and the lenders party thereto
10.22**** Participation Agreement, dated as of August 11, 1998, among
Harborside of Dayton Limited Partnership, as Lessee, HHC 1998-1
Trust, as Lessor, Wilmington Trust Company, BTD Harborside Inc.,
Morgan Stanley Senior Funding, Inc. and CSL Leasing, Inc., as
Investors, The Chase Manhattan Bank, as Agent, and the lenders
party thereto
10.23**** Lease, dated August 11, 1998, between HHC 1998-1 Trust, as
Lessor, and Harborside of Dayton Limited Partnership, as Lessee
10.24**** Accounts Receivable Intercreditor Agreement (Leased Facilities),
dated as of August 11, 1998, among (i) The Chase Manhattan Bank,
as administrative agent, (ii) HHC 1998-1 Trust, (iii) CSL
Leasing, Inc., BTD Harborside, Inc. and Morgan Stanley Senior
Funding, Inc. and (iv) Meditrust Company LLC
10.25**** Accounts Receivable Intercreditor Agreement (Mortgaged
Facilities), dated as of August 11, 1998, among (i) The Chase
Manhattan Bank, as administrative agent, (ii) HHC 1998-1 Trust,
(iii) CSL Leasing, Inc., BTD Harborside, Inc. and Morgan Stanley
Senior Funding, Inc. and (iv) Meditrust Mortgage Investments,
Inc.
10.26**** Financing Advisory Agreement, dated August 11, 1998, between the
Registrant (as successor to MergerCo) and Investcorp
International Inc. ("III")
10.27**** Agreement for Management Advisory, Strategic Planning and
Consulting Services, dated August 11, 1998, between the
Registrant (as successor to MergerCo) and III
10.28**** Second Amendment to Loan Agreement, Consent to Merger and
Confirmation of Guaranties, dated as of July 31, 1998, by and
among Bay Tree Nursing Center Corp., Countryside Cave Center
Corp., Sunset Point Nursing Center Corp., West Bay Nursing Center
Corp., Harborside Healthcare Limited Partnership, Harborside
Healthcare Corporation and Meditrust Mortgage Investments, Inc.
10.29**** Omnibus Amendment to Facility Lease Agreements, Consent to Merger
and Confirmation of Guaranties, dated as of July 31, 1998, by and
among Harborside New Hampshire Limited Partnership, Harborside
Bledo Limited Partnership, HHCI Limited Partnership, Harborside
Healthcare Limited Partnership, Harborside Healthcare Corporation
and Meditrust Company LLC
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule
-61-
<PAGE>
* Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-3096)
** Incorporated by reference to the Registrant's Registration
Statement on Form S-4 (Registration No. 333-51633)
*** Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997 (File No. 01-
14538)
**** Incorporated by reference to the Registrant's Registration
Statement on Form S-4 (Registration No. 333-64679)
# Replaces previously filed exhibit
+ Management contract or compensation plan or arrangement required
to be filed as an exhibit.
(b) Reports on Form 8-K:
None
-62-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to signed on
its behalf by the undersigned, thereunto duly authorized, on the 5th day of
April, 1999.
HARBORSIDE HEALTHCARE
CORPORATION
By /s/ Stephen L. Guillard
----------------------------------
Chairman of the Board,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated
/s/ Stephen L. Guillard Chairman, President, Chief Executive Officer and
Director
(Principal Executive Officer)
/s/ Damian N. Dell'Anno Executive Vice President of Operations and Director
/s/ William H. Stephan Senior Vice President, Chief Financial Officer and
Director
(Principal Financial and Accounting Officer)
/s/ Christopher J. O'Brien Director
/s/ Charles J. Philippin Director
/s/ Lars C. Haegg Director
/s/ Robert G. Sharp Director
/s/ Edward G. Lord Director
/s/ James O. Egan Director
/s/ Charles Marquis Director
-63-
<PAGE>
Exhibit 10.19(B)
Exhibit A
---------
FIRST AMENDMENT
FIRST AMENDMENT, dated as of March 30, 1999 (this "Amendment"), to the
---------
Credit Agreement, dated as of August 11, 1998 (the "Credit Agreement"), among
----------------
HARBORSIDE HEALTHCARE CORPORATION, a Delaware corporation (the "Company"), the
-------
other entities listed on the signature pages thereof, as joint and several
borrowers thereunder (the Company and such other entities being, collectively,
the "Borrowers"), the banks and other financial institutions or entities parties
---------
thereto (the "Lenders"), MORGAN STANLEY SENIOR FUNDING, INC. and BT ALEX. BROWN
-------
INCORPORATED, as co-arrangers, MORGAN STANLEY SENIOR FUNDING, INC., as
syndication agent, BANKERS TRUST COMPANY, as documentation agent, and THE CHASE
MANHATTAN BANK, as administrative agent for the Lenders (in such capacity, the
"Administrative Agent").
- ---------------------
W I T N E S S E T H:
-------------------
WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to
make, and have made, certain loans and other extensions of credit to the
Borrowers; and
WHEREAS, the Borrowers have requested, and, upon this Amendment
becoming effective, the Required Lenders will have agreed, that certain
provisions of the Credit Agreement be amended in the manner provided for in this
Amendment.
NOW, THEREFORE, in consideration of the premises and the agreements
hereinafter set forth, the parties hereto hereby agree as follows:
SECTION 1. Defined Terms. Terms defined in the Credit Agreement and
-------------
used herein shall have the meanings given to them in the Credit Agreement.
SECTION 2. Amendments to the Credit Agreement.
----------------------------------
2.1. Amendments to Subsection 1.1 of the Credit Agreement. (A)
----------------------------------------------------
Subsection 1.1 of the Credit Agreement is hereby amended by deleting the table
appearing in the definition of "Applicable Margin" and substituting in lieu of
such table the following table:
<PAGE>
2
<TABLE>
<CAPTION>
Alternate
Base Rate Eurodollar
Loans Loans
---------- ----------------
<S> <C> <C>
Term Loans: 1.75% 2.75%
Revolving Credit Loans: 1.75% 2.75%
Swing Line Loans: 1.75% Not applicable;
</TABLE>
(B) Subsection 1.1 of the Credit Agreement is hereby amended by
deleting the parenthetical phrase "(other than Liens permitted pursuant to
subsection 7.2(f))" appearing in the definition of "Leverage Ratio" and
substituting in lieu thereof the following parenthetical phrase: "(other than
Liens securing Indebtedness permitted pursuant to subsection 7.1)".
(C) Subsection 1.1 of the Credit Agreement is hereby amended by
adding thereto the following definition in its appropriate alphabetical order:
"Restriction Termination Date": as defined in subsection 7.9(e).
----------------------------
2.2. Amendment to Subsection 6.1 of the Credit Agreement. Subsection
---------------------------------------------------
6.1 of the Credit Agreement is hereby amended (i) by deleting the word "and" at
the end of paragraph (c) thereof, (ii) by deleting the semicolon at the end of
paragraph (d) thereof and substituting in lieu thereof "and" and (iii) by adding
thereto the following paragraph:
(e) as soon as available, but in any event not later than 45 days
after the end of each calendar month, the unaudited consolidated balance
sheet of the Company and its Subsidiaries as at the end of each such month
and the related unaudited consolidated statements of income and cash flows
of the Company and its Subsidiaries for such monthly period and the portion
of the fiscal year of the Company through such date, setting forth in each
case in comparative form the figures for the corresponding month in, and
year to date portion of, the previous year, and the figures for such
periods in the budget prepared by the Company and furnished to the
Administrative Agent, certified by the chief financial officer, controller
or treasurer of the Company as being fairly stated in all material
respects;
2.3. Amendments to Section 7 of the Credit Agreement. (A)
-----------------------------------------------
Subsection 7.6(g)(ii)(A) is hereby amended by (i) deleting the ratio "4.25 to
1.00" therein and substituting in lieu thereof the ratio "3.75 to 1.00" and
(ii) adding to the end of subsection 7.6(g)(ii)(A) the following proviso:
provided, further, that for purposes of calculating Consolidated EBITDA
-------- -------
pursuant to this clause (A) on and after March 30, 1999, such calculation
shall be made (1) during the quarter in which the Restriction Termination
Date occurs, by multiplying Consolidated
<PAGE>
3
EBITDA for the period of the two most recently ended consecutive fiscal
quarters by a fraction the numerator of which is 365 and the denominator of
which is the actual number of days elapsed during such period, (2) during
the quarter immediately after the quarter in which the Restriction
Termination Date occurs, by multiplying Consolidated EBITDA for the period
of three most recently ended consecutive fiscal quarters by a fraction the
numerator of which is 365 and the denominator of which is the actual number
of days elapsed during such period and (3) thereafter, by multiplying
Consolidated EBITDA for the period of four fiscal quarters ending as at the
last day of the most recently ended fiscal quarter by 1,
(B) Subsection 7.9 of the Credit Agreement is hereby amended by
deleting said subsection in its entirety and substituting in lieu thereof the
following:
7.9 Debt to EBITDA; Minimum EBITDA.
------------------------------
(a) At the last day of any fiscal quarter set forth below, permit the
ratio (the "Leverage Ratio") of Consolidated Indebtedness as of such day to
--------------
Consolidated EBITDA for the period of four fiscal quarters ending on such
day to be greater than the ratio set forth below for such fiscal quarter:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Quarter Ratio
----------- -------------- -----
<S> <C> <C>
1998 Fourth 6.85 to 1.00
1999 First 6.85 to 1.00
Second 6.85 to 1.00
Third 6.85 to 1.00
Fourth 6.85 to 1.00
2000 First 6.85 to 1.00
Second 6.85 to 1.00
Third 6.85 to 1.00
Fourth 6.50 to 1.00
2001 First 6.50 to 1.00
Second 6.50 to 1.00
Third 6.50 to 1.00
Fourth 6.25 to 1.00
2002 First 6.25 to 1.00
Second 6.25 to 1.00
Third 6.25 to 1.00
Fourth 6.00 to 1.00
Thereafter 6.00 to 1.00
</TABLE>
<PAGE>
4
(b) At the last day of the first fiscal quarter of 1999, permit
Consolidated EBITDA for the fiscal quarter ending on such day to be less
than -$2,000,000.
(c) At the last day of any fiscal quarter set forth below, permit
Consolidated EBITDA for the period of four fiscal quarters ending on such
day (or, in the case of the second, third and fourth fiscal quarters of
1999 referred to below, for the period of one, two or three quarters,
respectively, then ended) to be less than the amount set forth below for
such fiscal quarter:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Quarter Consolidated EBITDA
----------- -------------- -------------------
<S> <C> <C>
1999 Second $ 2,400,000
Third 6,600,000
Fourth 11,300,000
2000 First 16,400,000
Second 19,700,000
Third 22,200,000
Fourth 24,700,000
</TABLE>
(d) For purposes of calculating Consolidated EBITDA for any period
set forth in subsections 7.9(a), (b) and (c), the Consolidated EBITDA of
any Acquired Business acquired during such period (as the Consolidated
EBITDA of such Acquired Business may be adjusted (i) for those items that
occur by reason of such acquisition that would be substantially in
conformity with the calculation of Consolidated EBITDA in accordance with
Regulation S-X, (ii) in accordance with the adjustment to EBITDA for the
fiscal year ending December 31, 1997 described in the Confidential
Information Memorandum in an aggregate approximate amount of $1,300,000,
(iii) to reflect a full year of occupancy of newly constructed beds and
(iv) for any cost reduction resulting from the termination of any contracts
of the Acquired Business which are in existence at the time of the
acquisition of such Acquired Business and any additional costs incurred in
connection with the services that were terminated) shall be included on a
pro forma basis for such period (assuming the consummation of such
--- -----
acquisition and the incurrence, assumption or guarantee of any Indebtedness
in connection therewith occurred on the first day of such period).
<PAGE>
5
(e) Notwithstanding the foregoing, the Company shall not be required
to comply with the Leverage Ratio covenants for fiscal years 1999 and 2000
set forth in paragraph (a) of this subsection 7.9, but shall instead be
required to comply with the minimum Consolidated EBITDA covenants set forth
in paragraphs (b) and (c) of this subsection 7.9 until such time as the
Company elects to and does furnish to the Administrative Agent a
certificate of the chief financial officer of the Company certifying that
(i) for the two consecutive fiscal quarters immediately preceding such
certification, the Borrowers have satisfied the financial covenants set
forth in subsections 7.9 and 7.10 of the Credit Agreement (as in effect
without giving effect to any suspension of covenant compliance set forth
herein and, for purposes of determining such compliance, with Consolidated
EBITDA being deemed to be equal to the product of Consolidated EBITDA for
such two-quarter period multiplied by a fraction the numerator of which is
365 and the denominator of which is the actual number of days elapsed
during such period) and attaching computations showing such compliance,
(ii) at the last day of the period of the two consecutive fiscal quarters
immediately preceding such certification, the ratio of (A) Consolidated
Senior Indebtedness as of such day to (B) the product of Consolidated
EBITDA for such period multiplied by a fraction the numerator of which is
365 and the denominator of which is the actual number of days elapsed
during such period is less than or equal to 3.75 to 1.00 and attaching
computations showing such ratio and (iii) no Default or Event of Default
has occurred and is then continuing (the earlier of (x) the date on which
the Administrative Agent receives such certificate and computations and (y)
January 1, 2001 being the "Restriction Termination Date"). From and after
----------------------------
the Restriction Termination Date, the Company shall be subject to the
Leverage Ratio covenants set forth in paragraph (a) of this subsection 7.9,
but shall no longer be subject to the minimum Consolidated EBITDA covenants
set forth in paragraphs (b) and (c) of this subsection 7.9; provided,
--------
however, that for purposes of calculating Consolidated EBITDA for the
-------
quarter ending immediately after the Restriction Termination Date,
Consolidated EBITDA shall be deemed to be equal to the product of
Consolidated EBITDA for the period of three consecutive fiscal quarters
ending as at the last day of such quarter multiplied by a fraction the
numerator of which is 365 and the denominator of which is the actual number
of days elapsed during such period.
(C) Subsection 7.10 of the Credit Agreement is hereby amended by
adding at the end of such subsection the following sentence:
Notwithstanding the foregoing, the Company shall not be required to comply
with the Coverage Ratio covenants for fiscal years 1999 and 2000 set forth
above, but shall instead be required to comply with the minimum
Consolidated EBITDA covenants set forth in paragraphs (b) and (c) of
subsection 7.9 until the Restriction Termination Date. From and after the
Restriction Termination Date, the Company shall be subject to the Coverage
Ratio covenants set forth above, but shall no longer be subject to the
minimum
<PAGE>
6
Consolidated EBITDA covenants set forth in paragraphs (b) and (c)
of subsection 7.9; provided, however, that for purposes of calculating
-------- -------
Consolidated EBITDA for the quarter ending immediately after the
Restriction Termination Date, Consolidated EBITDA shall be deemed to be
equal to the product of Consolidated EBITDA for the period of three
consecutive fiscal quarters ending as at the last day of such quarter
multiplied by a fraction the numerator of which is 365 and the denominator
of which is the actual number of days elapsed during such period.
2.4. Amendment to Schedule III to the Credit Agreement. Schedule III
-------------------------------------------------
to the Credit Agreement is hereby amended in its entirety to read as set forth
in Schedule III hereto.
SECTION 3. Additional Borrowings and Acquisitions. To induce the
--------------------------------------
Administrative Agent to enter into this Amendment, and the Lenders to execute
and deliver Lender Consent Letters, each Borrower covenants and agrees that,
from and after the date hereof and until the Restriction Termination Date (as
defined in subsection 7.9(e) of the Credit Agreement as amended hereby):
(a) it will not be entitled to utilize the credit facilities provided
for in the Credit Agreement if, after giving effect to such utilization,
the sum of (i) the aggregate principal amount of all outstanding Loans,
(ii) the aggregate undrawn amount of all outstanding Letters of Credit
issued after March 30, 1999, (iii) the aggregate amount of all outstanding
L/C Obligations in respect of Letters of Credit issued after March 30, 1999
and (iv) the aggregate principal amount of all Synthetic Lease Obligations
shall exceed $58,450,000; provided, however, that in the event that the
-------- -------
Company furnishes to the Administrative Agent a certificate of the chief
financial officer of the Company certifying that, at the last day of a
fiscal quarter commencing after March 30, 1999 and ending prior to such
certification, Consolidated EBITDA for such quarter is at least $6,750,000,
and attaching computations as to such amount, then the Borrowers shall be
entitled to utilize an additional $5,000,000 aggregate principal amount of
the credit facilities provided for in the Credit Agreement to finance
acquisitions;
(b) Harborside of Dayton Limited Partnership, a Massachusetts limited
partnership and a Borrower under the Credit Agreement, shall not make any
request pursuant to Section 1.2 of the Participation Agreement, dated as of
August 11, 1998, among the Company, the Trust, the Synthetic Investors, the
Lenders and the Administrative Agent, that loans or advances be made to the
Trust under the Synthetic Lease Facility;
(c) the Borrowers shall use the proceeds of Revolving Credit Loans
solely (i) for general corporate purposes other than acquisitions, (ii) to
finance capital expenditures permitted under the Credit Agreement and (iii)
in the circumstances described in the proviso to clause (a) above, to
finance up to $5,000,000 in the aggregate for the purpose of effecting
acquisitions;
<PAGE>
7
(d) the Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, create, incur or assume any
Indebtedness in connection with any acquisition of any other Person
(whether through a purchase of stock, merger, consolidation or otherwise)
or of all or any substantial portion of the assets, or any business or
product line, of any other Person, except for Indebtedness created,
incurred or assumed in connection with acquisitions made in the
circumstances described in the proviso to clause (a) above;
(e) the Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, create, incur or assume any
Indebtedness, except (i) Indebtedness, in an aggregate principal amount not
to exceed the amount set forth in clause (a) above, of the Credit Parties
pursuant to the Credit Documents, (ii) Indebtedness of the Company and its
Subsidiaries owing to any Investor or any Affiliate thereof in an aggregate
principal amount at any one time outstanding not in excess of $15,000,000
and (iii) Indebtedness permitted by subsections 7.1(c), 7.1(g) and 7.1(m)
of the Credit Agreement; and
(f) any failure by any Borrower to comply with any of the covenants
and agreements set forth in this Section 3 shall constitute an Event of
Default under the Credit Agreement.
SECTION 4. 1998 Annual Financial Statements. Each Lender, by its
--------------------------------
execution and delivery of a Lender Consent Letter consenting to this Amendment,
agrees that, notwithstanding anything to the contrary contained in subsection
6.1(a) of the Credit Agreement, the Company shall be required to furnish the
financial statements for the Company's 1998 fiscal year required to be delivered
pursuant to subsection 6.1(a) of the Credit Agreement within 95 days after the
end of such fiscal year.
SECTION 5. Conditions to Effectiveness. This Amendment shall become
---------------------------
effective as of the date set forth above (the "Amendment Effective Date") when
------------------------
(a) each Borrower shall have executed and delivered to the Administrative Agent
this Amendment, (b) the Required Lenders shall have executed and delivered to
the Administrative Agent Lender Consent Letters (or facsimile transmissions
thereof) consenting to the execution of this Amendment by the Administrative
Agent and (c) the Company shall have paid to the Administrative Agent, for the
ratable account of the Lenders which shall have executed and delivered its
signature page hereto to the Administrative Agent by 3:00 p.m., New York City
time, on Tuesday, March 30, 1999, an amendment fee in an amount equal to 0.25%
of the sum of each such Lender=s Revolving Credit Commitment.
SECTION 6. Representation and Warranties. The representations and
-----------------------------
warranties made by the Borrowers in the Credit Documents are true and correct in
all material respects on and as of the Amendment Effective Date, before and
after giving effect to the effectiveness of this Amendment, as if made on and as
of the Amendment Effective Date, except to the extent such
<PAGE>
8
representations and warranties expressly relate to a specific earlier date, in
which case such representations and warranties were true and correct in all
material respects as of such earlier date.
SECTION 7. Payment of Expenses. The Company agrees to pay or
-------------------
reimburse the Administrative Agent for all of its out-of-pocket costs and
reasonable expenses incurred in connection with this Amendment and any other
documents prepared in connection herewith and the transactions contemplated
hereby, including, without limitation, the reasonable fees and disbursements of
counsel to the Administrative Agent.
SECTION 8. Reference to and Effect on the Credit Documents. On and
-----------------------------------------------
after the Amendment Effective Date, each reference in the Credit Agreement to
"this Agreement", "hereunder", "hereof" or words of like import referring to the
Credit Agreement, and each reference in the other Credit Documents to "the
Credit Agreement", "thereunder", "thereof" or words of like import referring to
the Credit Agreement, shall mean and be a reference to the Credit Agreement as
amended hereby. The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of any Lender or the Administrative Agent under any of
the Credit Documents. Except as expressly amended herein, all of the provisions
of the Credit Agreement and the other Credit Documents are and shall remain in
full force and effect in accordance with the terms thereof and are hereby in all
respects ratified and confirmed.
SECTION 9. Counterparts. This Amendment may be executed by one or
------------
more of the parties to this Amendment on any number of separate counterparts,
and all of said counterparts taken together shall be deemed to constitute one
and the same instrument. Delivery of an executed signature page of this
Amendment by facsimile transmission shall be effective as delivery of a manually
executed counterpart hereof. A set of the copies of this Amendment signed by
all the parties shall be lodged with the Company and the Administrative Agent.
SECTION 10. Governing Law. This Amendment and the rights and
-------------
obligations of the parties hereto shall be governed by, and construed and
interpreted in accordance with, the law of the State of New York.
<PAGE>
9
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective proper and duly authorized
officers as of the day and year first above written.
HARBORSIDE HEALTHCARE CORPORATION
By:
------------------------------
Title:
BAY TREE NURSING CENTER CORP.
BELMONT NURSING CENTER CORP.
COUNTRYSIDE CARE CENTER CORP.
HARBORSIDE HEALTH I CORPORATION
HARBORSIDE TOLEDO CORP.
KHI CORP.
MARYLAND HARBORSIDE CORP.
NEW JERSEY HARBORSIDE CORP.
OAKHURST MANOR NURSING CENTER
CORP.
ORCHARD RIDGE NURSING CENTER CORP.
SAILORS, INC.
SUNSET POINT NURSING CENTER CORP.
WEST BAY NURSING CENTER CORP.
By:
------------------------------
Title:
<PAGE>
10
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP IV
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP V
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP VI
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP VII
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP VIII
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP IX
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP X
HARBORSIDE ATLANTRIX LIMITED
PARTNERSHIP
HARBORSIDE CONNECTICUT LIMITED
PARTNERSHIP
HARBORSIDE HEALTHCARE BALTIMORE
LIMITED PARTNERSHIP
HARBORSIDE HEALTHCARE NETWORK
LIMITED PARTNERSHIP
HARBORSIDE MASSACHUSETTS LIMITED
PARTNERSHIP
HARBORSIDE NORTH TOLEDO LIMITED
PARTNERSHIP
HARBORSIDE OF CLEVELAND LIMITED
PARTNERSHIP
HARBORSIDE OF DAYTON LIMITED
PARTNERSHIP
HARBORSIDE OF FLORIDA LIMITED
PARTNERSHIP
HARBORSIDE OF OHIO LIMITED
PARTNERSHIP
HARBORSIDE REHABILITATION LIMITED
PARTNERSHIP
HARBORSIDE RHODE ISLAND LIMITED
PARTNERSHIP
RIVERSIDE RETIREMENT LIMITED
PARTNERSHIP
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
By:
------------------------------
Title:
<PAGE>
11
HARBORSIDE FUNDING LIMITED
PARTNERSHIP
By: HARBORSIDE HEALTHCARE LIMITED
PARTNERSHIP, as General Partner
By: KHI CORP., as General Partner
By:
------------------------------
Title:
BRIDGEWATER ASSISTED LIVING LIMITED
PARTNERSHIP
By: NEW JERSEY HARBORSIDE CORP.,
as General Partner
By:
------------------------------
Title:
HARBORSIDE NEW HAMPSHIRE LIMITED
PARTNERSHIP
HARBORSIDE TOLEDO LIMITED
PARTNERSHIP
HHCI LIMITED PARTNERSHIP
By: HARBORSIDE TOLEDO CORP.,
as General Partner
By:
------------------------------
Title:
<PAGE>
12
HARBORSIDE HEALTHCARE ADVISORS
LIMITED PARTNERSHIP
HARBORSIDE HEALTHCARE LIMITED
PARTNERSHIP
HARBORSIDE HOMECARE LIMITED
PARTNERSHIP
By: KHI CORP., as General Partner
By:
------------------------------
Title:
HARBORSIDE PROPERTIES TRUST I,
a Massachusetts business trust
By:
------------------------------
Name: , in his
------------------------------
capacity as trustee and not individually
THE CHASE MANHATTAN BANK,
as Administrative Agent
By:
------------------------------
Title:
<PAGE>
Schedule III to the
Credit Agreement
----------------
Pricing and Commitment Fee Grid
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Applicable Margin
-------------------------------
Leverage Ratio Eurodollar Commitment
ABR Loans Loans Fee
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Greater than or equal to 5.5 1.750% 2.750% 0.500%
- -----------------------------------------------------------------------------------------------
Less than 5.5 to 1.0, but greater than 1.500% 2.500% 0.500%
or equal to 5.0 to 1.0
- -----------------------------------------------------------------------------------------------
Less than 5.0 to 1.0, but greater than 1.250% 2.250% 0.500%
or equal to 4.5 to 1.0
- -----------------------------------------------------------------------------------------------
Less than 4.5 to 1.0, but greater than 1.000% 2.000% 0.375%
or equal to 4.0 to 1.0
- -----------------------------------------------------------------------------------------------
Less than 4.0 to 1.0, but greater than 0.750% 1.750% 0.375%
or equal to 3.5 to 1.0
- -----------------------------------------------------------------------------------------------
Less than 3.5 to 1.0, but greater than 0.500% 1.500% 0.300%
or equal to 3.0 to 1.0
- -----------------------------------------------------------------------------------------------
Less than 3.0 to 1.0 0.250% 1.250% 0.250%
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
LENDER CONSENT LETTER
HARBORSIDE HEALTHCARE CORPORATION CREDIT AGREEMENT
DATED AS OF AUGUST 11, 1998
To: The Chase Manhattan Bank, as Administrative Agent
270 Park Avenue
New York, New York 10017
Ladies and Gentlemen:
Reference is made to the Credit Agreement, dated as of August 11, 1998
(the "Credit Agreement"), among Harborside Healthcare Corporation, a Delaware
corporation (the "Company"), the other entities listed on the signature pages
thereof, as joint and several borrowers thereunder (the Company and such other
entities being, collectively, the "Borrowers"), the banks and other financial
institutions or entities parties thereto (the "Lenders"), Morgan Stanley Senior
Funding, Inc. and BT Alex. Brown Incorporated, as co-arrangers, Morgan Stanley
Senior Funding, Inc., as syndication agent, Bankers Trust Company, as
documentation agent, and The Chase Manhattan Bank, as administrative agent for
the Lenders (in such capacity, the "Administrative Agent"). Unless otherwise
defined herein, capitalized terms used herein and defined in the Credit
Agreement are so used as so defined.
The Borrowers have requested certain amendments to the Credit
Agreement on the terms described in the First Amendment to the Credit Agreement
in the form attached hereto as Exhibit A (the "First Amendment").
Pursuant to Section 9.1 of the Credit Agreement, the undersigned
Lender hereby consents to the execution by the Administrative Agent of the First
Amendment.
Very truly yours,
------------------------------
(NAME OF LENDER)
By:
---------------------------
Name:
Title:
Dated as of March 30, 1999
<PAGE>
Exhibit 21
Subsidiaries of Harborside Healthcare Corporation as of December 31, 1998:
<TABLE>
<CAPTION>
Jurisdiction of
Incorporation or
Name Organization Doing Business As
----- ---------------- ---------------------------------------------
<S> <C> <C>
1. Bay Tree Nursing Center Corporation Massachusetts Harborside Healthcare - Palm Harbor
2. Belmont Nursing Center Corporation Massachusetts Harborside Healthcare -Toledo
3. Bowie Center Limited Partnership Maryland Larkin Chase Nursing and Restoration Center
4. Countryside Care Center Corporation Massachusetts Harborside Healthcare -Terre Haute
5. Harborside of Cleveland Limited Partnership Massachusetts Harborside Healthcare - Beachwood
Rehabilitation and Nursing Center
Harborside Healthcare - Broadview
Heights Rehabilitation and Nursing Center
Harborside Healthcare - Westlake I
Rehabilitation and Nursing Center
Harborside Healthcare - Westlake II
Rehabilitation and Nursing Center
6. Harborside of Florida Limited Partnership Florida Harborside Healthcare - Brevard
7. Harborside of Ohio Limited Partnership Massachusetts Harborside Healthcare - Northwest Ohio
Harborside Healthcare - Defiance
8. Harborside Funding Limited Partnership Massachusetts
9. Harborside Health I Corporation Delaware Harborside Nursing Homes, Inc.
10. Harborside Healthcare Advisors Massachusetts
Limited Partnership
11. Harborside Healthcare Limited Massachusetts Allicor
Partnership Harborside Healthcare Management
Limited Partnership
12. Harborside Healthcare Network Florida Limited Partnership
13. Harborside Homecare Limited Massachusetts Behavioral Health Care
Partnership
</TABLE>
1
<PAGE>
<TABLE>
<S> <C> <C>
14. Harborside New Hampshire Massachusetts Harborside Nursing Facilities Limited
Limited Partnership Partnership
Harborside Healthcare - Applewood
Rehabilitation and Nursing Center
Harborside Healthcare - Crestwood
Rehabilitation and Nursing Center
Harborside Healthcare - Milford
Rehabilitation and Nursing Center
Harborside Healthcare - Northwood
Rehabilitation and Nursing Center
Harborside Healthcare - Pheasantwood
Rehabilitation and Nursing Center
Rehabilitation and Nursing Center
15. Harborside Rehabilitation Limited Massachusetts Theracor Rehabilitation Services
Partnership
16. Harborside Toledo Corporation Massachusetts
17. Harborside Toledo Limited Partnership Massachusetts Harborside Healthcare - Swanton
18. HHCI Limited Partnership Massachusetts Harborside Healthcare - Naples
Harborside Healthcare - Sarasota
Harborside Healthcare - Pinebrook
Harborside Healthcare - New Haven
Harborside Healthcare - Woods Edge
Harborside Healthcare - Indianapolis
Harborside Healthcare - Troy
19. KHI Corporation Delaware
20. Maryland Harborside Corporation Massachusetts
21. Oakhurst Manor Nursing Center Massachusetts Harborside Healthcare - Ocala
Corporation
22. Orchard Ridge Nursing Center Massachusetts Harborside Healthcare - Gulf Coast
Corporation
23. Riverside Retirement Limited Partnership Massachusetts Harborside Healthcare - Decatur
24. Sunset Point Nursing Center Corporation Massachusetts Harborside Healthcare - Clearwater
25. West Bay Nursing Center Corporation Massachusetts Harborside Healthcare - Tampa Bay
26. Harborside Healthcare Baltimore Limited Massachusetts Harborside Healthcare - Harford Gardens
Partnership
27. Harborside Massachusetts Massachusetts Harborside Healthcare - North Shore
Limited Partnership Harborside Healthcare - Maplewood
Harborside Healthcare - Cedar Glen
Harborside Healthcare - Danvers
28. Harborside of Dayton Massachusetts Harborside Healthcare - Laurelwood
Limited Partnership Harborside Healthcare - New Lebanon
Harborside Healthcare - Dayton
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
29. Harborside Connecticut Massachusetts Harborside Healthcare - Arden House
Limited Partnership Harborside Healthcare - Governor's
Harborside Healthcare - Willows
Harborside Healthcare - Madison House
Harborside Healthcare - Reservoir
30. Harborside Rhode Island Massachusetts Harborside Healthcare - Greeenwood
Limited Partnership Harborside Healthcare - Pawtuxet Village
31. Harborside North Toledo Massachusetts Harborside Healthcare - Sylvania
Limited Partnership Harborside Healthcare - Point Place
32. Harborside Danbury Massachusetts Harborside Healthcare - Glen Hill
Limited Partnership Harborside Healthcare - Glen Crest
</TABLE>
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 896
<SECURITIES> 0
<RECEIVABLES> 52,810
<ALLOWANCES> 2,864
<INVENTORY> 53,190<F1>
<CURRENT-ASSETS> 69,733
<PP&E> 160,504
<DEPRECIATION> 0
<TOTAL-ASSETS> 264,536
<CURRENT-LIABILITIES> 33,330
<BONDS> 188,830<F2>
42,293
0
<COMMON> 146
<OTHER-SE> (63)<F3>
<TOTAL-LIABILITY-AND-EQUITY> 264,536
<SALES> 0
<TOTAL-REVENUES> 311,044
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 329,147
<LOSS-PROVISION> (167)<F4>
<INTEREST-EXPENSE> 11,271
<INCOME-PRETAX> (29,207)
<INCOME-TAX> 5,020
<INCOME-CONTINUING> (24,187)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,187)
<EPS-PRIMARY> (3.42)
<EPS-DILUTED> (3.42)
<FN>
<F1>INCLUDES THE FOLLOWING ASSETS: PREPAID EXPENSES AND OTHER OF $10,934, PREPAID
INCOME TAXES OF $3,873, DEFERRED INCOME TAXES--CURRENT OF $4,084, DEFERRED
INCOME TAXES--LONG-TERM OF $2,229, RESTRICTED CASH OF $2,110, NOTE RECEIVABLE
OF $7,487, INTANGIBLE ASSETS, NET OF $18,173 AND OTHER ASSETS, NET OF $4,300.
<F2>INCLUDES THE FOLLOWING LONG-TERM LIABILITIES: DEFERRED INCOME OF $3,104,
CAPITAL LEASE OBLIGATION OF $51,253, AND LONG-TERM DEBT OF $134,473.
<F3>INCLUDES THE FOLLOWING EQUITY ACCOUNTS: ADDITIONAL PAID-IN CAPITAL OF $204,607,
TREASURY STOCK OF ($183,746) AND RETAINED DEFICIT OF ($20,924).
<F4>INCLUDES OTHER REVENUE $167.
</FN>
</TABLE>
