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 March 31, 2000
-----------------------------
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
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(617) 646-5400
- --------------------------------------------------------------------------------
(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
May 9, 2000: 7,261,332.
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1999 and March 31, 2000 3
Condensed Consolidated Statements of Operations
For the Three Months Ended
March 31, 1999 and 2000 4
Condensed Consolidated Statement of Changes
in Stockholders' Deficit for the Three Months
Ended March 31, 2000 5
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1999 and 2000 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 14
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Part II OTHER INFORMATION 21
Signatures 22
</TABLE>
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
- -------
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
(Unaudited)
December 31, March 31,
1999 2000
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 1,386 $ 1,127
Accounts receivable, net of allowances for doubtful
accounts of $3,098 and $3,655, respectively ........ 50,168 51,009
Prepaid expenses and other ............................. 19,940 20,014
Prepaid income taxes ................................... 2,608 2,721
Deferred income taxes .................................. 2,400 2,400
--------- ---------
Total current assets ................................ 76,502 77,271
Restricted cash ......................................... 2,420 2,559
Property and equipment, net ............................. 166,326 165,949
Deferred financing and other non-current assets, net .... 15,546 14,899
Other assets, net ....................................... 3,100 2,800
Note receivable ......................................... 7,487 7,487
Deferred income taxes ................................... 11,852 13,099
--------- ---------
Total assets .......................................... $ 283,233 $ 284,064
========= =========
LIABILITIES
Current liabilities:
Current maturities of long-term debt ................... $ 227 $ 233
Current portion of capital lease obligation ............ 4,633 4,727
Note payable to affiliate .............................. 5,000 5,000
Accounts payable ....................................... 9,328 10,217
Employee compensation and benefits ..................... 14,021 13,919
Other accrued liabilities .............................. 5,508 5,596
Accrued interest ....................................... 572 251
Current portion of deferred income
677 636
--------- ---------
Total current liabilities ............................ 39,966 40,579
Long-term portion of deferred income .................... 2,427 2,299
Long-term debt .......................................... 166,018 169,117
Long-term portion of capital lease obligation ........... 50,067 49,729
--------- ---------
Total liabilities .................................... 258,478 261,724
--------- ---------
Exchangeable preferred stock, redeemable,
$.01 par value with a liquidation value of
$1,000 per share; 500,000 shares authorized;
48,277 and 49,901 issued and outstanding, respectively . 48,277 49,901
--------- ---------
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value, 19,000,000 shares
authorized, 7,261,332 shares issued and outstanding .... 146 146
Additional paid-in capital ............................... 198,603 196,973
Less common stock in treasury, at cost, 7,349,832 shares . (183,746) (183,746)
Accumulated deficit ...................................... (38,525) (40,934)
--------- ---------
Total stockholders' deficit .......................... (23,522) (27,561)
--------- ---------
Total liabilities and stockholders' deficit .......... $ 283,233 $ 284,064
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-3-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the three months ended
March 31, March 31,
1999 2000
-------- --------
<S> <C> <C>
Total net revenues .......................... $ 71,704 $ 78,976
-------- --------
Expenses:
Facility operating ......................... 62,705 63,533
General and administrative ................. 4,792 4,475
Service charges paid to former affiliate ... 296 275
Amortization of prepaid management fee ..... 300 300
Depreciation and amortization .............. 2,541 2,642
Facility rent .............................. 5,611 5,676
-------- --------
Total expenses .......................... 76,245 76,901
-------- --------
Income (loss) from operations ............... (4,541) 2,075
Other:
Interest expense, net ...................... 4,800 5,744
Other expense .............................. 63 280
-------- --------
Loss before income taxes .................... (9,404) (3,949)
Income tax benefit .......................... (3,668) (1,540)
-------- --------
Net loss .................................... (5,736) (2,409)
Preferred stock dividends ................... (1,427) (1,630)
-------- --------
Loss applicable to common shares ............ $ (7,163) $ (4,039)
======== ========
Loss per common share (Note C):
Basic and diluted ...................... $ (0.99) $ (0.56)
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-4-
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-In Treasury Accumulated
Stock Capital Stock Deficit Total
<S> <C> <C> <C> <C> <C>
Stockholders' deficit, December 31, 1999 ........... $ 146 $ 198,603 $ (183,746) $ (38,525) $ (23,522)
Preferred stock dividends .......................... -- (1,630) -- -- (1,630)
Net loss for the three months ended
March 31, 2000 ................................... -- -- -- (2,409) (2,409)
-------- --------- ---------- ---------- ----------
Stockholders' deficit, March 31, 2000 .............. $ 146 $ 196,973 $ (183,746) $ (40,934) $ (27,561)
======== ========= ========== ========== ==========
</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 three months ended
March 31,
----------------------
1999 2000
Operating activities:
<S> <C> <C>
Net loss ....................................................................... $(5,736) $(2,409)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation of property and equipment ....................................... 1,664 2,031
Amortization of deferred financing and other non-current assets .............. 873 611
Amortization of prepaid management fee ....................................... 300 300
Amortization of deferred income .............................................. (168) (169)
Accretion of senior subordinated discount notes .............................. 2,844 3,158
Amortization of loan costs and fees (included in rental and interest expense) 14 36
Accretion of interest on capital lease obligation ............................ 828 894
------- -------
619 4,452
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable .................................. 876 (841)
Increase in prepaid expenses and other ....................................... (3,100) (74)
Increase in deferred income taxes ............................................ -- (1,247)
Increase in accounts payable ................................................. 3,600 889
Increase (decrease) in employee compensations and benefits ................... 2,345 (102)
Increase (decrease) in accrued interest ........................................ 60 (321)
Increase in other accrued liabilities ........................................ 865 88
Increase in prepaid income taxes ............................................. (3,573) (113)
------- -------
Net cash provided by operating activities ...................................... 1,692 2,731
------- -------
Investing activities:
Additions to property and equipment .......................................... (4,397) (1,654)
Additions to deferred financing and other non-current assets ................. (1,058) --
Transfers (to) restricted cash, net .......................................... (194) (139)
------- -------
Net cash used by investing activities ........................................ (5,649) (1,793)
------- -------
Financing activities:
Borrowings under revolving line of credit .................................... 7,000 --
Payments of long-term debt ................................................... (75) (53)
Principal payments of capital lease obligation ............................... (1,046) (1,138)
Dividends paid on exchangeable preferred stock ............................... (6) (6)
------- -------
Net cash provided (used) by financing activities ............................... 5,873 (1,197)
------- -------
Net increase (decrease) in cash and cash equivalents ........................... 1,916 (259)
Cash and cash equivalents, beginning of period ................................. 896 1,386
------- -------
Cash and cash equivalents, end of period ....................................... $ 2,812 $ 1,127
======= =======
Supplemental Disclosure:
Interest paid ................................................................ $ 1,382 $ 2,185
======= =======
Income taxes paid ............................................................ $ 47 $ 21
======= =======
Accretion of preferred stock dividends ....................................... $ 1,421 $ 1,624
======= =======
</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, until September 1999, provided rehabilitation
therapy services to non-affiliated long-term care facilities (See Note D). As of
March 31, 2000, 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 of
accounting.
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 filing on Form 10-K for the year ended
December 31, 1999. In the opinion of management, the accompanying unaudited
financial statements reflect all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the Company's financial position
as of March 31, 2000, the results of its operations for the three-month periods
ended March 31, 1999 and 2000 and its cash flows for the three-month periods
ended March 31, 1999 and 2000. The results of operations for the three-month
period ended March 31, 2000 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 three months ended March 31, 1999
and 2000:
<TABLE>
<CAPTION>
1999 2000
----------- -----------
Numerator:
<S> <C> <C>
Net loss .................................. $(5,736,000) $(2,409,000)
Preferred Stock dividends ................. (1,427,000) (1,630,000)
----------- -----------
Loss applicable to common shares .............. $(7,163,000) $(4,039,000)
=========== ===========
Denominator:
Denominator for basic and diluted loss per
common share - weighted average shares ... 7,261,000 7,261,000
=========== ===========
Basic and diluted loss per common share ....... $ (0.99) $ (0.56)
=========== ===========
</TABLE>
For the three month periods ended March 31, 1999 and 2000, 670,813 and
625,510, respectively, of stock options were not included in the computation of
diluted loss per common share because to do so would have been antidilutive.
D. Restructuring Costs
During the third quarter of 1999, the Company terminated its contracts to
provide rehabilitative therapy services to non-affiliated long-term care
facilities. The Company, through a wholly-owned subsidiary, had provided
physical, speech and occupational therapy services to non-affiliated long-term
care 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 continues to provide rehabilitation therapy services to long-term care
facilities which it owns and operates.
The Company's therapy services restructuring plan required the termination of
approximately sixty rehabilitation therapy services employees and the closure of
two regional offices. During the third quarter of 1999, the Company recorded a
restructuring charge 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 March 31, 2000, the Company's restructuring
reserve was fully utilized.
-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, 1999 and March 31, 2000; the condensed consolidating
results of operations for the three-month periods ended March 31, 1999 and 2000;
and the consolidating cash flows for the three-months ended March 31, 1999 and
2000 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, 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Elimination Consolidated
ASSETS
Current assets:
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= =========
</TABLE>
-9-
<PAGE>
E. Condensed Consolidating Financial Information (Continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
As of March 31, 2000
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Elimination Consolidated
ASSETS
Current assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ........................ $ -- $ 446 $ 681 $ -- $ 1,127
Accounts receivable, net of allowance ............ -- 36,367 14,642 -- 51,009
Intercompany receivable .......................... 137,742 -- -- (137,742) --
Prepaid expenses and other ....................... 4,010 13,731 2,273 -- 20,014
Prepaid income taxes ............................. 2,721 -- -- -- 2,721
Deferred income taxes ............................ 2,150 250 -- -- 2,400
--------- --------- --------- --------- ---------
Total current assets ................................ 146,623 50,794 17,596 (137,742) 77,271
Restricted cash ..................................... -- 1,931 628 -- 2,559
Investment in limited partnership ................... 15,584 -- 4,044 (19,628) --
Property and equipment, net ......................... -- 146,606 19,343 -- 165,949
Deferred financing and other
non-current assets, net ........................... 10,298 3,284 1,317 -- 14,899
Other assets, net ................................... 2,800 -- -- -- 2,800
Note receivable ..................................... -- 7,487 -- -- 7,487
Deferred income taxes ............................... 71 13,028 -- -- 13,099
--------- --------- --------- --------- ---------
Total assets ........................................ $ 175,376 $ 223,130 $ 42,928 $(157,370) $ 284,064
========= ========= ========= ========= =========
LIABILITIES
Current liabilities:
Current maturities of long-term debt ............. $ -- $ 22 $ 211 $ -- $ 233
Current portion of capital lease
obligation ..................................... -- 4,727 -- -- 4,727
Note payable to affiliate ........................ 5,000 -- -- -- 5,000
Accounts payable ................................. -- 7,738 2,479 -- 10,217
Intercompany payable ............................. -- 110,370 10,857 (121,227) --
Employee compensation and benefits ............... -- 11,242 2,677 -- 13,919
Other accrued liabilities ........................ -- 4,558 1,038 -- 5,596
Accrued interest ................................. 5,313 14,450 -- (19,512) 251
Current portion of deferred income ............... -- -- -- 636 636
--------- --------- --------- --------- ---------
Total current liabilities ........................... 10,313 153,107 17,262 (140,103) 40,579
Long-term portion of deferred income ................ -- 816 2,119 (636) 2,299
Long-term debt ...................................... 132,243 1,513 15,849 19,512 169,117
Long-term portion of capital lease obligation ....... -- 49,729 -- -- 49,729
--------- --------- --------- --------- ---------
Total liabilities ................................... 142,556 205,165 35,230 (121,227) 261,724
--------- --------- --------- --------- ---------
Exchangeable preferred stock, redeemable,
$.01 par value with a liquidation value of
$1,000 per share; 500,000 shares authorized;
49,901 shares issued and outstanding ............ 49,901 -- -- -- 49,901
--------- --------- --------- --------- ---------
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 .......................... 196,747 -- -- 226 196,973
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 ................................. (30,228) (9,359) (3,261) 1,914 (40,934)
--------- --------- --------- --------- ---------
Total stockholders' equity (deficit) ................ (17,081) 17,965 7,698 (36,143) (27,561)
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity (deficit) $ 175,376 $ 223,130 $ 42,928 $(157,370) $ 284,064
========= ========= ========= ========= =========
</TABLE>
-10-
<PAGE>
E. Condensed Consolidating Financial Information (Continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
For the three months ended March 31, 1999
(Unaudited)
(dollars in thousands)
For the three months ended March 31, 1999:
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Elimination Consolidated
<S> <C> <C> <C> <C> <C>
Total net revenues .............................. $ 7 $ 53,436 $ 23,149 $ (4,888) $ 71,704
-------- -------- -------- -------- --------
Expenses:
Facility operating ............................ -- 47,689 19,904 (4,888) 62,705
General and administrative .................... 10 4,782 -- -- 4,792
Service charges paid to former affiliate ..... -- 296 -- -- 296
Amortization of prepaid management fee ........ 300 -- -- -- 300
Depreciation and amortization ................. 374 1,745 422 -- 2,541
Facility rent ................................. -- 3,468 2,143 -- 5,611
Management fees paid to affiliates ............ -- (1,402) 1,402 -- --
-------- -------- -------- -------- --------
Total expenses .................................. 684 56,578 23,871 (4,888) 76,245
-------- -------- -------- -------- --------
Loss from operations ............................ (677) (3,142) (722) -- (4,541)
Other:
Interest expense, net ......................... 697 3,673 430 -- 4,800
Other expense ................................. -- -- -- 63 63
-------- -------- -------- -------- --------
Loss before income taxes ........................ (1,374) (6,815) (1,152) (63) (9,404)
Income tax benefit .............................. (536) (2,658) (449) (25) (3,668)
-------- -------- -------- -------- --------
Net loss ........................................ $ (838) $ (4,157) $ (703) $ (38) $ (5,736)
======== ======== ======== ======== ========
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
For the three months ended March 31, 2000
(Unaudited)
(dollars in thousands)
For the three months ended March 31, 2000:
Parent Guarantors Non-Guarantors Elimination Consolidated
Total net revenues .............................. $ -- $ 54,048 $ 25,175 $ (247) $ 78,976
-------- -------- -------- -------- --------
Expenses:
Facility operating ............................ -- 43,182 20,598 (247) 63,533
General and administrative .................... 6 4,469 -- -- 4,475
Service charges paid to former affiliate ...... -- 275 -- -- 275
Amortization of prepaid management fee ........ 300 -- -- -- 300
Depreciation and amortization ................. 452 1,717 473 -- 2,642
Facility rent ................................. -- 3,515 2,161 -- 5,676
Management fees paid to affiliates ............ -- (1,499) 1,499 -- --
-------- -------- -------- -------- --------
Total expenses .................................. 758 51,659 24,731 (247) 76,901
-------- -------- -------- -------- --------
Income (loss) from operations ................... (758) 2,389 444 -- 2,075
Other:
Interest expense, net ......................... 972 4,350 422 -- 5,744
Other expense ................................. -- -- -- 280 280
-------- -------- -------- -------- --------
Income (loss) before income taxes ............... (1,730) (1,961) 22 (280) (3,949)
Income taxes (benefit) .......................... (675) (772) 9 (102) (1,540)
-------- -------- -------- -------- --------
Net income (loss) ............................... $ (1,055) $ (1,189) $ 13 $ (178) $ (2,409)
======== ======== ======== ======== ========
</TABLE>
-11-
<PAGE>
E. Condensed Consolidating Financial Information (Continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
For the three months ended March 31, 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Elimination Consolidated
Operating activities:
<S> <C> <C> <C> <C> <C>
Net cash provided (used) by operating activities: .. $ (5,258) $ 5,832 $ 120 $ 998 $ 1,692
-------- ------- ------- ------- -------
Investing activities:
Additions to property and equipment ............ -- (3,145) (778) (474) (4,397)
Additions to deferred financing and other
non-current assets ............................. (1,737) 678 1 -- (1,058)
Transfers (to) from restricted cash, net ....... -- 373 (43) (524) (194)
-------- ------- ------- ------- -------
Net cash used by investing activities ............... (1,737) (2,094) (820) (998) (5,649)
-------- ------- ------- ------- -------
Financing activities:
Borrowings under revolving line of credit ...... 7,000 -- -- -- 7,000
Payments of long-term debt ..................... -- (119) 44 -- (75)
Principal payments of capital lease obligation (1,046) -- -- (1,046)
Dividends paid on exchangeable preferred stock . (6) -- -- -- (6)
-------- ------- ------- ------- -------
Net cash (used) provided by financing activities .... 6,994 (1,165) 44 -- 5,873
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents (1) 2,573 (656) -- 1,916
Cash and cash equivalents, beginning of period ...... 51 99 746 -- 896
------- ------- ------- ------- -------
Cash and cash equivalents, end of period .......... $ 50 $ 2,672 $ 90 $ -- $ 2,812
======= ======= ======= ======= =======
Supplemental Disclosure:
Interest paid ....................................... $ 201 $ 1,057 $ 124 $ -- $ 1,382
======= ======= ======= ======= =======
Income taxes paid ................................... $ 47 $ -- $ -- $ -- $ 47
======= ======= ======= ======= =======
Accretion of preferred stock dividends .............. $ 1,421 $ -- $ -- $ -- $ 1,421
======= ======= ======= ======= =======
</TABLE>
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<PAGE>
E. Condensed Consolidating Financial Information (Continued)
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
For the three months ended March 31, 2000
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Elimination Consolidated
Operating activities:
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities: ......... $ 6 $ 2,638 $ 87 $ -- $ 2,731
------- ------- ------- ------- -------
Investing activities:
Additions to property and equipment ............ -- (1,269) (385) -- (1,654)
Transfers (to) restricted cash, net ............ -- (105) (34) -- (139)
------- ------- ------- ------- -------
Net cash used by investing activities ............... -- (1,374) (419) -- (1,793)
------- ------- ------- ------- -------
Financing activities:
Payments of long-term debt ..................... -- (35) (18) -- (53)
Principal payments of capital lease obligation (1,138) -- -- (1,138)
Dividends paid on exchangeable preferred stock . (6) -- -- -- (6)
------- ------- ------- ------- -------
Net cash used by financing activities ............... (6) (1,173) (18) -- (1,197)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents -- 91 (350) -- --
(259)
Cash and cash equivalents, beginning of period ...... -- 355 1,031 -- 1,386
------- ------- ------- ------- -------
Cash and cash equivalents, end of period $ .......... -- $ 446 $ 681 $ -- $ 1,127
======= ======= ======= ======= =======
Supplemental Disclosure:
Interest paid ....................................... $ 370 $ 1,654 $ 161 $ -- $ 2,185
======= ======= ======= ======= =======
Income taxes paid ................................... $ 21 $ -- $ -- $ -- $ 21
======= ======= ======= ======= =======
Accretion of preferred stock dividends .............. $ 1,624 $ -- $ -- $ -- $ 1,624
======= ======= ======= ======= =======
</TABLE>
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<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 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 March 31, 2000, the Company
operated 50 facilities (22 owned, 27 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. 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:
<TABLE>
<CAPTION>
As of March 31,
---------------
1999 2000
---- ----
<S> <C> <C>
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 ended March 31,
1999 2000
--------- ---------
Patient days (2):
Private and other ........ 124,030 114,969
Medicare ................. 50,741 62,693
Medicaid ................. 303,790 309,266
--------- ---------
Total ....................... 478,561 486,928
========= =========
Total net revenues:
Private and other ........ 30.8% 26.9%
Medicare ................. 21.0% 24.7%
Medicaid ................. 48.2% 48.4%
--------- ---------
Total ...................... 100.0% 100.0%
========= =========
Average Occupancy Rate (3) . 90.6% 90.8%
Quality Mix (4) ............ 51.8% 51.6%
</TABLE>
(1) Includes one managed facility with 106 licensed beds on March 31, 1999 and
March 31, 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.
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<PAGE>
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 March 31, 1999 Compared to Three Months Ended March 31, 2000
Total Net Revenues. Total net revenues increased by $7,272,000 or 10.1%, from
$71,704,000 in the first quarter of 1999 to $78,976,000 in the first quarter of
2000. The increase in total revenues from 1999 to 2000 was primarily the result
of higher occupancy and higher average revenues per patient day. The average
occupancy rate at all of the Company's facilities increased from 90.6% during
the first quarter of 1999 to 90.8% during the first quarter of 2000. Average net
patient service revenues per patient day at the Company's facilities increased
from $146.67 in the first quarter of 1999 to $160.21 in the first quarter of
2000. The Company's average Medicare Part A per diem rate increased from $287
per Medicare patient day in the first quarter of 1999 to $298 per Medicare
patient day in the first quarter of 2000, while the Company's average per diem
Medicaid rate increased from $114.35 in the first quarter of 1999 to $123.72 in
the first 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. Primarily as a result of this election, the Company's
average Medicare Part A payment rate increased from $287 per Medicare patient
day during the first quarter of 1999 to $298 per Medicare patient day during the
first quarter of 2000. The Company's quality mix of private, Medicare and
insurance revenues was 51.8% for the three months ended March 31, 1999 as
compared to 51.6% during the same period of 2000.
Facility Operating Expenses. Facility operating expenses increased by
$828,000, or 1.3%, from $62,705,000 in the first quarter of 1999 to $63,533,000
in the first quarter of 2000. Salaries and wages decreased by approximately
$900,000, or 2.7%, from the first quarter of 1999 to the first quarter of 2000,
primarily as a result of workforce reduction actions taken during the first
quarter of last year. This reduction in salaries and wages was almost entirely
offset by higher employee benefit costs (health insurance and workers'
compensation expense) incurred during the first quarter of 2000 as compared with
the prior year period. The overall increase in operating expenses in 2000 was
the result of higher expenditures for purchased services (such as infusion
therapy, radiology, laboratory and ambulance services) and all other expenses
combined.
General and Administrative; Service Charges Paid to Former Affiliate. General
and administrative expenses decreased by $317,000, or 6.6% from $4,792,000 in
the first quarter of 1999 to $4,475,000 in the first quarter 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
quarter 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 quarter of 1999, such reimbursements totaled $296,000 compared to
$275,000 during the first quarter of 2000.
Depreciation and Amortization. Depreciation and amortization increased from
$2,541,000 in the first quarter of 1999 to $2,642,000 in the first quarter of
2000 primarily due to the amortization of costs in connection with obtaining the
amendment of the Company's New Credit Facility in the first quarter of 1999.
Amortization of Prepaid Management Fees. Amortization of prepaid management
fees was $300,000 during the first quarter of 1999 and the first quarter of
2000.
Facility Rent. Facility rent expense for the first quarter increased by
$65,000 from $5,611,000 in 1999 to $5,676,000 in 2000.
Interest Expense, net. Interest expense, net, increased from $4,800,000 in the
first quarter of 1999 to $5,744,000 in the first quarter 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 March 31, 2000, the Discount Notes had
accreted to a balance of $119 million. Additionally, as of March 31, 1999, the
Company had $19,750,000 outstanding on its revolving credit facility as opposed
to $32,750,000 as of March 31, 2000. The Company has not made additional
borrowings on its revolving credit facility since July 7, 1999.
Income Tax Benefit. As a result of losses incurred in the first quarter of
1999 and 2000, income tax benefits of $3,668,000 and $1,540,000, respectively,
were recognized for those periods.
Net Loss. The net loss decreased from $5,736,000 in the first quarter of 1999
to $2,409,000 in the first quarter of 2000.
-15-
<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
leases which are accounted for as capital leases 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 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 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 New Credit
Facility, any or all of the full $250 million of 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 EBITDA.
As noted above, the Company, through a wholly-owned limited partnership,
leases and operates four facilities in Ohio (the "Cleveland Facilities") which
it acquired in 1996 through capital leases. 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. 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. 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, as a result of which the Company would have been in default under
each of these leases and could have faced the loss of these operations. Such a
default could also have triggered cross-defaults under the Company's other
lease and debt obligations. In December of 1999, the Company paid $5 million
to the landlord of the Cleveland Facilities and obtained an option (the "New
Option") to acquire these facilities. The Company borrowed $5 million from an
affiliate of Investcorp S.A. to fund this payment. The Company already held an
option to acquire these facilities during a limited period beginning July 1,
2001. The New Option allows the Company to exercise its right to purchase the
Cleveland Facilities beginning as of the date of the New Option. The New
Option requires the Company to complete the acquisition prior to December 31,
2000. The New Option provides a waiver of the net worth requirement until the
earlier of the lapse of the New Option or December 31, 2000. The Company
intends to exercise the New Option by June 30, 2000 and then assign its
purchase rights to an investment entity organized by Investcorp and enter into
an operating lease of the Cleveland Facilities by December 31, 2000. The $5
million payment made to obtain the New Option will be applied to the purchase
price of the Cleveland Facilities, or forfeited if the acquisition is not
completed. If the Company cannot complete the refinancing of the Cleveland
Facilities by December 31, 2000, the Company would also be required to make an
additional payment of $3,000,000 to the landlord, and the Company could
potentially face the loss of the Cleveland Facilities. Although no assurances
can be given in this regard, the Company believes that it will be able to
complete the refinancing of the Cleveland Facilities within the required time
period.
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 earnings before interest, taxes, depreciation and
amortization ("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 "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. Beginning with the first quarter of
1999, the 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
Amendment requires minimum amounts of EBITDA, measured quarterly, but calculated
on a rolling twelve-month basis, through December 31, 2000. As long as the
-16-
<PAGE>
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 March 31, 2000, total
borrowings under the New Credit Facility were approximately $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 March 31, 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 Amendment provides minimum EBITDA targets only through
December 31, 2000. However, the 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. Since the
covenant allowing the Company to maintain compliance through the achievement of
required minimum cumulative amounts of EBITDA expires as of December 31, 2000,
the Company must be able to achieve compliance with the alternate financial
ratios by that date, or it may have to seek additional modifications to the New
Credit Facility.
The Company's operating activities during the first quarter of 1999 generated
net cash of $1,692,000 as compared to generating net cash of $2,731,000 in the
first quarter of 2000, an improvement of $1,039,000. Although cash flows from
operations in 2000 increased as the result of a lower net loss and higher levels
of non-cash expenses in 2000 (including depreciation, amortization and accretion
of interest on the Company's Discount Notes), most of this improvement was
offset by an increase in the Company's operating assets.
Net cash used by investing activities decreased from $5,649,000 during the
first quarter of 1999 to $1,793,000 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 amendment of the Company's New Credit Facility. The primary
use of cash for investing purposes during 2000 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. 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
$5,873,000 in 1999 to net cash used of $1,197,000 in 2000. This decrease was
primarily due to the fact that during the first three months of 1999 the Company
borrowed $7,000,000 under the New Credit Facility as compared to no new
borrowings during the first three months of 2000. The Company has not drawn on
its revolving credit facility since July 7, 1999.
In addition to the Discount Notes, as of March 31, 2000, the Company had two
mortgage loans outstanding totaling $17,595,000 and $32,750,000 in advances on
its New Credit Facility. One mortgage loan had an outstanding principal balance
of $16,060,000 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 $1,535,000 at December 31, 1999, 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 aggregate approximately
$5,000,000. 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.
On November 29, 1999, the "Consolidated Appropriations Act (the "CAA") was
signed into law. The CAA was designed to mitigate some of the effects of the
BBA. The CAA 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
CAA, 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 CAA will temporarily increase 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 later of (a)
October 1, 2000 or (b) the date HCFA implements a revised PPS system that more
accurately reimburses the costs of caring for medically complex patients. The
CAA 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 CAA
also excluded costs for certain supplies and services that were formerly
required to be reimbursed by a skilled nursing facility's PPS rate. The CAA also
eliminated the annual provider limitations on Part B therapy charges per
beneficiary for fiscal 2000 and 2001. As a result of the number of variables
involved (including facility specific occupancy, the acuity distribution of
Medicare patients, and the length of time the temporary increases in the federal
per diem rate stay in effect), the Company cannot at this time accurately
quantify the dollar impact of the CAA on the Company's financial position or the
results of its operations.
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.
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<PAGE>
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 undertook a comprehensive effort to evaluate and address risks
that could have arisen in connection with the inability of computer programs to
recognize dates that followed December 31, 1999 (the "Year 2000 Issue"). The
Company has not observed any significant problems with its information
technology systems or equipment. The Company has noted no problems with similar
systems operated by third parties doing business with the Company, including its
suppliers, state Medicaid agencies and fiscal intermediaries responsible for
administering payments on behalf of the Medicare program.
-18-
<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 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.
-19-
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------
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 three months ended March 31, 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 three month periods ending March 31, 1999
or March 31, 2000.
-20-
<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.
-21-
<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
President, and Chief Executive Officer
By: /s/ William H. Stephan
----------------------------
William H. Stephan
Senior Vice President and
Chief Financial Officer
DATE: May 10, 2000
-22-
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,127
<SECURITIES> 0
<RECEIVABLES> 54,664
<ALLOWANCES> (3,655)
<INVENTORY> 65,979<F1>
<CURRENT-ASSETS> 77,271
<PP&E> 196,295
<DEPRECIATION> (30,346)
<TOTAL-ASSETS> 284,064
<CURRENT-LIABILITIES> 40,579
<BONDS> 221,145<F2>
49,901
0
<COMMON> 146
<OTHER-SE> (27,707)<F3>
<TOTAL-LIABILITY-AND-EQUITY> 284,064
<SALES> 0
<TOTAL-REVENUES> 78,976
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 76,901
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,744
<INCOME-PRETAX> (3,949)
<INCOME-TAX> (1,540)
<INCOME-CONTINUING> (2,409)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,409)
<EPS-BASIC> (0.56)
<EPS-DILUTED> (0.56)
<FN>
<F1> Includes the following assets: prepaid expenses and other of $20,014,
deferred income taxes--current of $2,400, prepaid income taxes of $2,721,
deferred income taxes--long-term of $13,099, restricted cash of $2,559,
deferred financing and other non-current assets, net, of $14,899, note
receivable $7,487 and other assets, net, of $2,800.
<F2>Includes the following long-term liabilities: deferred income of $2,299,
capital lease obligation of $49,729, and long-term debt of $169,117.
<F3>Includes the following equity accounts: additional paid-in capital of
$196,973 treasury stock of ($183,746) and acccumulated deficit of
($40,934).
</FN>
</TABLE>
