UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
--------------------- ---------------------------
Commission file number 333-64679
----------
Harborside Healthcare Corporation
Delaware 04-3307188
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
One Beacon Street, Boston, Massachusetts 02108
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(Address of principal executive offices) (Zip Code)
(617) 646-5400
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
Number of shares of common stock, par value $0.01 per share outstanding as of
November 12, 1999: 7,261,332.
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Page
Part I. Financial Information
Condensed Consolidated Balance Sheets
December 31, 1998 and September 30, 1999 3
Condensed Consolidated Statements of Operations
For the Three Months and the Nine Months Ended
September 30, 1998 and 1999 4
Condensed Consolidated Statement of Changes
in Stockholders' Equity (Deficit) for the Nine Months
Ended September 30, 1999 5
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial 15
Condition and Results of Operations
Part II Other Information 22
Signatures 23
</TABLE>
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
ASSETS --------- ---------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................... $ 896 $ 2,994
Accounts receivable, net of allowances for doubtful
accounts of $2,864 and $4,135, respectively .............................. 49,946 47,774
Prepaid expenses and other ................................................... 10,934 15,980
Prepaid income taxes ......................................................... 3,873 12,828
Deferred income taxes ........................................................ 4,084 4,084
--------- ---------
Total current assets ...................................................... 69,733 83,660
Restricted cash ............................................................... 2,110 2,142
Property and equipment, net ................................................... 160,504 165,920
Deferred financing and other non-current assets, net .......................... 18,173 16,235
Other assets, net ............................................................. 4,300 3,400
Note receivable................................................................ 7,487 7,487
Deferred income taxes ......................................................... 2,229 2,229
--------- ---------
Total assets ................................................................ $ 264,536 $ 281,073
========= =========
LIABILITIES
Current liabilities:
Current maturities of long-term debt ......................................... $ 207 $ 218
Current portion of capital lease obligation .................................. 4,278 4,542
Accounts payable ............................................................. 7,401 11,820
Employee compensation and benefits ........................................... 13,220 11,930
Other accrued liabilities .................................................... 7,485 7,805
Accrued interest ............................................................. 62 238
Current portion of deferred income ........................................... 677 677
--------- ---------
Total current liabilities .................................................. 33,330 37,230
Long-term portion of deferred income .......................................... 3,104 2,597
Long-term debt ................................................................ 134,473 163,035
Long-term portion of capital lease obligation ................................. 51,253 50,257
--------- ---------
Total liabilities .......................................................... 222,160 253,119
--------- ---------
Exchangeable preferred stock, redeemable, $.01 par value with a liquidation
value of $1,000 per share; 500,000 shares authorized;
42,293 and 46,707 issued and outstanding ..................................... 42,293 46,707
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 19,000,000 shares
authorized, 7,261,332 shares issued and outstanding .......................... 146 146
Additional paid-in capital ..................................................... 204,607 200,180
Less common stock in treasury, at cost, 7,349,832 shares ....................... (183,746) (183,746)
Accumulated deficit ............................................................ (20,924) (35,333)
--------- ---------
Total stockholders' equity (deficit) ....................................... 83 (18,753)
--------- ---------
Total liabilities and stockholders' equity (deficit) ....................... $ 264,536 $ 281,073
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-3-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total net revenues ................................... $ 78,697 $ 77,590 $ 227,337 $ 224,310
--------- --------- --------- ---------
Expenses:
Facility operating ................................. 62,887 63,014 179,917 187,066
General and administrative ......................... 3,625 4,204 11,100 13,585
Service charges paid to former affiliate ........... 313 307 941 880
Amortization of prepaid management fee ............. 200 300 200 900
Depreciation and amortization ...................... 1,821 2,347 4,084 7,451
Facility rent ...................................... 5,465 5,645 17,086 16,849
Merger Costs ....................................... 37,172 -- 37,172 --
Restructuring costs ................................ -- 5,745 -- 5,745
--------- --------- --------- ---------
Total expenses ................................... 111,483 81,562 250,500 232,476
--------- --------- --------- ---------
Loss from operations ................................. (32,786) (3,972) (23,163) (8,166)
Other:
Interest expense, net .............................. 3,591 5,410 6,793 15,266
Other expense (income) ............................. (17) (141) 55 189
--------- --------- --------- ---------
Loss before income taxes ............................. (36,360) (9,241) (30,011) (23,621)
Income tax benefit ................................... (7,460) (3,604) (4,984) (9,212)
--------- --------- --------- ---------
Net loss ............................................. $ (28,900) $ (5,637) $ (25,027) $ (14,409)
========= ========= ========= =========
Loss per common share:
Basic ......................................... $ (3.93) $ (0.99) $ (3.28) $ (2.59)
========= ========= ========= =========
Diluted ....................................... $ (3.93) $ (0.99) $ (3.28) $ (2.59)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-4-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-In Treasury Retained Total
Stock Capital Stock Deficit
<S> <C> <C> <C> <C> <C>
Stockholders' equity (deficit), December 31, 1998 .... $ 146 $ 204,607 $ (183,746) $ (20,924) $ 83
Preferred stock dividends ............................ -- (4,427) -- -- (4,427)
Net loss for the nine months ended
September 30, 1999 ................................. -- -- -- (14,409) (14,409)
-------- -------- ---------- ---------- ---------
Stockholders' equity (deficit), September 30, 1999.... $ 146 $ 200,180 $ (183,746) $ (35,333) $ (18,753)
======== ========= ========== ========== =========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-5-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1998 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net loss ................................................................ $ (25,027) $ (14,409)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation of property and equipment ................................. 3,238 5,053
Amortization of deferred financing and
other non-current assets ............................................ 846 2,398
Amortization of prepaid management fee ................................. 200 900
Amortization of deferred income ........................................ (453) (507)
Accretion of senior subordinated discount notes ........................ 1,847 8,725
Amortization of loan costs and fees (included in interest expense) ..... 33 108
Accretion of interest on capital lease obligation ...................... 2,403 2,549
Other non-cash items, net .............................................. (350) --
Write-off of goodwill and other assets related to restructuring......... -- 1,852
--------- ---------
(17,263) 6,669
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ............................. (12,340) 2,172
Increase in prepaid expenses and other ................................. (1,343) (5,046)
Increase (decrease) in accounts payable ................................ (140) 4,419
Increase (decrease) in employee compensation and benefits .............. 3,643 (1,290)
Increase in accrued interest ........................................... 211 176
Increase in other accrued liabilities .................................. 5,967 320
Increase in prepaid income taxes ....................................... (7,681) (8,955)
--------- ---------
Net cash used by operating activities .................................... (28,946) (1,535)
--------- ---------
Investing activities:
Additions to property and equipment .................................... (65,936) (10,672)
Additions to deferred financing and other non-current assets ........... (18,794) (2,217)
Transfers to restricted cash, net ...................................... 514 (32)
--------- ---------
Net cash used by investing activities ................................... (84,216) (12,921)
--------- ---------
Financing activities:
Borrowings under revolving line of credit .............................. 17,150 20,000
Repaid on revolving line of credit ..................................... (20,000) --
Payment of long-term debt .............................................. (141) (152)
Proceeds from the issuance of bonds payable ............................ 99,493 --
Proceeds from the issuance of preferred stock .......................... 40,000 --
Purchase of treasury stock ............................................. (183,746) --
Proceeds from sale of common stock ..................................... 158,500 --
Principal payments of capital lease obligation ......................... (3,019) (3,281)
Cash receipt in connection with lease .................................. 1,935 --
Exercise of stock options .............................................. 29 --
Dividends paid on exchangeable preferred stock ......................... -- (13)
--------- ---------
Net cash provided by financing activities ................................ 110,201 16,554
--------- ---------
Net increase (decrease) in cash and cash equivalents ..................... (2,961) 2,098
Cash and cash equivalents, beginning of period ........................... 8,747 896
--------- ---------
Cash and cash equivalents, end of period ................................. $ 5,786 $ 2,994
========= =========
Supplemental Disclosure:
Interest paid .......................................................... $ 3,217 $ 4,370
========= =========
Income taxes paid ...................................................... $ 2,977 $ 155
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-6-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. General
Harborside Healthcare Corporation and its subsidiaries (the "Company") operate
long-term care facilities and through September 1999 provided rehabilitation
therapy services to non-affiliated facilities (See Note D). As of September 30,
1999, the Company owned twenty-two facilities, operated twenty-seven additional
facilities under various leases and managed one facility. The Company accounts
for its investment in one 75% owned facility using the equity method.
B. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Form 10-K for the year ended December 31,
1998. In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the Company's financial position as of
September 30, 1999, the results of its operations for the three-month and
nine-month periods ended September 30, 1998 and 1999 and its cash flows for the
nine-month periods ended September 30, 1998 and 1999. The results of operations
for the three-month and nine-month period ended September 30, 1999 are not
necessarily indicative of the results which may be expected for the full year.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.
C. Loss Per Common Share
The following table sets forth the computation of basic and diluted loss per
Common Share for the periods ended September 30, 1998 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1999 1998 1999
------ ------ ------ -------
<S> <C> <C> <C> <C>
Numerator:
Net income loss .................................... $ (28,900,000) $ (5,637,000) $ (25,027,000) $ (14,409,000)
Preferred Stock dividends .......................... (931,000) (1,525,000) (931,000) (4,427,000)
------------- ------------- ------------- -------------
Loss available for Common Shares ....................... $ (29,831,000) $ (7,162,000) $ (25,958,000) $ (18,836,000)
============= ============= ============= =============
Denominator for basic and diluted loss per Common
Share - adjusted weighted average shares and
assumed conversions .............................. 7,595,000 7,261,000 7,904,000 7,261,000
============= ============= ============= =============
Basic loss per Common Share ............................ $ (3.93) $ (0.99) $ (3.28) $ (2.59)
============= ============= ============= =============
Diluted loss per Common Share .......................... $ (3.93) $ (0.99) $ (3.28) $ (2.59)
============= ============= ============= =============
</TABLE>
D. Restructuring Costs
During the third quarter of 1999, the Company terminated its contracts with
non-affiliated facilities and ceased providing therapy services to
non-affiliated facilities. The Company, through its subsidiary Theracor, had
provided physical, speech and occupational services to non-affiliated skilled
nursing facilities since 1995. Significant changes in the contract therapy
business, primarily related to reductions in Medicare reimbursement for therapy
services caused by the Balanced Budget Act of 1997 led to this decision. The
Company will continue to provide rehabilitation therapy services to nursing
facilities which it owns.
The Company's therapy services restructuring plan required the termination of
approximately 60 rehabilitation therapy services employees and the closure of
two regional offices. During the third quarter of 1999, the Company recorded
restructuring charges of approximately $5.7 million under this plan, most of
which were non-cash in nature. The restructuring charge consisted of $2.5
million of uncollectible accounts receivable, $1.5 million of unamortized
goodwill, $0.7 million of employee costs and approximately $1.0 million due to
the write-off of other assets. As of September 30, 1999, the Company's
restructuring reserve was approximately $1.2 million.
-7-
<PAGE>
E. 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, 1998 and September 30, 1999; the condensed
consolidating results of operations for the three-month and nine-month periods
ended September 30, 1998 and 1999; and the consolidating cash flows for the
nine-months ended September 30, 1998 and 1999 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.
-8-
<PAGE>
E. Condensed Consolidating Financial Information (Continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
As of December 31, 1998
(Unaudited)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantor Elimination Consolidated
---------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 51 $ 99 $ 746 $ - $ 896
Accounts receivable, 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
Deferred financing and other
non-current 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 liquidation value of $1,000 per share;
500,000 shares authorized;
42,293 shares issued and outstanding ...................... 42,293 -- -- -- 42,293
--------- --------- --------- --------- --------
STOCKHOLDERS' EQUITY (DEFICIT)
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
Less common stock in treasury, at
cost, 7,349,832 shares ..................................... (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 (deficit) .......................... (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>
-9-
<PAGE>
E. Condensed Consolidating Financial Information (Continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
As of September 30, 1999
(Unaudited)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantor Elimination Consolidated
--------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ -- $ 1,930 $ 1,064 $ -- $ 2,994
Accounts receivable, net of allowance ........................ -- 33,094 14,680 -- 47,774
Intercompany receivable ...................................... 120,781 11,878 -- (132,659) --
Prepaid expenses and other ................................... 4,622 9,240 2,118 -- 15,980
Prepaid income taxes ......................................... 12,828 -- -- -- 12,828
Deferred income taxes ........................................ 2,150 1,934 -- -- 4,084
--------- --------- --------- --------- ---------
Total current assets ............................................ 140,381 58,076 17,862 (132,659) 83,660
Restricted cash ................................................. -- 1,566 576 -- 2,142
Investment in limited partnership ............................... 15,584 -- 4,044 (19,628) --
Property and equipment, net ..................................... -- 146,601 19,319 -- 165,920
Deferred financing and other
non-current assets, net ....................................... 11,249 3,543 1,443 -- 16,235
Other assets, net ............................................... 3,400 -- -- -- 3,400
Note receivable ................................................. -- 7,487 -- -- 7,487
Deferred income taxes ........................................... 71 2,158 -- -- 2,229
--------- --------- -------- --------- ---------
Total assets .................................................... $ 170,685 $ 219,431 $ 43,244 $(152,287) $ 281,073
========= ========= ========= ========= =========
LIABILITIES
Current liabilities:
Current maturities of long-term debt ......................... $ -- $ 17 $ 201 $ -- $ 218
Current portion of capital lease
obligation ................................................. -- 4,542 -- -- 4,542
Accounts payable ............................................. -- 9,396 2,424 -- 11,820
Intercompany payable ......................................... -- 104,464 11,226 (115,690) --
Employee compensation and benefits ........................... -- 9,046 2,884 -- 11,930
Other accrued liabilities .................................... -- 6,911 894 -- 7,805
Accrued interest ............................................. 3,575 9,971 -- (13,308) 238
Current portion of deferred income ........................... -- 677 -- -- 677
--------- --------- --------- --------- ---------
Total current liabilities ....................................... 3,575 145,024 17,629 (128,998) 37,230
Long-term portion of deferred income ............................ -- 971 2,303 (677) 2,597
Long-term debt .................................................. 132,243 1,527 15,957 13,308 163,035
Long-term portion of capital lease obligation ................... -- 50,257 -- -- 50,257
--------- --------- --------- --------- ---------
Total liabilities ............................................... 135,818 197,779 35,889 (116,367) 253,119
--------- --------- --------- --------- ---------
Exchangeable preferred stock, redeemable, $.01 par value
with a liquidation value of $1,000 per share;
500,000 shares authorized;
46,707 shares issued and outstanding ........................... 46,707 -- -- -- 46,707
--------- --------- --------- --------- ---------
STOCKHOLDERS' EQUITY (DEFICIT)
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 ...................................... 199,953 -- -- 227 200,180
Less common stock in treasury, at
cost, 7,349,832 shares ....................................... (183,746) -- -- -- (183,746)
Partners' equity ................................................ -- 24,755 7,074 (31,829) --
Accumulated deficit ............................................. (28,193) (5,672) (3,604) 2,136 (35,333)
--------- --------- --------- --------- ---------
Total stockholders' equity (deficit) ............................ (11,840) 21,652 7,355 (35,920) (18,753)
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity (deficit) $ 170,685 $ 219,431 $ 43,244 $(152,287) $ 281,073
========= ========= ========= ========= =========
</TABLE>
-10-
<PAGE>
E. Condensed Consolidating Financial Information (Continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
For the three months ended
September 30, 1998 and 1999
(Unaudited)
(dollars in thousands)
For the three months ended September 30, 1998:
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Elimination Consolidated
----------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Total net revenues $ - $ 60,586 $ 25,541 $ (7,430) $ 78,697
----------- ---------- ---------- ----------- ---------
Expenses:
Facility operating - 48,760 21,557 (7,430) 62,887
General and administrative (63) 3,632 56 - 3,625
Service charges paid to affiliate - 313 - - 313
Amortization of prepaid management fee 200 - - - 200
Depreciation and amortization 248 1,155 418 - 1,821
Facility rent - 3,414 2,051 - 5,465
Merger costs 23,486 13,435 251 - 37,172
Management fees paid to affiliates - (1,601) 1,601 - -
----------- ---------- ---------- ----------- ----------
Total expenses 23,871 69,108 25,934 (7,430) 111,483
----------- ---------- ---------- ----------- ----------
Loss from operations (23,871) (8,522) (393) - (32,786)
Other:
Interest expense, net 771 2,645 175 - 3,591
Other income - (17) - - (17)
----------- ---------- ---------- ----------- ----------
Loss before income taxes (24,642) (11,150) (568) - (36,360)
Income tax benefit (3,224) (4,122) (114) - (7,460)
----------- ---------- ---------- ----------- ----------
Net loss $ (21,418) $ (7,028) $ (454) $ - $ (28,900)
=========== ========== ========== =========== ==========
For the three months ended September 30, 1999:
Parent Guarantors Non-Guarantors Elimination Consolidated
----------- ---------- ------------- ----------- ------------
Total net revenues $ - $ 57,049 $ 24,579 $ (4,038) $ 77,590
----------- ---------- ---------- ----------- ----------
Expenses:
Facility operating - 46,712 20,340 (4,038) 63,014
General and administrative 17 4,187 - - 4,204
Service charges paid to affiliate - 307 - - 307
Amortization of prepaid management fee 300 - - - 300
Depreciation and amortization 420 1,473 454 - 2,347
Facility rent - 3,533 2,112 - 5,645
Restructuring costs - 5,745 5,745
Management fees paid to affiliates - (1,609) 1,609 - -
------------ ---------- ---------- ----------- ----------
Total expenses 737 60,348 24,515 (4,038) 81,562
------------ ---------- ---------- ----------- ----------
Income (loss) from operations (737) (3,299) 64 - (3,972)
Other:
Interest expense, net 755 4,224 431 - 5,410
Other income - - - (141) (141)
------------ ---------- ---------- ----------- ----------
Income (loss) before income taxes (1,492) (7,523) (367) 141 (9,241)
Income taxes (benefit) (582) (2,934) (143) 55 (3,604)
------------ ---------- ---------- ----------- ------------
Net income (loss) $ (910) $ (4,589) $ (224) $ 86 $ (5,637)
============ ========== ========== =========== ===========
</TABLE>
-11-
<PAGE>
E. Condensed Consolidating Financial Information (Continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
For the nine months ended September
30, 1998 and 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
For the nine months ended September 30, 1998:
Parent Guarantors Non-Guarantors Elimination Consolidated
----------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Total net revenues $ - $ 171,957 $ 76,408 $ (21,028) $ 227,337
---------- ---------- --------- ----------- ---------
Expenses:
Facility operating - 136,985 63,960 (21,028) 179,917
General and administrative 153 10,720 227 - 11,100
Service charges paid to affiliate - 941 - - 941
Amortization of prepaid management fee 200 - - - 200
Depreciation and amortization 262 2,664 1,158 - 4,084
Facility rent - 10,868 6,218 - 17,086
Merger costs 23,486 13,435 251 - 37,172
Management fees paid to affiliates - (4,670) 4,670 - -
---------- ---------- --------- ----------- --------
Total expenses 24,101 170,943 76,484 (21,028) 250,500
---------- ---------- --------- ----------- --------
Income (loss) from operations (24,101) 1,014 (76) - (23,163)
Other:
Interest expense, net 771 5,554 468 - 6,793
Other expense - 55 - - 55
----------- ---------- --------- ----------- ----------
Loss before income taxes (24,872) (4,595) (544) - (30,011)
Income tax benefit (3,134) (1,654) (196) - (4,984)
----------- ---------- --------- ----------- ----------
Net loss $ (21,738) $ (2,941) $ (348) $ - $ (25,027)
=========== ========== ========= =========== ==========
For the nine months ended September 30, 1999:
Parent Guarantors Non-Guarantors Elimination Consolidated
----------- ---------- ------------- ----------- ------------
Total net revenues $ 24 $ 165,777 $ 71,796 $ (13,287) $ 224,310
----------- ---------- --------- ----------- ----------
Expenses:
Facility operating - 139,598 60,755 (13,287) 187,066
General and administrative 43 13,542 - - 13,585
Service charges paid to affiliate - 880 - - 880
Amortization of prepaid management fee 900 - - - 900
Depreciation and amortization 1,200 4,960 1,291 - 7,451
Facility rent - 10,480 6,369 - 16,849
Restructuring costs - 5,745 - - 5,745
Management fees paid to affiliates - (4,434) 4,434 - -
----------- ---------- --------- ----------- ---------
Total expenses 2,143 170,771 72,849 (13,287) 232,476
----------- ---------- --------- ----------- ---------
Loss from operations (2,119) (4,994) (1,053) - (8,166)
Other:
Interest expense, net 2,178 11,791 1,297 - 15,266
Other expense - - - 189 189
----------- ---------- --------- ----------- ---------
Loss before income taxes (4,297) (16,785) (2,350) (189) (23,621)
Income tax benefit (1,676) (6,546) (916) (74) (9,212)
----------- ---------- --------- ----------- ---------
Net loss $ (2,621) $ (10,239) $ (1,434) $ (115) $ (14,409)
=========== ========== ========= =========== =========
</TABLE>
-12-
<PAGE>
E. Condensed Consolidating Financial Information (Continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
For the nine months ended September 30,
1998
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantor Elimination Consolidated
--------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net cash provided (used) by operating activities: ..... $ (98,039) $ 71,446 $ 3,682 $ (6,035) $ (28,946)
--------- --------- --------- --------- ---------
Investing activities:
Additions to property and equipment ............... -- (66,530) (2,209) 2,803 (65,936)
Additions to deferred financing and other
non-current assets .............................. (16,885) (1,909) -- -- (18,794)
Transfers (to) from restricted cash, net .......... -- (1,654) (1,064) 3,232 514
--------- --------- --------- --------- ---------
Net cash provided (used) by investing activities ....... (16,885) (70,093) (3,273) 6,035 (84,216)
--------- --------- --------- --------- ---------
Financing activities:
Borrowings under revolving line of credit ......... -- 17,150 -- -- 17,150
Repaid on revolving line of credit ................ -- (20,000) -- -- (20,000)
Payment of long-term debt ......................... -- (72) (69) -- (141)
Issuance of bonds payable ......................... 99,493 -- -- -- 99,493
Issuance of preferred stock ....................... 40,000 -- -- -- 40,000
Purchase of treasury stock ........................ (183,746) -- -- -- (183,746)
Proceeds from sale of common stock ................ 158,500 -- -- -- 158,500
Principal payments of capital lease obligation .... -- (3,019) -- -- (3,019)
Receipt of cash in connection with lease .......... -- 1,935 -- -- 1,935
Redemption of stock options ....................... 29 -- -- -- 29
--------- --------- --------- --------- ---------
Net cash provided (used) by financing activities 114,276 (4,006) (69) -- 110,201
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents ... (648) (2,653) 340 -- (2,961)
Cash and cash equivalents, beginning of period ......... 698 4,383 3,666 -- 8,747
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period ............... $ 50 $ 1,730 $ 4,006 $ -- $ 5,786
========= ========= ========= ========= =========
Supplemental Disclosure:
Interest paid .......................................... $ 268 $ 2,353 $ 596 $ -- $ 3,217
========= ========= ========= ========= =========
Income taxes paid ...................................... $ 2,977 $ -- $ -- $ -- $ 2,977
========= ========= ========= ========= =========
</TABLE>
-13-
<PAGE>
E. Condensed Consolidating Financial Information (Continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
For the nine months ended September 30,
1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantor Elimination Consolidated
-------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net cash provided (used) by operating activities: $(17,516) $ 12,855 $ 2,128 $ 998 $ (1,535)
-------- --------- -------- -------- --------
Investing activities:
Additions to property and equipment ............ -- (8,364) (1,834) (474) (10,672)
Additions to deferred financing and other
non-current assets ............................ (2,522) 311 (6) -- (2,217)
Transfers (to) from restricted cash, net ....... -- 596 (104) (524) (32)
-------- -------- -------- -------- --------
Net cash used by investing activities ............... (2,522) (7,457) (1,944) (998) (12,921)
-------- -------- -------- -------- --------
Financing activities:
Borrowings under revolving line of credit 20,000 -- -- -- 20,000
Payment of long-term debt ...................... -- (286) 134 -- (152)
Principal payments of capital lease obligation.. (3,281) -- -- (3,281)
Dividends paid on exchangeable preferred stock . (13) -- -- -- (13)
-------- -------- -------- -------- --------
Net cash provided (used) by financing activities .... 19,987 (3,567) 134 -- 16,554
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents (51) 1,831 318 -- 2,098
Cash and cash equivalents, beginning of period ...... 51 99 746 -- 896
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period $ .......... -- $ 1,930 $ 1,064 $ -- $ 2,994
======== ======== ======== ======== ========
Supplemental Disclosure:
Interest paid ....................................... $ 623 $ 3,376 $ 371 $ -- $ 4,370
======== ======== ======== ======== ========
Income taxes paid ................................... $ 155 $ -- $ -- $ -- $ 155
======== ======== ======== ======== ========
</TABLE>
-14-
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements including those concerning
Management's expectations regarding future financial performance and future
events. These forward-looking statements involve significant risk and
uncertainties, including those described herein and included under "Special Note
Regarding Forward-Looking Statements" below. Actual results may differ
materially from those anticipated by such forward-looking statements.
OVERVIEW
Harborside Healthcare 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, New Hampshire and Rhode Island), the Northeast (Connecticut),
and the Mid-Atlantic (New Jersey and Maryland). As of September 30, 1999, the
Company operated 50 facilities (22 owned, 27 leased and one managed) with a
total of 6,124 licensed beds. The Company provides a broad continuum of medical
services including: (i) traditional skilled nursing care and (ii) specialty
medical services, including a variety of subacute care programs such as
orthopedic rehabilitation, CVA/stroke care, cardiac recovery, pulmonary
rehabilitation and wound care, as well as distinct programs for the provision of
care to Alzheimer's and hospice patients. As part of its subacute services, the
Company provides physical, occupational and speech rehabilitation therapy
services at Company-operated facilities. Beginning in 1995 and continuing
through September 15, 1999, the Company provided rehabilitation therapy services
at non-affiliated facilities. During the third quarter of 1999, the Company
recorded a $5.7 million charge in connection with the termination of all of the
Company's rehabilitation therapy contracts with non-affiliated facilities (See
Note D to the Company's condensed consolidated financial statements included
elsewhere in this report).
The following table sets forth the number of facilities and the number of
licensed beds operated by the Company:
<TABLE>
<CAPTION>
As of September 30,
1998 1999
---- ----
<S> <C> <C>
Facilities operated (1) 49 50
Licensed beds (1) 6,043 6,124
</TABLE>
The following table sets forth certain operating data for the periods indicated:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Patient days (2):
Private and other ............................................... 129,699 122,245 375,831 368,292
Medicare ........................................................ 47,810 55,494 147,008 162,338
Medicaid ........................................................ 306,767 316,164 862,540 925,022
----------- ----------- ----------- -----------
Total 484,276 493,903 1,385,379 1,455,652
=========== =========== =========== ===========
Total net revenues:
Private and other ............................................... 30.0% 28.2% 31.2% 29.5%
Medicare ........................................................ 26.4% 21.6% 26.3% 21.5%
Medicaid ........................................................ 43.6% 50.2% 42.5% 49.0%
----------- ----------- ----------- -----------
Total ............................................................. 100.0% 100.0% 100.0% 100.0%
=========== =========== =========== ===========
Average Occupancy rate (3) ........................................ 92.4% 91.4% 92.6% 90.9%
Quality Mix (4) ................................................... 56.4% 49.8% 57.5% 51.0%
</TABLE>
(1) Includes two managed facilities with 178 licensed beds on September 30,
1998 and one managed facility with 106 licensed beds on September 30, 1999.
(2) "Patient Days" includes billed bed days for facilities operated by the
Company excluding billed bed days of managed facilities and the one
facility accounted for using the equity method.
(3) "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. This calculation includes all facilities operated by the
Company excluding managed facilities.
(4) "Quality Mix" consists of the percentage of revenues derived from Medicare,
commercial insurers and other private payors.
-15-
<PAGE>
RESULTS OF OPERATIONS
The Company's total net revenues include net patient service revenues and
rehabilitation therapy service revenues from contracts with non-affiliated
long-term care facilities. Private net patient service revenues are recorded at
established per diem billing rates. Net patient service revenues to be
reimbursed under contracts with third-party payers, primarily the Medicare and
Medicaid programs, are recorded at amounts estimated to be realized under these
contractual arrangements.
The Company's facility operating expenses consist primarily of payroll and
employee benefits related to nursing, housekeeping and dietary services provided
to patients, as well as maintenance and administration of the facilities. Other
significant facility operating expenses include the cost of rehabilitation
therapy services, medical and pharmacy supplies, food, utilities, insurance and
taxes. The Company's facility operating expenses also include the general and
administrative costs associated with the operation of the Company's
rehabilitation therapy business. The Company's general and administrative
expenses include all costs associated with its regional and corporate
operations.
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1999
Total Net Revenues. Total net revenues decreased by $1,107,000 or 1.4%, from
$78,697,000 in the third quarter of 1998 to $77,590,000 in the third quarter of
1999. The reduction in total revenues from 1998 to 1999 was primarily the result
of lower occupancy and lower average revenues per patient day. This reduction
was offset by an increase of $2,074,000 from the acquisition of two Danbury,
Connecticut facilities (the "Danbury Facilities") on December 1, 1998. The
average occupancy rate at all of the Company's facilities decreased from 92.4%
during the third quarter of 1998 to 91.4% during the third quarter of 1999.
Average net patient service revenues per patient day at "same store" facilities
decreased from $158.33 in the third quarter of 1998 to $155.33 in the third
quarter of 1999. This decrease in average net patient service revenues per
patient day was a result of the implementation of the new Medicare Prospective
Payment System ("PPS") which became effective at all of the Company's facilities
on January 1, 1999. Implementation of PPS caused the Company's average Medicare
Part A per diem rate to decrease from $394 per Medicare patient day in the third
quarter of 1998 to $284 per Medicare patient day in the third quarter of 1999.
During the third quarter of 1999, the Company also experienced reduced revenues
generated through the provision of Medicare Part B services to residents at its
facilities. PPS established certain annual per patient limitations on the amount
of Part B therapy that is reimbursable through the Medicare program. Management
believes that the introduction of these annual limits resulted in reduced
revenues during 1999 as affected parties adapted to the new regulatory
environment. Additionally, during the third quarter of 1999, the Company
terminated its contracts to provide rehabilitation therapy services at
non-affiliated facilities. The Company's quality mix of private, Medicare and
insurance revenues was 56.4% for the three months ended September 30, 1998 as
compared to 49.8% during the same period of 1999. This decrease in quality mix
of revenues was the result of the decrease in Medicare revenues caused by the
implementation of PPS.
Facility Operating Expenses. Facility operating expenses increased by
$127,000, or 0.2%, from $62,887,000 in the third quarter of 1998 to $63,014,000
in the third quarter of 1999. Of this increase, $1,690,000 was due to the
operations of the Danbury Facilities.
General and Administrative; Service Charges Paid to Former Affiliate. General
and administrative expenses increased by $579,000, or 16.0% from $3,625,000 in
the third quarter of 1998 to $4,204,000 in the third quarter of 1999. This
increase resulted from the expansion of regional and corporate support, and
additional travel, consulting and systems development expenses associated with
the Company's growth. The Company reimburses a former affiliate for certain data
processing and administrative services provided to the Company. During the third
quarter of 1998, such reimbursements totaled $313,000 compared to $307,000
during the third quarter of 1999.
Depreciation and Amortization. Depreciation and amortization increased from
$1,821,000 in the third quarter of 1998 to $2,347,000 in the third quarter of
1999 primarily due to the amortization of costs related to the leveraged
recapitalization and the exercise of purchase options for seven facilities which
were financed through synthetic leases prior to the leveraged recapitalization.
The exercise of these purchase options was funded through financing arranged in
connection with the leveraged recapitalization.
Amortization of Prepaid Management Fees. Amortization of prepaid management
fees was $200,000 during the third quarter of 1998 as compared to $300,000 in
the third quarter of 1999.
Facility Rent. Facility rent expense for the third quarter increased by
$180,000 from $5,465,000 in 1998 to $5,645,000 in 1999.
Interest Expense, net. Interest expense, net, increased from $3,591,000 in the
third quarter of 1998 to $5,410,000 in the third quarter of 1999. This net
increase is primarily due to the issuance of $99,500,000 of 11% Senior
Subordinated Discount Notes during the third quarter of 1998 in connection with
the leveraged recapitalization. The interest associated with these notes
accretes until cash payments begin on August 1, 2003.
Restructuring cost: In connection with the Company's therapy services
restructuring plan, the Company incurred restructuring costs of $5,745,000
during the third quarter of 1999. The most significant components of this charge
were the write-off of approximately $1.5 million of unamortized goodwill and a
$2.5 million increase to the reserve for uncollectible receivables as a result
of the Company's termination of non-affiliated contracts (See Note D to the
Company's condensed consolidated financial statements included elsewhere in this
report).
Income Tax Benefit. As a result of losses incurred, an income tax benefit of
$7,460,000 was recognized during the third quarter of 1998 compared to an income
tax benefit of $3,604,000 for the same period of 1999.
Net Loss. Net loss was $28,900,000 in the third quarter of 1998 as compared to
a loss of $5,637,000 in the third quarter of 1999.
-16-
<PAGE>
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1999
Total Net Revenues. Total net revenues decreased by $3,027,000 or 1.3%, from
$227,337,000 in the first nine months of 1998 to $224,310,000 in the first nine
months of 1999. The reduction in total revenues from 1998 to 1999 was primarily
the result of lower occupancy and lower average revenues per patient day. This
reduction was partially offset by the following revenue increases at facilities
acquired in 1998: $2,226,000 from the acquisition of two North Toledo, Ohio
facilities (the "North Toledo Facilities") on April 1, 1998; $4,777,000 from the
acquisition of two Rhode Island facilities (the "Rhode Island Facilities") on
May 8, 1998, and $6,136,000 from the acquisition of two Danbury, Connecticut
facilities (the "Danbury Facilities") on December 1, 1998. The average occupancy
rate at all of the Company's facilities decreased from 92.6% during the first
nine months of 1998 to 90.9% during the first nine months of 1999. Average net
patient service revenues per patient day at "same store" facilities decreased
from $156.32 in the first nine months of 1998 to $151.66 in the first nine
months of 1999. This decrease in average net patient service revenues per
patient day was a result of the implementation of the new Medicare Prospective
Payment System ("PPS") which became effective at all of the Company's facilities
on January 1, 1999. Implementation of PPS caused the Company's average Medicare
Part A per diem rate to decrease from $373 per Medicare patient day in the first
nine months of 1998 to $284 per Medicare patient day in the first nine months of
1999. During the first nine months of 1999, the Company also experienced reduced
revenues generated through the provision of Medicare Part B services to
residents at its facilities. This reduction was due partially to lower
productivity by Company therapists during the first quarter as they adjusted to
the newly implemented Medicare reimbursement system. Additionally, PPS
established certain annual per patient limitations on the amount of Part B
therapy that is reimbursable through the Medicare program. Management believes
that the introduction of these annual limits resulted in reduced revenues during
the first nine months of 1999 as affected parties adapted to the new regulatory
environment. Implementation of PPS also caused a decrease in revenues generated
by providing rehabilitation therapy services to non-affiliated long-term care
facilities. In response to reduced reimbursement from the Medicare program,
non-affiliated facilities reduced the amount of therapy services provided at
their facilities. Additionally, during the third quarter of 1999, the Company
terminated its contracts to provide rehabilitation therapy services at
non-affiliated facilities. The Company's quality mix of private, Medicare and
insurance revenues was 57.5% for the nine months ended September 30, 1998 as
compared to 51.0% during the same period of 1999. This decrease in quality mix
of revenues was the result of the decrease in Medicare revenues caused by the
implementation of PPS.
Facility Operating Expenses. Facility operating expenses increased by
$7,149,000, or 4.0%, from $179,917,000 for the first nine months of 1998 to
$187,066,000 for the first nine months of 1999 as the result of acquired
facilities. Of this increase, $2,040,000 was due to the operations of the North
Toledo Facilities, $4,387,000 was due to the operations of the Rhode Island
Facilities, and $4,942,000 was due to the operations of the Danbury Facilities.
General and Administrative; Service Charges Paid to Former Affiliate. General
and administrative expenses increased by $2,485,000, or 22.4%, from $11,100,000
for the first nine months of 1998 to $13,585,000 for the first nine months of
1999. This increase resulted from the expansion of regional and corporate
support, and additional travel, consulting and systems development expenses
associated with the Company's growth. The Company reimburses a former affiliate
for certain data processing and administrative services provided to the Company.
During the first nine months of 1998, such reimbursements totaled $941,000
compared to $880,000 in 1999.
Depreciation and Amortization. Depreciation and amortization increased from
$4,084,000 for the first nine months of 1998 to $7,451,000 for the first nine
months of 1999 primarily due to the amortization of costs related to the
leveraged recapitalization and the exercise of purchase options for seven
facilities which were financed through synthetic leases prior to the leveraged
recapitalization. The exercise of these purchase options was funded through
financing arranged in connection with the leveraged recapitalization.
Amortization of Prepaid Management Fees. Amortization of prepaid management
fees was $200,000 during the first nine months of 1998 as compared to $900,000
during the first nine months of 1999.
Facility Rent. Facility rent expense for the first nine months decreased by
$237,000 from $17,086,000 in 1998 to $16,849,000 in 1999. The decrease in rent
expense is the result of a reduction in rent expense related to the exercise of
purchase options on previously leased facilities partially offset by the
acquisition of the Danbury Facilities by means of a synthetic lease.
Interest Expense, net. Interest expense, net, increased from $6,793,000 for
the first nine months of 1998 to $15,266,000 for the first nine months of 1999.
This net increase is primarily due to the issuance of $99,500,000 of 11% Senior
Subordinated Discount Notes during the third quarter of 1998 in connection with
the leveraged recapitalization. The interest associated with these notes
accretes until cash payments begin on August 1, 2003.
Restructuring costs: In connection with the Company's therapy services
restructuring plan, the Company incurred restructuring costs of $5,745,000
during the third quarter of 1999. The most significant components of this charge
were the write-off of approximately $1.5 million of unamortized goodwill and a
$2.5 million increase to the reserve for uncollectible receivables as a result
of the Company's termination of non-affiliated contracts (See Note D to the
Company's condensed consolidated financial statements included elsewhere in this
report).
Income Tax Benefit. As a result of losses incurred, an income tax benefit of
$4,984,000 was recognized during the first nine months of 1998 as compared to an
income tax benefit of $9,212,000 for the same period of 1999.
Net Loss. The net loss was $25,027,000 for the first nine months of 1998 as
compared to a loss of $14,409,000 for the first nine months of 1999.
-17-
<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 four facilities located in Ohio 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 synthetic lease borrowings. 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. In connection with the leveraged
recapitalization completed 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
converts 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.
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 were 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. Such transitional difficulties resulted in lower than expected
revenues, primarily due to fewer than expected Medicare patient days, lower
Medicare Part A 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 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. All
of the staffing reductions were implemented, on or prior to, April 1, 1999.
Effective March 30, 1999, the Company obtained 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 modified 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 September 30,
1999, total borrowings under the New Credit Facility (exclusive of undrawn
letters of credit outstanding as of March 30, 1999) were approximately
$49,024,000 and consisted of $32,750,000 of revolver loans, $13,700,000 of
synthetic leasing loans and $2,574,000 of undrawn letters of credit issued after
March 30, 1999. As of September 30, 1999 the Company was in compliance with the
financial covenants of the New Credit Facility.
The Company's operating activities during the first nine months of 1999 used
net cash of $1.5 million as compared to net cash of $28.9 million used during
the same period in 1998. The decrease in net cash used by operations during the
first nine months of 1999 was primarily due to a lower net loss an increase in
non-cash interest expense and a decrease in accounts receivable.
Net cash used by investing activities was $12.9 million during the first nine
months of 1999 as compared to $84.2 million used during the same period in 1998.
Net cash invested in each period was used primarily to fund additions to
property and equipment at the facilities. Additionally, during the first quarter
of 1999, approximately $1,000,000 was expended in connection with obtaining the
amendment of the Company's New Credit Facility.
Net cash provided by financing activities during the first nine months of 1999
was $16.6 million as compared to $110.2 million during the first nine months of
1998. During the first nine months of 1999 the Company borrowed $20.0 million
under the New Credit Facility.
In addition to the Discount Notes, as of September 30, 1999, the Company had
two mortgage loans outstanding in the aggregate amount of $17.7 million, in
addition to advances outstanding under its revolving credit facility and $54.8
million of capital lease obligations. One of the Company's mortgage loans had an
outstanding balance of $16.2 million, of which $15.1 million is due at maturity
in 2004. This loans bears interest at an annual rate of 10.65% plus additional
interest equal to 0.3% of the difference between the annual operating revenues
of four mortgaged facilities and the actual revenues of these facilities during
a twelve month base period. The Company's other mortgage loan, which encumbers a
single facility, had an outstanding principal balance of $1.5 million, of which
$1.3 million is due in 2010.
-18-
<PAGE>
The Company had expected that its capital expenditures for 1999, excluding
acquisitions of new long-term care facilities, would aggregate approximately
$12,000,000. The Company expects that capital additions for the fourth quarter
of 1999 will not exceed $3,000,000. The Company's expected capital expenditures
relate to maintenance capital expenditures, systems enhancements, special
construction projects and other capital improvements. The Company expects that
its future facility acquisitions will be financed with borrowings under the
Company's revolving credit facility, direct operating leases or assumed debt.
The Company may be required to obtain additional equity financing to finance any
significant acquisitions in the future.
The Company'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. The Company's 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.
The Company, through a wholly-owned limited partnership, leases and operates
four facilities acquired in 1996 which are accounted for as capital leases for
financial reporting purposes. Each lease is guaranteed by the Company. The
guaranty provides that failure by the Company to have a specified minimum
consolidated net worth at the end of any two consecutive quarters is an event of
default under the guaranty, which in turn would be an event of default under
each lease. As a result of the restructuring charge taken by the Company during
the third quarter of 1999, the Company's consolidated net worth as of September
30, 1999 (as calculated for purposes of this requirement) has fallen below the
required level. The Company anticipates that its net worth will continue to be
below the required level at December 31, 1999, as a result of which the Company
would be in default under each of these leases and could potentially face the
loss of these operations. Such a default may also trigger cross-defaults under
the Company's other lease and debt obligations. The Company is exploring various
alternatives to address this potential default, including discussions with the
landlord of these properties concerning relief from the net worth requirement
and a possible buyout or refinancing of the facilities. The Company believes
that an acceptable arrangement can be worked out prior to December 31, 1999
which would avoid any material disruption of its business.
SEASONALITY
The Company's earnings generally fluctuate from quarter to quarter. This
seasonality is related to a combination of factors which include the timing and
amount of Medicaid rate increases, seasonal census cycles, and the number of
days in a given fiscal quarter.
INFLATION
The healthcare industry is labor intensive. Wages and other labor related costs
are especially sensitive to inflation. Certain of the Company's other expense
items, such as supplies and real estate costs are also sensitive to inflationary
pressures. Shortages in the labor market or general inflationary pressure could
have a significant effect on the Company. In addition, suppliers pass along
rising costs to the Company in the form of higher prices. When faced with
increases in operating costs, the Company has sought to increase its charges for
services and its requests for reimbursement from government programs. The
Company's private pay customers and third party reimbursement sources may be
less able to absorb increased prices for the Company's services. The Company's
operations could be adversely affected if it is unable to recover future cost
increases or experiences significant delays in increasing rates of reimbursement
of its labor or other costs from Medicare and Medicaid revenue sources.
The Year 2000 Issue
The Company continues to evaluate and address 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 September 30, 1999 the Company has tested and evaluated substantially all of
its information technology ("IT") systems and 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, publicly stated that
it would be Year 2000 compliant by December 31, 1998. HCFA has imposed the same
December 31, 1998 deadline on its fiscal intermediaries and stated that it
expected 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. Additionally, the 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 its
credit facility.
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 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.
-19-
<PAGE>
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.
-20-
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q, including information set forth under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations", constitute "Forward-Looking Statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The
Company desires to take advantage of certain "safe harbor" provisions of the
Reform Act and is including this special note to enable the Company to do so.
Forward-looking statements included in this Form 10-Q, or hereafter included in
other publicly available documents filed with the Securities and Exchange
Commission, reports to the Company's stockholders and other publicly available
statements issued or released by the Company involve known and unknown risks,
uncertainties, and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ materially from
the future results, performance (financial or operating) or achievements
expressed or implied by such forward-looking statements. The Company believes
the following important factors could cause such a material difference to occur:
1. The Company's ability to grow through the acquisition and development
of long-term care facilities or the acquisition of ancillary
businesses.
2. The Company's ability to identify suitable acquisition candidates, to
consummate or complete construction projects, or to profitably operate
or successfully integrate enterprises into the Company's other
operations.
3. The occurrence of changes in the mix of payment sources utilized by the
Company's patients to pay for the Company's services.
4. The adoption of cost containment measures by private pay sources such
as commercial insurers and managed care organizations, as well as
efforts by governmental reimbursement sources to impose cost
containment measures.
5. Changes in the United States healthcare system, including changes in
reimbursement levels 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.
-21-
<PAGE>
>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
-22-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Harborside Healthcare Corporation
By: /s/ Stephen L. Guillard
-----------------------
Stephen L. Guillard
Chairman, President, and
Chief Executive Officer
By: /s/ William H. Stephan
----------------------
William H. Stephan
Senior Vice President and
Chief Financial Officer
DATE: November 12, 1999
-23-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the balance
sheet and statement of operations and is qualified in its entirety to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,994
<SECURITIES> 0
<RECEIVABLES> 51,909
<ALLOWANCES> (4,135)
<INVENTORY> 64,385<F1>
<CURRENT-ASSETS> 83,660
<PP&E> 192,104
<DEPRECIATION> (26,184)
<TOTAL-ASSETS> 281,073
<CURRENT-LIABILITIES> 37,230
<BONDS> 215,889<F2>
46,707
0
<COMMON> 146
<OTHER-SE> (18,899)<F3>
<TOTAL-LIABILITY-AND-EQUITY> 281,073
<SALES> 0
<TOTAL-REVENUES> 224,310
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 232,476
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,266
<INCOME-PRETAX> (23,621)
<INCOME-TAX> (9,212)
<INCOME-CONTINUING> (14,409)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,409)
<EPS-BASIC> (2.59)
<EPS-DILUTED> (2.59)
<FN>
<F1>Includes the following assets: prepaid expenses and other of $15,980,
deferred income taxes--current of $4,084, prepaid income taxes of $12,828,
deferred income taxes--long-term of $2,229, restricted cash of $2,142, deferred
financing and other non-current assets, net of $16,235, note receivable $7,487
and other assets, net of $3,400.
<F2>Includes the following long-term liabilities: deferred income of $2,597,
capital lease obligation of $50,257, and long-term debt of $163,035.
<F3>Includes the following equity accounts: additional paid-in capital of
$200,180, treasury stock of ($183,746,) and accumulated deficit of ($35,333).
</FN>
</TABLE>
