G. Condensed Consolidating Financial Information (continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
As of December 31, 1999
(Unaudited)
(dollars in thousands)
Parent Guarantors Non-Guarantors Elimination Consolidated
--------- --------- ------------ --------- ---------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ -- $ 355 $ 1,031 $ -- $ 1,386
Accounts receivable, net of allowance .............. -- 34,423 15,745 -- 50,168
Intercompany receivable ............................ 137,614 -- -- (137,614) --
Prepaid expenses and other ......................... 3,590 14,096 2,254 -- 19,940
Prepaid income taxes ............................... 2,608 -- -- -- 2,608
Deferred income taxes .............................. 2,150 250 -- -- 2,400
-------- --------- ---------- ---------- ----------
Total current assets .................................. 145,962 49,124 19,030 (137,614) 76,502
Restricted cash ....................................... -- 1,826 594 -- 2,420
Investment in limited partnership ..................... 15,584 -- 4,044 (19,628) --
Property and equipment, net ........................... -- 146,976 19,350 -- 166,326
Deferred financing and other
non-current assets, net ............................. 10,749 3,416 1,381 -- 15,546
Other assets, net ..................................... 3,100 -- -- -- 3,100
Note receivable ....................................... -- 7,487 -- -- 7,487
Deferred income taxes ................................. 71 11,781 -- -- 11,852
-------- -------- ---------- --------- ---------
Total assets .......................................... $175,466 $220,610 $ 44,399 $(157,242) $ 283,233
======== ======== ========== ========= =========
LIABILITIES
Current liabilities:
Current maturities of long-term debt ............. $ -- $ 22 $ 205 $ -- $ 227
Current portion of capital lease
obligation ....................................... -- 4,633 -- -- 4,633
Note payable to affiliate .......................... 5,000 -- -- -- 5,000
Accounts payable ................................... -- 6,879 2,449 -- 9,328
Intercompany payable ............................... -- 109,511 11,766 (121,277) --
Employee compensation and benefits ................. -- 10,687 3,334 -- 14,021
Other accrued liabilities .......................... -- 4,663 845 -- 5,508
Accrued interest ................................... 4,342 12,584 -- (16,354) 572
Current portion of deferred income ................. -- -- -- 677 677
-------- -------- ---------- --------- ---------
Total current liabilities ............................. 9,342 148,979 18,599 (136,954) 39,966
Long-term portion of deferred income .................. -- 893 2,211 (677) 2,427
Long-term debt ........................................ 132,243 1,517 15,904 16,354 166,018
Long-term portion of capital lease obligation ........ -- 50,067 -- -- 50,067
-------- -------- ---------- --------- ---------
Total liabilities ..................................... 141,585 201,456 36,714 (121,277) 258,478
-------- -------- ---------- --------- ---------
Exchangeable preferred stock, redeemable,
$.01 par value with a liquidation
value of $1,000 per share;
500,000 shares authorized;
48,277 shares issued and outstanding .............. 48,277 -- -- -- 48,277
-------- --------- ---------- --------- ---------
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 ............................ 198,377 -- -- 226 198,603
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 ................................... (29,173) (8,170) (3,274) 2,092 (38,525)
-------- --------- --------- --------- ---------
Total stockholders' equity (deficit) .................. (14,396) 19,154 7,685 (35,965) (23,522)
-------- --------- --------- --------- ---------
Total liabilities and stockholders' equity (deficit) . $175,466 $ 220,610 $ 44,399 $(157,242) $ 283,233
======== ========= ========= ========= =========
9
G. Condensed Consolidating Financial Information (continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
As of September 30, 2000
(Unaudited)
(dollars in thousands)
Parent Guarantors Non-Guarantors Elimination Consolidated
--------- --------- --------- --------- ---------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ -- $ 6,616 $ 1,408 $ -- $ 8,024
Accounts receivable, net of allowance .............. -- 33,635 14,630 -- 48,265
Intercompany receivable ............................ 123,359 -- -- (123,359) --
Prepaid expenses and other ......................... 3,438 7,765 1,510 -- 12,713
Deferred income taxes .............................. 5,303 -- -- -- 5,303
--------- -------- --------- --------- ---------
Total current assets .................................. 132,100 48,016 17,548 (123,359) 74,305
Restricted cash ....................................... -- 3,926 652 -- 4,578
Investment in limited partnership ..................... 15,584 -- 4,044 (19,628) --
Property and equipment, net ........................... -- 86,040 19,581 -- 105,621
Deferred financing and other
non-current assets, net ............................. 9,394 1,187 1,201 -- 11,782
Other assets, net ..................................... 2,200 -- -- -- 2,200
Note receivable ....................................... -- 7,487 -- -- 7,487
Deferred income taxes ................................. 11,852 3,832 -- -- 15,684
--------- --------- --------- --------- ---------
Total assets .......................................... $ 171,130 $ 150,488 $ 43,026 $(142,987) $ 221,657
========= ========= ========= ========= =========
LIABILITIES
Current liabilities:
Current maturities of long-term debt ............... $ -- $ 19 $ 225 $ -- $ 244
Accounts payable ................................... -- 7,974 2,342 -- 10,316
Intercompany payable ............................... -- 96,077 10,880 (106,957) --
Employee compensation and benefits ................. -- 10,592 2,816 -- 13,408
Other accrued liabilities .......................... -- 4,558 1,421 -- 5,979
Accrued interest ................................... 8,229 14,621 -- (22,276) 574
Current portion of deferred income ................. -- -- -- 554 554
--------- --------- --------- --------- ---------
Total current liabilities ............................. 8,229 133,841 17,684 (128,679) 31,075
Long-term portion of deferred income .................. -- 651 1,935 (544) 2,042
Long-term debt ........................................ 132,243 5,267 15,735 22,276 175,521
--------- --------- --------- --------- ---------
Total liabilities ..................................... 140,472 139,759 35,354 (106,947) 208,638
--------- --------- --------- --------- ---------
Exchangeable preferred stock, redeemable,
$.01 par value with a liquidation
value of $1,000 per share;
500,000 shares authorized;
53,320 shares issued and outstanding .............. 53,320 -- -- -- 53,320
--------- --------- --------- --------- ---------
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 ............................ 193,320 1 -- 226 193,547
cost, 7,349,832 shares ................................ (183,746) -- -- -- (183,746)
Partners' equity ...................................... -- 24,755 7,074 (31,829) --
Accumulated deficit ................................... (32,382) (16,596) (3,287) 2,017 (50,248)
--------- --------- --------- --------- ---------
Total stockholders' equity (deficit) .................. (22,662) 10,729 7,672 (36,040) (40,301)
---------- --------- --------- --------- ---------
Total liabilities and stockholders' equity (deficit) .. $ 171,130 $ 150,488 $ 43,026 $(142,987) $ 221,657
========== ========= ========= ========= =========
10
G. Condensed Consolidating Financial Information (continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Operations
For the three months ended September 30, 1999
(Unaudited)
(dollars in thousands)
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 former 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)
======== ======== ======== ======== ========
For the three months ended September 30, 2000
Parent Guarantors Non-Guarantors Elimination Consolidated
-------- -------- -------- -------- --------
Total net revenues .......................... $ -- $ 56,042 $ 25,325 $ (440) $ 80,927
-------- -------- -------- -------- --------
Expenses:
Facility operating ........................ -- 43,883 21,590 (440) 65,033
General and administrative ................ 13 4,273 -- -- 4,286
Service charges paid to former affiliate .. -- 295 -- -- 295
Amortization of prepaid management fee .... 300 -- -- -- 300
Depreciation and amortization ............. 452 1,673 488 -- 2,613
Facility rent ............................. -- 3,570 2,135 -- 5,705
Loss on termination of capital lease ...... -- 8,914 -- -- 8,914
Management fees paid to affiliates ........ -- (1,499) 1,499 -- --
-------- -------- -------- -------- --------
Total expenses .............................. 765 61,109 25,712 (440) 87,146
-------- -------- -------- -------- --------
Income (loss) from operations ............... (765) (5,067) 387 -- (6,219)
Other:
Interest expense, net ..................... 1,025 4,397 414 -- 5,836
Other income .............................. -- -- -- (111) (111)
-------- -------- -------- -------- --------
Income (loss) before income taxes ........... (1,790) (9,464) (801) 111 (11,944)
Income taxes (benefit) ...................... (699) (3,708) (312) 61 (4,658)
-------- -------- -------- -------- --------
Net income (loss) ........................... $ (1,091) $ (5,756) $ (489) $ 50 $ (7,286)
======== ======== ======== ======== ========
11
G. Condensed Consolidating Financial Information (continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Operations
For the nine months ended September 30, 1999
(Unaudited)
(dollars in thousands)
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 former 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)
========= ========= ========= ========= =========
For the nine months ended September 30, 2000
Parent Guarantors Non-Guarantors Elimination Consolidated
--------- --------- --------- --------- ---------
Total net revenues .......................... $ -- $ 164,213 $ 76,080 $ (976) $ 239,317
--------- --------- --------- --------- ---------
Expenses:
Facility operating ........................ -- 130,255 62,452 (976) 191,731
General and administrative ................ 20 13,647 -- -- 13,667
Service charges paid to former affiliate .. -- 845 -- -- 845
Amortization of prepaid management fee .... 900 -- -- -- 900
Depreciation and amortization ............. 1,356 5,199 1,441 -- 7,996
Facility rent ............................. -- 10,572 6,457 -- 17,029
Loss on the termination of capital lease .. -- 8,914 -- -- 8,914
Management fees paid to affiliates ........ -- (4,494) 4,494 -- --
--------- --------- --------- --------- ---------
Total expenses .............................. 2,276 164,938 74,844 (976) 241,082
--------- --------- --------- --------- ---------
Income (loss) from operations ............... (2,276) (725) 1,236 -- (1,765)
Other:
Interest expense, net ..................... 2,985 13,087 1,258 -- 17,330
Other expense ............................. -- -- -- 123 123
--------- --------- --------- --------- ---------
Loss before income taxes .................... (5,261) (13,812) (22) (123) (19,218)
Income tax benefit .......................... (2,052) (5,386) (9) (48) (7,495)
--------- --------- --------- --------- ---------
Net loss .................................... $ (3,209) $ (8,426) $ (13) $ (75) $ (11,723)
========= ========= ========= ========= =========
12
G. 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)
Parent Guarantors Non-Guarantors Elimination Consolidated
-------- -------- --------- -------- --------
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
Payments 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 (used) provided 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
======== ======== ========= ======== ========
Accretion of preferred stock dividends............ $ 4,414 $ -- $ -- $ -- $ 4,414
======== ======== ========= ======== ========
13
G. Condensed Consolidating Financial Information (continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
For the nine months ended September 30, 2000
(Unaudited)
(dollars in thousands)
Parent Guarantors Non-Guarantors Elimination Consolidated
-------- -------- -------------- -------- --------
Operating activities:
Net cash provided by operating activities: ........ $ 5,014 $ 15,099 $ 2,087 $ -- $ 22,200
-------- -------- --------- -------- --------
Investing activities:
Additions to property and equipment ................ -- (3,620) (1,503) -- (5,123)
Additions to deferred financing and other
non-current assets ................................. (1) -- -- -- (1)
Transfers to restricted cash, net .................. -- (2,100) (58) -- (2,158)
-------- -------- --------- -------- -------
Net cash used by investing activities .............. (1) (5,720) (1,561) -- (7,282)
-------- -------- --------- -------- -------
Financing activities:
Repayment of note payable to affiliate ............. (5,000) -- -- -- (5,000)
Payments of long-term debt ......................... -- (34) (149) -- (183)
Principal payments of capital lease obligation ..... -- 3,084) -- -- (3,084)
Dividends paid on exchangeable preferred stock ..... (13) -- -- -- (13)
-------- -------- --------- -------- --------
Net cash used by financing activities .............. (5,013) (3,118) (149) -- (8,280)
-------- -------- -------- -------- --------
Net increase in cash and cash equivalents .......... -- 6,261 377 -- 6,638
Cash and cash equivalents, beginning of period ..... -- 355 1,031 -- 1,386
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period ......... $ -- $ 6,616 $ 1,408 $ -- $ 8,024
======== ======== ======== ======== ========
Supplemental Disclosure:
Interest paid .................................... $ 872 $ 3,821 $ 367 $ -- $ 5,060
======== ======== ======== ======== ========
Income taxes paid ................................ $ 130 $ -- $ -- $ -- $ 130
======== ======== ======== ======== ========
Accretion of preferred stock dividends............ $ 5,043 $ -- $ -- $ -- $ 5,043
======== ======== ======== ======== ========
14
Item 2.
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 four principal regions:
the Southeast (Florida), the Midwest (Ohio and Indiana), New England
(Connecticut, Massachusetts, New Hampshire and Rhode Island) and the
Mid-Atlantic (New Jersey and Maryland). As of September 30, 2000, the Company
operated 50 facilities (18 owned, 31 leased and one managed) with a total of
6,124 licensed beds. As described in Note A to the unaudited condensed
consolidated financial statements included elsewhere in this report, the Company
accounts for its investment in one of its owned facilities using the equity
method of accounting. 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
1999, the Company also provided rehabilitation therapy services under contracts
with non-affiliated long-term care facilities through a wholly-owned subsidiary.
During the third quarter of 1999, the Company terminated all of its contracts
with non-affiliated facilities and ceased providing therapy services to
non-affiliated facilities. During the third quarter of 1999, the Company
recorded a $5.7 million charge in connection with the termination of these
rehabilitation therapy contracts with non-affiliated facilities. (See Note D to
the Company's unaudited 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:
As of September 30,
--------------------------------
1999 2000
---- ----
Facilities operated (1) 50 50
Licensed beds (1) 6,124 6,124
The following table sets forth certain operating data for the periods indicated:
For the three months For the nine months ended
ended September 30, September 30,
-------------------------- ----------------------------
1999 2000 1999 2000
---- ---- ---- ----
Patient days (2):
Private and other 122,245 115,761 368,292 343,010
Medicare 55,494 56,421 162,338 179,541
Medicaid 316,164 313,695 925,022 932,343
------- ------- --------- ---------
Total 493,903 485,877 1,455,652 1,454,894
======= ======= ========= =========
Total net revenues:
Private and other 28.2% 26.0% 29.5% 26.2%
Medicare 21.6% 23.8% 21.5% 24.7%
Medicaid 50.2% 50.2% 49.0% 49.1%
------ ------ ------- -------
Total 100.0% 100.0% 100.0% 100.0%
====== ====== ======= ======
Average Occupancy Rate (3) 91.4% 89.7% 90.9% 90.2%
Quality Mix (4) 49.8% 49.8% 51.0% 50.9%
(1) Includes one managedfacility with 106 licensed beds on September 30, 1999
and September 30, 2000.
(2) "Patient Days" includes billed bed days for the facilities operated by the
Company excluding billed bed days of the managed facility and the facility
accounted for using the equity method of accounting.
(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 the managed facility.
(4) "Quality Mix" consists of the percentage of the Company's total net revenues
which are derived from Medicare, commercial insurers and other private payors.
15
RESULTS OF OPERATIONS
The Company's total net revenues include net patient service revenues, and
beginning in 1995, rehabilitation therapy service revenues from contracts with
non-affiliated long-term care facilities until the third quarter of 1999 when
these contracts were terminated. (See Note D to the Company's condensed
consolidated financial statements included elsewhere in this report.) 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. 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'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 general and administrative expenses include all costs
associated with its regional and corporate operations.
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 2000
Total Net Revenues. Total net revenues increased by $3,337,000 or 4.3%, from
$77,590,000 in the third quarter of 1999 to $80,927,000 in the third quarter of
2000. The increase in total revenues from 1999 to 2000 was primarily the result
of higher average revenues per patient day. The average occupancy rate at all of
the Company's facilities decreased from 91.4% during the third quarter of 1999
to 89.7% during the third quarter of 2000. Average net patient service revenues
per patient day at the Company's facilities increased from $154 in the third
quarter of 1999 to $164 in the third quarter of 2000. The Company's average
Medicare Part A per diem rate increased from $296 per Medicare patient day in
the third quarter of 1999 to $323 per Medicare patient day in the third quarter
of 2000, while the Company's average per diem Medicaid rate increased from $123
in the third quarter of 1999 to $129 in the third quarter of 2000. In accordance
with provisions of the Balanced Budget Refinement Act of 1999, the Company
elected to have fourteen of its facilities waive their remaining transition
period available under Medicare's current prospective payment reimbursement
system. Effective January 1, 2000, these fourteen facilities began to be
reimbursed at the Federal per diem payment rate for paid Medicare days.
Additionally, the Balanced Budget Refinement Act of 1999 temporarily increased
the Federal per diem rates by 20 percent for fifteen acuity categories beginning
on April 1, 2000. These increased rates will stay in effect until the date on
which the Health Care Financing Administration implements a revised PPS system
that more accurately reimburses the costs of caring for medically complex
patients. The Company believes that it is unlikely that a new PPS system will be
implemented prior to October 1, 2001. Primarily as the result of electing to
move fourteen facilities to the Federal per diem rate and the temporary Medicare
rate increases implemented on April 1, 2000, the Company's average Medicare Part
A payment rate increased from $296 per Medicare patient day during the third
quarter of 1999 to $323 per Medicare patient day during the third quarter of
2000. The Company's quality mix of private, Medicare and insurance revenues was
49.8% for the three months ended September 30, 1999 and September 30, 2000.
Facility Operating Expenses. Facility operating expenses increased by
$2,019,000, or 3.2%, from $63,014,000 in the third quarter of 1999 to
$65,033,000 in the third quarter of 2000. The overall increase in operating
expenses in 2000 was primarily the result of higher expenditures for employee
benefit costs and temporary nursing personnel. The increase in employee benefits
costs is driven primarily by higher costs associated with maintaining the
Company's health insurance plan. Management's discussions with benefit
consultants have convinced management that inflationary pressures will increase
the cost of the Company's health plan at an annual rate of 10 to 15 percent for
at least the next year. Consistent with other long-term care providers, the
Company continues to find it difficult to recruit and retain employees, most
notably nursing personnel. As a result of these difficulties, the Company has
been forced to rely more heavily on temporary nursing personnel. The expense
associated with temporary nursing personnel increased by 29.7% from the third
quarter of 1999 to the third quarter of 2000.
General and Administrative; Service Charges Paid to Former Affiliate. General
and administrative expenses increased by $82,000, or 2.0% from $4,204,000 in the
third quarter of 1999 to $4,286,000 in the third quarter of 2000. The Company
reimburses a former affiliate for data processing services provided to the
Company. During the third quarter of 1999, such reimbursements totaled $307,000
compared to $295,000 during the third quarter of 2000.
Depreciation and Amortization. Depreciation and amortization increased from
$2,347,000 in the third quarter of 1999 to $2,613,000 in the third quarter of
2000 primarily due to the depreciation of capital expenditures acquired in 2000.
Amortization of Prepaid Management Fees. Amortization of prepaid management
fees was $300,000 during the third quarter of 1999 and the third quarter of
2000.
Facility Rent. Facility rent expense for the third quarter increased by
$60,000 from $5,645,000 in 1999 to $5,705,000 in 2000.
Interest Expense, net. Interest expense, net, increased from $5,410,000 in the
third quarter of 1999 to $5,836,000 in the third quarter of 2000. This increase
is the result of higher outstanding balances in 2000 with respect to the
Company's 11% Senior Subordinated Discount Notes (the "Discount Notes"). The
Company issued $99.5 million of Discount Notes in August 1998. The interest
associated with the Discount Notes accretes until August 1, 2003 and then
becomes payable in cash, semi-annually in arrears, beginning on February 1,
2004. As of September 30, 2000, the Discount Notes had accreted to a balance of
$125,550,000. Additionally, as of September 30, 1999 and 2000, the Company had
$32,750,000 outstanding on its revolving credit facility. The Company has not
made additional borrowings on its revolving credit facility since July 7, 1999.
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.)
16
Loss on Termination of Capital Lease: In connection with the termination of a
capital lease during the third quarter of 2000, the Company recorded a
non-recurring charge of $8.9 million. The principal components of this charge
included the write-off of capital leased assets in excess of the related capital
lease obligation ($5.7 million) and the write-off of deferred financing costs
($1.8 million) related to the Company's bank credit facility. (See Note E to the
Company's condensed consolidated financial statements included elsewhere in this
report.)
Income Tax Benefit. As a result of losses incurred in the third quarters of
1999 and 2000, income tax benefits of $3,604,000 and $4,658,000, respectively,
were recognized for those periods.
Net Loss. The net loss was $5,637,000 in the third quarter of 1999 as compared
to $7,286,000 in the third quarter of 2000.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 2000
Total Net Revenues. Total net revenues increased by $15,007,000 or 6.7%, from
$224,310,000 in the first nine months of 1999 to $239,317,000 in the first nine
months of 2000. The increase in total revenues from 1999 to 2000 was primarily
the result of higher average revenues per patient day. The average occupancy
rate at all of the Company's facilities decreased from 90.9% during the first
nine months of 1999 to 90.2% during the first nine months of 2000. Average net
patient service revenues per patient day at the Company's facilities increased
from $151 in the first nine months of 1999 to $162 in the first nine months of
2000. The Company's average Medicare Part A per diem rate increased from $289
per Medicare patient day in the first nine months of 1999 to $313 per Medicare
patient day in the first nine months of 2000, while the Company's average per
diem Medicaid rate increased from $119 in the first nine months of 1999 to $126
in the first nine months of 2000. In accordance with provisions of the Balanced
Budget Refinement Act of 1999, the Company elected to have fourteen of its
facilities waive their remaining transition period available under Medicare's
current prospective payment reimbursement system. Effective January 1, 2000,
these fourteen facilities began to be reimbursed at the Federal per diem payment
rate for paid Medicare days. Additionally, the Balanced Budget Refinement Act of
1999 temporarily increased the Federal per diem rates by 20 percent for fifteen
acuity categories beginning on April 1, 2000. These increased rates will stay in
effect until the date on which the Health Care Financing Administration
implements a revised PPS system that more accurately reimburses the costs of
caring for medically complex patients. The Company believes that it is unlikely
that a new PPS system will be implemented prior to October 1, 2001. Primarily as
the result of electing to move fourteen facilities to the Federal per diem rate
and the temporary Medicare rate increases implemented on April 1, 2000, the
Company's average Medicare Part A payment rate increased from $289 per Medicare
patient day during the first nine months of 1999 to $313 per Medicare patient
day during the first nine months of 2000. The Company's quality mix of private,
Medicare and insurance revenues was 51.0% for the nine months ended September
30, 1999 as compared to 50.9% during the same period of 2000.
Facility Operating Expenses. Facility operating expenses increased by
$4,665,000, or 2.5%, from $187,066,000 in the first nine months of 1999 to
$191,731,000 in the first nine months of 2000. The overall increase in operating
expenses was primarily the result of higher expenditures for employee benefit
costs and temporary nursing personnel. The increase in employee benefits costs
is driven primarily by higher costs associated with maintaining the Company's
health insurance plan. Management's discussions with benefit consultants have
convinced management that inflationary pressures will increase the cost of the
Company's health plan at an annual rate of 10 to 15 percent for at least the
next year. Consistent with other long-term care providers, the Company continues
to find it difficult to recruit and retain employees, most notably nursing
personnel. As a result of these difficulties, the Company has been forced to
rely more heavily on temporary nursing personnel. The expense associated with
temporary nursing personnel increased by 19.5% from the first nine months of
1999 to the first nine months of 2000.
General and Administrative; Service Charges Paid to Former Affiliate. General
and administrative expenses increased by $82,000, or 0.6%, from $13,585,000 in
the first nine months of 1999 to $13,667,000 in the first nine months of 2000.
During the first quarter of 1999, the Company recorded a $700,000 charge for
costs associated with the termination of an acquisition which the Company had
begun reviewing in the latter half of 1998. Excluding the non-recurring charge
in 1999, the net increase in general and administrative expenses in the first
nine months of 2000 is the result of higher benefit costs. The Company
reimburses a former affiliate for data processing services provided to the
Company. During the first nine months of 1999, such reimbursements totaled
$880,000 compared to $845,000 during the first nine months of 2000.
Depreciation and Amortization. Depreciation and amortization increased from
$7,451,000 in the first nine months of 1999 to $7,996,000 in the first nine
months of 2000 primarily due to the depreciation of capital expenditures
acquired in 2000.
Amortization of Prepaid Management Fees. Amortization of prepaid management
fees was $900,000 during the first nine months of 1999 and the first nine months
of 2000.
Facility Rent. Facility rent expense for the first nine months increased by
$180,000 from $16,849,000 in 1999 to $17,029,000 in 2000.
Interest Expense, net. Interest expense, net, increased from $15,266,000 in
the first nine months of 1999 to $17,330,000 in the first nine months of 2000.
This increase is the result of higher outstanding balances in 2000 with respect
to both the Company's 11% Senior Subordinated Discount Notes (the "Discount
Notes") and its revolving credit facility. The Company issued $99.5 million of
Discount Notes in August 1998. The interest associated with the Discount Notes
accretes until August 1, 2003 and then becomes payable in cash, semi-annually in
arrears, beginning on February 1, 2004. As of September 30, 2000, the Discount
Notes had accreted to a balance of $125,550,000. Additionally, as of September
30, 1999 and 2000, the Company had $32,750,000 outstanding on its revolving
credit facility. The Company has not made additional borrowings on its revolving
credit facility since July 7, 1999.
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 E to the
Company's condensed consolidated financial statements included elsewhere in this
report.)
17
Loss on Termination of Capital Lease: In connection with the termination of a
capital lease during the third quarter of 2000, the Company recorded a
non-recurring charge of $8.9 million. The principal components of this charge
included the write-off of capital leased assets in excess of the related capital
lease obligation ($5.7 million) and the write-off of deferred financing costs
($1.8 million) related to the Company's bank credit facility. (See Note E to the
Company's condensed consolidated financial statements included elsewhere in this
report.)
Income Tax Benefit. As a result of losses incurred in the first nine months of
1999 and 2000, income tax benefits of $9,212,000 and $7,495,000, respectively,
were recognized for those periods.
Net Loss. The net loss was $14,409,000 in the first nine months of 1999 as
compared to $11,723,000 in the first nine months of 2000.
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. The Company's leased
facilities are leased from either the owner of the facilities, from a real
estate investment trust which has purchased the facilities from the owner, or
through synthetic lease borrowings. The Company’s 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 until August 1, 2003 and then becomes payable in
cash, semi-annually in arrears, beginning on February 1, 2004. 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 does not expect to pay any cash dividends on the
Preferred Stock prior to August 1, 2003. In August 1998, the Company also
entered into a new $250 million collateralized credit facility (the "New Credit
Facility"). The terms of the New Credit Facility originally provided 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 New Credit
Facility, availability under the New Credit Facility may be used for synthetic
lease financings. Proceeds of loans under the New Credit 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 earnings before interest, taxes,
depreciation and amortization ("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 reduced level of EBITDA during the first quarter of 1999 was
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 at the Company's own
facilities. In response, during the first quarter of 1999, 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 (the "First Amendment") to the
New Credit Facility which limited 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. Beginning
with the first quarter of 1999, the First Amendment replaced the original
financial covenants with one new financial covenant, a minimum cumulative amount
of EBITDA. The original financial covenants provided maximum ratios of total
indebtedness to EBITDA and senior indebtedness to EBITDA, and a minimum debt
service coverage ratio. The First Amendment requires minimum amounts of EBITDA,
measured quarterly, but calculated on a rolling twelve-month basis, through
December 31, 2000. As long as the Company meets or exceeds the required minimum
cumulative amounts of EBITDA, the Company may access the New Credit Facility for
general corporate purposes, subject to the reduced amount of availability. As of
September 30, 2000, total borrowings under the New Credit Facility were
$52,019,000 and consisted of $32,750,000 of revolver loans, $13,700,000 of
synthetic lease obligations and $5,569,000 of undrawn letters of credit. As of
September 30, 2000, the Company had approximately $9,000,000 of funding
available under the New Credit Facility and was not in default of the financial
covenants of the New Credit Facility. The First Amendment provides minimum
EBITDA targets only through December 31, 2000. The First Amendment also provides
that the Company will have access to the New Credit Facility if the Company is
in compliance with specified maximum ratios of total indebtedness to EBITDA,
senior indebtedness to EBITDA, and a minimum debt service coverage ratio, such
ratios to be calculated by annualizing the actual amounts of EBITDA achieved by
the Company in either (a) the second and third quarters of 2000, or (b) the
third and fourth quarters of 2000. Continued access to the New Credit Facility
is then dependent on the Company maintaining compliance with financial ratio
requirements. The covenant allowing the Company to maintain compliance through
the achievement of required minimum cumulative amounts of EBITDA expires as of
December 31, 2000, and the Company must be able to achieve compliance with
alternate financial ratios by March 31, 2001, or it will have to seek additional
modifications to its existing financial covenants.
Until September 27, 2000, the Company, through a wholly-owned limited
partnership, leased and operated four
18
facilities in Ohio (the "Cleveland Facilities") which it acquired in 1996
through capital leases. Each of the four leases contained an option to purchase
the facility beginning July 1, 2001 and each lease was guaranteed by the
Company. The guaranty provided that failure by the Company to have a specified
minimum consolidated net worth at the end of any two consecutive quarters would
be an event of default under the guaranty, which in turn would be an event of
default under each lease. During the third quarter of 1999, the Company recorded
a $5.7 million restructuring charge to terminate its contracts to provide
rehabilitation therapy services to non-affiliated long-term care facilities.
(See Note D to the Company's condensed consolidated financial statements
included elsewhere in this report.) As a result of this restructuring charge,
the Company's consolidated net worth as of September 30, 1999 (as calculated for
purposes of this requirement) had fallen below the required level. The Company
anticipated that its net worth would continue to be below the required level at
December 31, 1999, which would have resulted in an event of default under each
of these leases with the Company potentially facing the loss of these
operations. Such default could also have triggered cross-defaults under the
Company's other lease and debt obligations. In December 1999, the Company paid
$5 million to its landlord and obtained an option (the "New Option") to acquire
the Cleveland Facilities. The Company borrowed $5 million from an affiliate of
Investcorp S.A. to fund this payment. The New Option allowed the Company to
exercise its right to purchase the Cleveland Facilities beginning as of the date
of the New Option, required the Company to complete the acquisition prior to
December 31, 2000 and provided a waiver of the net worth covenant through that
date. The Company exercised the New Option on June 30, 2000 and assigned its
purchase rights for the Cleveland Facilities to an investment entity organized
by Investcorp.
On September 27, 2000, the Company terminated the Cleveland Facilities capital
leases and assigned its purchase rights for these facilities to the investment
entity for $5.0 million, which acquired the Cleveland Facilities on September
27, 2000. On that date, the Company entered into new operating leases for each
of the Cleveland Facilities with combined annual rent expense of approximately
$5.8 million. The Company also repaid the $5.0 million loan from an affiliate of
Investcorp S.A. As a result of the capital lease termination, the Company
recorded a non-recurring charge of $8.9 million. The principal components of
this charge included the write-off of capital leased assets in excess of the
related capital lease obligation ($5.7 million) and the write-off of deferred
financing costs ($1.8 million) originally incurred in obtaining the Company's
New Credit Facility. In order to complete the Cleveland Facility leasing
transaction, the Company was required to obtain the release of certain
collateral held by the bank group which provides the New Credit Facility. The
Company obtained the release of the collateral as part of an amendment (the
"Second Amendment") to the New Credit Facility, which also resulted in a
permanent reduction of the Company's maximum borrowings under the credit
facility from $250 million to $150 million and an increase in the Company's
borrowing rate. As a result of the permanent reduction in funds available
through the credit facility, the Company was required to write-off a
proportionate amount of the deferred financing costs incurred when the credit
facility was originally obtained.
The Company's operating activities during the first nine months of 1999 used
net cash of $1,535,000 as compared to generating net cash of $22,200,000 in the
first nine months of 2000, an improvement of $23,735,000. Cash flows from
operations in 2000 increased primarily as the result of a lower net loss, higher
levels of non-cash expenses in 2000 (including depreciation, amortization,
accretion of interest on the Company's Discount Notes, and the loss on
termination of a capital lease), and the receipt of a federal income tax refund
of approximately $3,000,000.
Net cash used by investing activities decreased from $12,921,000 during the
first nine months of 1999 to $7,282,000 for the same period in 2000. The primary
use of cash for investing purposes during 1999 was to fund additions to property
and equipment associated with the maintenance of the Company’s existing
facilities and the development of its data processing capabilities.
Additionally, during the first quarter of 1999, approximately $1,000,000 was
expended in connection with obtaining the First Amendment of the Company’s
New Credit Facility. The primary use of cash for investing purposes during 2000
has been to fund additions to property and equipment associated with the
maintenance of the Company's nursing facilities. The Company has made a
concerted effort to minimize its capital expenditures without compromising the
quality of its facilities.
Net cash provided by financing activities decreased from net cash provided of
$16,554,000 in 1999 to net cash used of $8,280,000 in 2000. This decrease was
due to the fact that during the first nine months of 1999 the Company borrowed
$20,000,000 under the New Credit Facility as compared to no new borrowings
during the first nine months of 2000. The Company has not drawn on its revolving
credit facility since July 7, 1999. During the third quarter of 2000, the
Company also repaid a $5,000,000 note payable from an affiliate of Investcorp
S.A.
In addition to the Discount Notes, as of September 30, 2000, the Company
had two mortgage loans outstanding totaling $17,465,000 and had $32,750,000 in
advances on its New Credit Facility. One mortgage loan had an outstanding
principal balance of $15,958,000 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 $1,507,000 at September 30,
2000, of which $1,338,000 is due in 2010.
Harborside expects that its capital expenditures for 2000, excluding
acquisitions of new long-term care facilities, will not exceed $8,000,000.
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
in order to finance any significant acquisitions in the future.
In November 1999, the "Balanced Budget Refinement Act" (the "BBRA") was signed
into law. The BBRA was designed to mitigate some of the effects of the BBA. The
BBRA allowed skilled nursing facilities to elect transition to the full federal
per diem rate at the beginning of their cost reporting periods for cost periods
beginning on or after January 1, 2000. Using the election allowed by the BBRA,
the Company chose to move fourteen facilities to the full federal per diem rate
effective January 1, 2000. As a result, the Company now uses the full federal
per diem rate to calculate Medicare revenue at twenty-three of its skilled
nursing facilities. Additionally, the BBRA temporarily increased the federal per
diem rates by 20% for fifteen acuity categories beginning on April 1, 2000.
These increased rates will stay in effect until the date HCFA implements a
revised PPS system that more accurately reimburses the costs of caring for
medically complex patients. The BBRA also provides for a four percent increase
in the federal per diem rates for all acuity categories for a two-year period
beginning October 1, 2000. The BBRA also excluded costs for certain supplies and
services that were formerly required to be reimbursed by a skilled nursing
facility's PPS rate. The BBRA also eliminated the annual provider limitations on
Part B therapy charges per beneficiary for fiscal 2000 and 2001.
19
Both the House of Representatives and the Senate have passed legislation that
would, among other measures, provide temporary Medicare payment relief to
skilled nursing facilities beyond the relief already provided by the Balanced
Budget Refinement Act of 1999. However, the two houses of Congress have not yet
reconciled their differing pieces of legislation, and the President has
threatened to veto the reconciled legislation if it does not incorporate certain
amendments that would not directly affect the Medicare payment relief proposed
for skilled nursing facilities. The legislation involved also provides for an
increase in the federal minimum wage rate. In the absence of an identifiable
resolution to the differences which exist between the legislation passed by the
two houses of Congress as well as the threatened Presidential veto, the Company
cannot currently estimate the impact such incremental payment relief will have
on the Company's consolidated financial position, results of its operations or
cash flows. Since most employees of the Company earn in excess of the Federal
minimum wage rate, the Company does not expect that the proposed increase in the
Federal minimum wage rate will have a direct material impact on the Company's
wage rates; however, the Company does expect that such an increase might provide
additional stimulus to wage increases in the overall labor market.
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.
20
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. TheCompany'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 and pricing of insurance for the inherent
risks of liability in the healthcare industry.
12. Price increases in pharmaceuticals, durable medical equipment and
other items.
13. The Company's reputation for delivering high-quality care and its
ability to attract and retain patients, including patients with
relatively high acuity levels.
14. Changes in general economic conditions, including changes that
pressure governmental reimbursement sources to reduce the amount and
scope of healthcare coverage.
The foregoing review of significant factors should not be construed as
exhaustive or as an admission regarding the adequacy of disclosures previously
made by the Company.
21
Most of the Company's debt obligations bear interest at fixed rates and are
not affected by changes in market interest rates; however, borrowings under the
Company's New Credit Facility are sensitive to changes in interest rates. Under
the New Credit Facility, interest is based on either LIBOR or prime rates of
interest (plus applicable margins determined by the Company's leverage), at the
Company's election. As the prime and LIBOR rates of interest increase, interest
expense associated with the Company's borrowings under the New Credit Facility
would also increase.
The Company did not experience significant changes in interest rates during
the nine months ended September 30, 2000. As part of the Company's risk
management program, the Company continuously reviews its overall exposure to
interest rate risk and evaluates the benefits of interest rate hedging through
the use of derivative instruments, such as interest rate swaps. By entering into
an interest rate swap, the Company can effectively transform variable rate debt
into fixed rate debt. The Company did not have any interest rate swap
arrangements outstanding during the nine month periods ending September 30, 1999
or September 30, 2000.
22
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
10.19 (c) SECOND AMENDMENT, dated as of September 25,
2000 to the Credit Agreement, dated as of
August 11, 1998 among HARBORSIDE HEALTHCARE
CORPORATION, a Delaware corporation, the
other entities listed on the signature pages
thereof, as joint and several borrowers
thereunder , the banks and other financial
institutions or entities parties thereto,
CHASE SECURITIES INC., as arranger, 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.
10.30 LEASE dated September 26, 2000, by and
between, HHC BEACHWOOD, INC. as LANDLORD AND
HARBORSIDE OF CLEVELAND LIMITED PARTNERSHIP
as TENANT.
10.31 LEASE dated September 26, 2000, by and
between, HHC BROADVIEW, INC. as LANDLORD AND
HARBORSIDE OF CLEVELAND LIMITED PARTNERSHIP
as TENANT.
10.32 LEASE dated September 26, 2000, by and
HHC WESTBAY, INC. as LANDLORD AND
HARBORSIDE OF CLEVELAND LIMITED PARTNERSHIP
as TENANT
(b) Reports on 8-K
None
23
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
President, and Chief Executive Officer
By: /s/ William H.Stephan
---------------------
William H. Stephan
Senior Vice President and
Chief Financial Officer
DATE: November 14, 2000
24
