-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ALgpVxTA6Z1i+ktIikDRNMRrBVNqlM2UPUMoi5ff0MQaSQglIhV3CxNc4cgcFuM8 nlwiaE5yP6GzdnDKSxv38Q== 0000950142-97-000676.txt : 19970814 0000950142-97-000676.hdr.sgml : 19970814 ACCESSION NUMBER: 0000950142-97-000676 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARBORSIDE HEALTHCARE CORP CENTRAL INDEX KEY: 0001011693 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 043307188 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14358 FILM NUMBER: 97659698 BUSINESS ADDRESS: STREET 1: 470 ATLANTIC AVE CITY: BOSTON STATE: MA ZIP: 02210 BUSINESS PHONE: 6175561515 MAIL ADDRESS: STREET 1: 470 ATLANTIC AVE CITY: BOSTON STATE: MA ZIP: 02210 10-Q 1 FORM 10-Q 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 June 30, 1997 --------------------------------------------- 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 01-14358 -------- Harborside Healthcare Corporation ------------------------------------------------------------------------------ Delaware 04-3307188 ------------------------------------------------------------------------------ (State or other jurisdiction of (IRS employer identification no.) incorporation or organization) 470 Atlantic Avenue, Boston, Massachusetts 02210 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (617) 556-1515 - ------------------------------------------------------------------------------- (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 August 13, 1997: 8,001,999. HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES Table of Contents Page ---- Part I. Financial Information Condensed Consolidated Balance Sheets December 31, 1996 and June 30, 1997 3 Condensed Consolidated Statements of Operations For the Three Months and Six Months Ended June 30, 1996 and 1997 4 Condensed Consolidated Statements of Changes in Stockholders' Equity For the Six Months Ended June 30, 1997 5 Condensed Consolidated Statements of Cash Flows For the Six Months Ended June 30, 1996 and 1997 6 Notes to Condensed Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Part II Other Information 16 Signatures 17 -2- PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share amounts)
December 31, June 30, 1996 1997 ----------- -------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 9,722 $ 10,694 Accounts receivable, net of allowances for doubtful accounts of $1,860 and $1,700, respectively 22,984 27,561 Prepaid expenses and other 3,570 6,086 Demand note due from limited partnership 1,369 -- Deferred income taxes 1,580 1,580 -------- -------- Total current assets 39,225 45,921 Restricted cash 3,751 3,827 Investment in limited partnership 256 193 Property and equipment, net 95,187 94,287 Intangible assets, net 3,004 4,147 Deferred income taxes 376 376 -------- -------- Total assets $141,799 $148,751 ======== ======== LIABILITIES Current liabilities: Current maturities of long-term debt $ 169 $ 178 Current portion of capital lease obligation 3,744 3,771 Accounts payable 6,011 6,328 Employee compensation and benefits 8,639 10,217 Other accrued liabilities 2,177 3,293 Accrued interest 19 84 Current portion of deferred income 368 369 Income taxes payable 1,272 567 -------- -------- Total current liabilities 22,399 24,807 Long-term portion of deferred income 2,948 2,763 Long-term portion of capital lease obligation 53,533 53,090 Long-term debt 18,039 20,116 -------- -------- Total liabilities 96,919 100,776 -------- -------- STOCKHOLDERS' EQUITY Common stock, $.01 par value, 30,000,000 shares authorized, 8,000,000 shares issued and outstanding 80 80 Additional paid-in capital 48,340 48,340 Accumulated deficit (3,540) (445) --------- --------- Total stockholders' equity 44,880 47,975 --------- --------- Total liabilities and stockholders' equity $ 141,799 $ 148,751 ========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements. -3- HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Combined prior to June 14, 1996) (Unaudited) (dollars in thousands, except per share amounts)
For the three months ended For the six months ended June 30, June 30, --------------------------- -------------------------- 1996 1997 1996 1997 ----------- ----------- ----------- ----------- Total net revenues $ 36,872 $ 50,292 $ 71,803 $ 97,676 ----------- ----------- ----------- ----------- Expenses: Facility operating 29,806 40,142 57,926 77,517 General and administrative 1,710 2,257 3,430 4,723 Service charges paid to affiliate 180 177 365 354 Special compensation and other 1,201 -- 1,716 -- Depreciation and amortization 576 960 1,115 1,882 Facility rent 2,553 2,687 5,098 5,309 ----------- ----------- ----------- ----------- Total expenses 36,026 46,223 69,650 89,785 ----------- ----------- ----------- ----------- Income from operations 846 4,069 2,153 7,891 Other: Interest expense, net 835 1,364 1,810 2,756 Loss on investment in limited partnership 240 92 367 61 ----------- ----------- ----------- ----------- Income (loss) before income taxes and extraordinary loss (229) 2,613 (24) 5,074 Income taxes (benefit) (400) 1,020 (400) 1,979 ----------- ----------- ----------- ----------- Income before extraordinary loss 171 1,593 376 3,095 Extraordinary loss on early retirement of debt, net of taxes of $843 (1,318) -- (1,318) -- ----------- ----------- ----------- ----------- Net income (loss) $ (1,147) $ 1,593 $ (942) $ 3,095 =========== =========== =========== =========== Net income per share $ 0.20 $ 0.39 =========== =========== Pro forma data: Historical loss before income taxes and extraordinary loss $ (229) $ (24) Pro forma income taxes (benefit) (489) (409) ----------- ----------- Pro forma income before extraordinary loss 260 385 Extraordinary loss, net (1,318) (1,318) ----------- ----------- Pro forma net loss $ (1,058) $ (933) =========== =========== Pro forma net income (loss) per share: Pro forma income before extraordinary loss $ 0.05 $ 0.08 Extraordinary loss, net (0.26) (0.28) ----------- ----------- Pro forma net loss $ (0.21) $ (0.20) =========== =========== Weighted average number of common and common equivalent shares used in per share computations 5,092,000 8,028,000 4,760,000 8,026,000
The accompanying notes are an integral part of the condensed consolidated financial statements. -4- HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) (dollars in thousands)
Additional Common Paid-In Accumulated Stock Capital Deficit Total ------ ---------- ----------- ------- Stockholders' equity, December 31, 1996 $80 $48,340 $ (3,540) $44,880 Net income for the six months ended June 30, 1997 -- -- 3,095 3,095 ------- -------- -------- ------ Stockholders' equity, June 30, 1997 $80 $48,340 $ (445) 47,975 === ======= ======= ======
The accompanying notes are an integral part of the condensed consolidated financial statements. -5- HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Combined prior to June 14, 1996) (Unaudited) (dollars in thousands) For the six months ended June 30, --------------------------------- 1996 1997 --------- -------- Operating activities: Net income (loss) $ (942) $ 3,095 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest 234 -- Extraordinary loss, net 1,318 -- Depreciation of property and equipment 940 1,712 Amortization of intangible assets 175 170 Amortization of deferred income (181) (184) Loss from investment in limited partnership 367 61 Amortization of loan costs and fees 67 44 Deferred interest (57) -- Common stock grant 225 -- Accretion of interest on capital lease obligation -- 1,419 Other 2 2 -------- -------- 2,148 6,319 Changes in operating assets and liabilities: (Increase) in accounts receivable (3,642) (4,577) (Increase) in prepaid expenses and other 912 (2,516) (Increase) in deferred income taxes (400) -- (Decrease) in accounts payable 1,283 317 Increase in employee compensation and benefits 1,863 1,578 Increase in accrued interest 238 65 (Decrease) increase in other accrued liabilities 1,857 1,116 Increase in income taxes payable -- (705) -------- -------- Net cash provided by operating activities 4,259 1,597 -------- -------- Investing activities: Additions to property and equipment (1,497) (812) Additions to intangibles (1,001) (1,357) Transfers to restricted cash, net (842) (76) Repayment of demand note -- 1,369 -------- -------- Net cash used by investing activities (3,340) (876) -------- -------- Financing activities: Issuance of long-term debt -- 2,175 Payment of long-term debt (25,175) (89) Debt prepayment penalty (1,517) -- Principal payments of capital lease obligation -- (1,835) Note payable to an affiliate (2,000) -- Receipt of lease inducement 3,685 -- Dividend distribution (140) -- Distribution to minority interest (33,727) -- Purchase of equity interests 803 -- Proceeds of initial public offering, net 37,731 -- -------- -------- Net cash provided (used) by financing activities (20,340) 251 -------- -------- Net increase (decrease) in cash and cash equivalents (19,421) 972 Cash and cash equivalents, beginning of period 40,157 9,722 -------- -------- Cash and cash equivalents, end of period $ 20,736 $ 10,694 ======== ======== Supplemental Disclosure: Interest paid $ 2,023 $ 1,734 Income taxes paid $ 0 $ 2,684 ======== ======== The accompanying notes are an integral part of the condensed consolidated financial statements. -6- HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Combined prior to June 14, 1996) (Unaudited) A. General 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 Annual Report or Form 10-K for the year ended December 31, 1996. 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 June 30, 1997, the results of its operations for the three-month and six-month periods ended June 30, 1997 and 1996 and its cash flows for the six-month periods ended June 30, 1997 and 1996. The results of operations for the three-month and six-month periods ended June 30, 1997 are not necessarily indicative of the results which may be expected for the full year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report. B. Basis of Presentation The Company was incorporated as a Delaware corporation on March 19, 1996 and was formed as a holding company, in anticipation of an initial public offering (the "Offering"), to combine under the control of a single corporation the operations of various business entities (the "Predecessor Entities") which were all under the majority control of several related stockholders. Immediately prior to the Offering, the Company executed an agreement (the "Reorganization Agreement") which resulted in the transfer of ownership of the Predecessor Entities to the Company prior to completion of the Offering in exchange for 4,400,000 shares of the Company's common stock. The Company's financial statements for periods prior to the Offering have been prepared by combining the historical financial statements of the Predecessor Entities, similar to a pooling of interests presentation. On June 14, 1996, the Company completed the issuance of 3,600,000 shares of common stock through the Offering resulting in net proceeds to the Company (after deducting underwriters' commissions and other offering expenses) of $37,160,000. The consolidated financial statements include the accounts of Harborside Healthcare Corporation and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. C. Investment in Limited Partnership The Company holds a 75% partnership interest in Bowie Center Limited Partnership (the "Partnership") which the Company accounts for using the equity method. Although the Company owns a majority interest in the Partnership, the Company only holds a 50% voting interest in the Partnership and accordingly, it does not exercise control over the operations of the Partnership. The results of operations of the Partnership are summarized below:
For the six months ended June 30, ------------------------------- 1996 1997 -------------- ------------- Net operating revenues $3,806,000 $4,154,000 Net operating expenses 4,053,000 3,967,000 Net income (loss) (490,000) (82,000)
The financial position of the Partnership is as follows: As of June 30, 1997 --------------------- Current assets $2,391,000 Non-current assets 4,815,000 Current liabilities 730,000 Non-current liabilities 6,217,000 Partners' equity 259,000
continued -7- HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued (Combined prior to June 14, 1996) (Unaudited) D. Special Compensation and Other During the first half of 1996, the Company incurred $1,716,000 of non-recurring expenses associated with its corporate reorganization and its initial public offering. Substantially all of these non-recurring expenses related to special compensation arrangements with key members of management in connection with the reorganization of the Company's ownership structure which preceded the completion of its initial public offering. E. Income Taxes Prior to the implementation of the Reorganization Agreement, the Predecessor Entities (primarily partnerships and subchapter S corporations) operated under common control but were not directly subject to federal or state income taxes and, accordingly, no provision for income taxes was made in the Company's historical financial statements prior to the implementation date of the Reorganization Agreement. A pro forma income tax expense has been reflected for each period presented prior to the reorganization date, as if the Company had always owned the Predecessor Entities. The pro forma income tax expense was computed using an estimated effective tax rate of 39%. The rate was derived by using the statutory federal income tax rate of 34% plus an average of the various state statutory income tax rates (net of federal benefits) where the Company operates. With the implementation of the Reorganization Agreement, the Company inherited the tax basis of the Predecessor Entities and recognized a deferred tax asset of $400,000. This amount resulted from the expected future tax consequences of temporary differences between the carrying amounts of the transferred assets and liabilities used for financial reporting purposes and the inherited tax bases and was reflected as an income tax benefit in the three month period ended June 30, 1996. F. Acquisitions As of July 1, 1996, a subsidiary of the Company began leasing four long-term care facilities in Ohio (the "Ohio Facilities"). The following unaudited pro forma condensed consolidated statement of earnings presents the condensed results of operations of the Company after giving effect to the acquisition of the Ohio Facilities for the six month period ended June 30, 1996, as if this acquisition had occurred as of January 1, 1996. The pro forma financial results are not necessarily indicative of the actual results of operations which might have occurred or of the results of operations which may occur in the future.
For the six months ended June 30, --------------------------------- 1996 ---- Total net revenues $ 88,095 Income before income taxes and extraordinary loss 56 Extraordinary loss on early retirement of debt, net (1,318) Net loss (862) Pro forma net loss (884) Pro forma net loss per common share using 4,760,000 common and common common equivalent shares $ (0.19)
On August 1, 1997, the Company completed the acquisition of four long-term care facilities with 401 beds. All four facilities are located in Massachusetts north of Boston and are expected to generate annualized revenues of approximately $18,500,000. The Company is leasing these facilities from a real estate investment trust for an initial period of ten years with eight consecutive five year renewal terms exercisable at the Company's option. In conjunction with the lease, the Company was granted an option to purchase the facilities as a group, which is exercisable one year before the end of the initial term and each renewal term. The purchase option is exercisable at the fair market value of the facilities at the time of exercise. continued -8- HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued (Combined prior to June 14, 1996) (Unaudited) G. Long-term debt In April of 1997, the Company obtained a three-year $25M revolving credit facility from a commercial bank. Borrowings under this facility are collateralized by patient accounts receivable and certain other assets. The facility matures in April 2000 and provides for prime or LIBOR interest rate options. The revolving credit facility contains covenants which, among other things, require the Company to maintain certain financial ratios and imposes certain limitations or prohibitions on the Company's ability to incur indebtedness, pay dividends, make investments or dispose of assets. As of June 30, 1997, $2,000,000 was outstanding on the facility. -9- 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 provides high quality long-term care, subacute care and other specialty medical services in four principal regions: the Southeast, the Midwest, New England and the Mid-Atlantic. As of June 30, 1997, the Company operated 31 facilities (13 owned and 18 leased) with a total of 3,864 licensed beds. The Company provides traditional skilled nursing care, a wide range of subacute care programs (such as orthopedic, CVA/stroke, cardiac, pulmonary and wound care), as well as distinct programs for the provision of care to Alzheimer's and hospice patients. In addition, the Company provides rehabilitation therapy at Company-operated and non-affiliated facilities. As of June 30, 1997, the Company provided rehabilitation therapy services to patients at 52 non-affiliated long-term care facilities. The Company seeks to position itself as the long-term care provider of choice to managed care and other private referral sources in its target markets by achieving a strong regional presence and by providing a full range of high quality, cost effective nursing and specialty medical services. The Company was created in March 1996, in anticipation of an initial public offering (the "Offering"), in order to combine under its control the operations of various long-term care facilities and ancillary businesses (the "Predecessor Entities") which had operated since 1988. The Company completed the Offering on June 14, 1996 and issued 3,600,000 shares of common stock at $11.75 per share. The owners of the Predecessor Entities contributed their interests in such Predecessor Entities to the Company and received 4,400,000 shares of the Company's common stock. The Company's financial statements for periods prior to the Offering have been prepared by combining the historical financial statements of the Predecessor Entities, similar to a pooling of interests presentation. The Company's financial statements prior to the date of the Offering do not include a provision for Federal or state income taxes because the Predecessor Entities (primarily partnerships and subchapter S corporations) were not directly subject to Federal or state income taxation. The Company's consolidated financial statements for periods prior to the date of the Offering include a pro forma income tax expense for each period presented, as if the Company had always owned the Predecessor Entities. See Note E to the financial statements included elsewhere in this report. One of the Predecessor Entities was the general partner of the Krupp Yield Plus Limited Partnership ("KYP"), which owned seven facilities (the "Seven Facilities") until December 31, 1995. The Company held a 5% interest in KYP while the remaining 95% was owned by the limited partners of KYP (the "Unitholders"). Effective December 31, 1995, KYP sold the Seven Facilities and a subsidiary of the Company began leasing the facilities from the buyer. Prior to December 31, 1995 the accounts of KYP were included in the Company's consolidated financial statements and the interest of the Unitholders was reflected as minority interest. In March of 1996, a liquidating distribution was paid to the Unitholders. The following table sets forth the number of facilities owned and leased by the Company and the number of licensed beds operated by the Company:
As of June 30, -------------------------------------------- 1996 1997 ---- ---- Facilities: Owned (1) 9 13 Leased 17 18 ------ ------ Total 26 31 ====== ====== Licensed beds: Owned (1) 1,028 1,720 Leased 1,980 2,144 ----- ----- Total 3,008 3,864 ===== =====
(1) Includes the Larkin Chase Center, which is owned by Bowie Center Limited Partnership, a joint venture in which the Company has a 75% ownership interest and a non-affiliated investor has a 25% ownership interest. -10- The following table sets forth certain operating data for the periods indicated:
For the three months ended June 30, For the six months ended June 30, ----------------------------------- --------------------------------- 1996 1997 1996 1997 ---- ---- ---- ---- Patient days: Private and other 75,561 89,477 150,609 176,161 Medicare 23,721 33,062 47,217 66,968 Medicaid 144,352 189,113 288,082 370,365 ------- ------- ------- ------- Total 243,634 311,652 485,908 613,494 ======= ======= ======= ======= Average Occupancy rate (1) 92.7% 91.5% 92.4% 91.9%
Total net revenues: Private and other 36.4% 33.1% 36.5% 33.5% Medicare 26.2% 28.4% 26.3% 28.7% Medicaid 37.4% 38.5% 37.2% 37.8% ----- ------ ----- ----- Total 100.0% 100.0% 100.0% 100.0% ====== ====== ====== ======
(1) "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. RESULTS OF OPERATIONS The Company's total net revenues include net patient service revenues and rehabilitation therapy service revenues from contracts with non-affiliated long-term care facilities. Private net patient service revenues are recorded at established per diem billing rates. Net patient service revenues to be reimbursed under contracts with third-party payers, primarily the Medicare and Medicaid programs, are recorded at amounts estimated to be realized under these contractual arrangements. The Company's facility operating expenses consist primarily of payroll and employee benefits related to nursing, housekeeping and dietary services provided to patients, as well as maintenance and administration of the facilities. Other significant facility operating expenses include the cost of rehabilitation therapy services, medical and pharmacy supplies, food, utilities, insurance and taxes. The Company's facility operating expenses also include the general and administrative costs associated with the operation of the Company's rehabilitation therapy business. The Company's general and administrative expenses include all costs associated with its regional and corporate operations. Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1997 Total Net Revenues. Total net revenues increased by $13,420,000 or 36.4%, from $36,872,000 in the second quarter of 1996 to $50,292,000 in the second quarter of 1997. This increase resulted primarily from the acquisition of four Ohio Facilities on July 1, 1996 and the acquisition of the Harford Gardens facility on March 1, 1997, the generation of revenues from rehabilitation therapy services provided to additional non-affiliated long-term care facilities and increased net patient service revenues per patient day at the Company's "same store" facilities. Of such increase, $9,068,000 or 67.6% of the increase resulted from the operation of the Ohio Facilities and $1,715,000 or 12.8% of the increase resulted from the operation of the Harford Gardens facility. The Company began providing rehabilitation therapy services at non-affiliated long-term care facilities during 1995. Revenues generated by providing these services increased by $1,211,000, from $2,704,000 in the second quarter of 1996 to $3,915,000 in the second quarter of 1997. The remaining $1,426,000, or 10.6% of such increase, is attributable to higher average net patient service revenues per patient day at the Company's "same store" facilities, primarily resulting from increased levels of care provided to patients with medically complex conditions. Average net patient service revenues per patient day at "same store" facilities increased from $139.61 during the second quarter of 1996 to $149.37 during the second quarter of 1997. Partially offsetting this increase was a reduction in occupancy at "same store" facilities from 92.7% during the second quarter of 1996 to 90.9% during the second quarter of 1997. The average occupancy rate at all of the Company's facilities decreased from 92.7% during the second quarter of 1996 to 91.5% during the second quarter of 1997. The Company's quality mix of private, Medicare and insurance revenues was 62.6% for the three months ended June 30, 1996 as compared to 61.5% in the same period of 1997. The slight decrease in the quality mix percentage was primarily due to the acquisition of the Harford Garden facility. Facility Operating Expenses. Facility operating expenses increased by $10,336,000, or 34.7%, from $29,806,000 in the second quarter of 1996 to $40,142,000 in the second quarter of 1997. The acquisition of the Ohio Facilities accounted for $6,903,000, or 66.8% of the increase in facility operating expenses while Harford Gardens accounted for $1,340,000, or 13.0% of this increase. Operating expenses associated with additional non-affiliate therapy contracts increased from $2,508,000 during the second quarter of 1996 to $3,374,000 during the second quarter of 1997 and accounted for 8.4% of the increased costs. The remainder of the increase in facility operating expenses, approximately $1,227,000, is due to increases in the costs of labor, medical supplies and rehabilitation therapy services -11- purchased from third parties at "same store" facilities. General and Administrative; Service Charges Paid to Affiliate. General and administrative expenses increased by $547,000, or 32.0% from $1,710,000 in the second quarter of 1996 to $2,257,000 in the second quarter of 1997. This increase resulted from the acquisition of the Ohio Facilities, the expansion of regional and corporate support, and additional travel and consulting expenses associated with the Company's growth. The Company reimburses an affiliate for rent and other expenses related to its corporate headquarters as well as for certain data processing and administrative services provided to the Company. During the second quarter of 1996, such reimbursements totaled $180,000 compared to $177,000 during the second quarter of 1997. Special Compensation and Other. In connection with the Offering and corporate reorganization, the Company recorded $1,201,000 of non-recurring charges in the second quarter of 1996. Of this amount, $1,086,000 consisted of compensation earned by key members of management as a result of the successful Offering. Depreciation and Amortization. Depreciation and amortization increased from $576,000 in the second quarter of 1996 to $960,000 in the second quarter of 1997 primarily as a result of the acquisition of the Ohio facilities. Facility Rent. Facility rent expense for the second quarter increased by $134,000 from $2,553,000 in 1996 to $2,687,000 in 1997. The increase in rent expense is primarily the result of the acquisition of Harford Gardens on March 1, 1997. Interest Expense, net. Interest expense, net, increased from $835,000 in the second quarter of 1996 to $1,364,000 in the second quarter of 1997. This net increase is due to additional interest expense resulting from the acquisition of the Ohio Facilities partially offset by reduced interest following the repayment of $25,000,000 of long-term debt in June 1996, using proceeds from the Offering. Loss on Investment in Limited Partnership. The Company accounts for its investment in Bowie Center Limited Partnership using the equity method. The Company recorded a loss of $240,000 in the second quarter of 1996 as compared to loss of $92,000 during the second quarter of 1997 in connection with this investment. Extraordinary Loss on Early Retirement of Debt. During the second quarter of 1996, the Company repaid $25,000,000 of long-term debt using proceeds from the Offering. In connection with this early repayment, the Company recorded an extraordinary loss of $2,161,000 ($1,318,000 net of related tax benefit) as the result of a prepayment penalty paid to the lender and the write-off of deferred financing costs. Income Tax Benefit. Income taxes increased from a benefit of $400,000 in the second quarter of 1996 to an expense of $1,020,000 in the second quarter of 1997. Prior to the date of the Offering, the Company's financial statements do not include a provision for Federal or state income taxes because the Predecessor Entities (primarily partnerships and subchapter S corporations) were not subject to Federal or state income taxation. The contribution of the Predecessor Entities' interests which occurred as part of a corporate reorganization contemporaneously with the Offering, caused the Company to recognize a non-recurring tax benefit of $400,000 as a result of inherited book-tax differences. The Company's consolidated financial statements for periods prior to the date of the Offering include a pro forma income tax expense (calculated as 39% of historical income before taxes) for each period presented, as if the Predecessor Entities had previously been tax-paying entities. Net Income (Loss). Net loss was $1,147,000 in the second quarter of 1996 as compared to income of $1,593,000 in the second quarter of 1997. Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1997 Total Net Revenues. Total net revenues increased by $25,873,000 or 36.0%, from $71,803,000 in the first half of 1996 to $97,676,000 in the first half of 1997. This increase resulted primarily from the acquisition of four Ohio Facilities on July 1, 1996 and the acquisition of the Harford Gardens facility on March 1, 1997, the generation of revenues from rehabilitation therapy services provided to additional non-affiliated long-term care facilities and increased net patient service revenues per patient day at the Company's "same store" facilities. Of such increase, $17,624,000 or 68.1% of the increase resulted from the operation of the Ohio Facilities and $2,327,000 or 9.0% of the increase resulted from the operation of the Harford Gardens facility. The Company began providing rehabilitation therapy services at non-affiliated long-term care facilities during 1995. Revenues generated by providing these services increased by $2,182,000, from $5,085,000 in the first half of 1996 to $7,267,000 in the first half of 1997. The remaining $3,740,000, or 14.5% of such increase, is attributable to higher average net patient service revenues per patient day at the Company's "same store" facilities, primarily resulting from increased levels of care provided to patients with medically complex conditions. Average net patient service revenues per patient day at "same store" facilities increased from $136.75 during the first half of 1996 to $146.89 during the first half of 1997. Partially offsetting this increase was a reduction in occupancy at "same store" facilities from 92.4% during the first half of 1996 to 91.5% during the first half of 1997. The average occupancy rate at all of the Company's facilities decreased from 92.4% during the first half of 1996 to 91.9% during the first half of 1997. The Company's quality mix of private, Medicare and insurance revenues was 62.8% for the six months ended June 30, 1996 as compared to 62.2% in the same period of 1997. The slight decrease in the quality mix percentage was primarily due to the acquisition of the Harford Garden and Ohio facilities. -12- Facility Operating Expenses. Facility operating expenses increased by $19,591,000, or 33.8%, from $57,926,000 in the first half of 1996 to $77,517,000 in the first half of 1997. The acquisition of the Ohio Facilities accounted for $13,186,000, or 67.3% of the increase in facility operating expenses while Harford Gardens accounted for $1,754,000, or 9.0% of this increase. Operating expenses associated with additional non-affiliate therapy contracts increased from $4,479,000 during the first half of 1996 to $6,408,000 during the first half of 1997 and accounted for 9.9% of the increased costs. The remainder of the increase in facility operating expenses, approximately $2,722,000, is due to increases in the costs of labor, medical supplies and rehabilitation therapy services purchased from third parties at "same store" facilities. General and Administrative; Service Charges Paid to Affiliate. General and administrative expenses increased by $1,293,000, or 37.7%, from $3,430,000 in the first half of 1996 to $4,723,000 in the first half of 1997. This increase resulted from the acquisition of the Ohio Facilities, the expansion of regional and corporate support, and additional travel and consulting expenses associated with the Company's growth. The Company reimburses an affiliate for rent and other expenses related to its corporate headquarters as well as for certain data processing and administrative services provided to the Company. During the second quarter of 1996, such reimbursements totaled $365,000 compared to $354,000 during the second quarter of 1997. Special Compensation and Other. In connection with the Offering and corporate reorganization, the Company recorded $1,716,000 of non-recurring charges in the first half of 1996. Of this amount, $1,524,000 consisted of compensation earned by key members of management as a result of the successful Offering and the corporate restructuring which preceded the Offering. Depreciation and Amortization. Depreciation and amortization increased from $1,115,000 in the first half of 1996 to $1,882,000 in the first half of 1997 primarily as a result of the acquisition of the Ohio facilities. Facility Rent. Facility rent expense for the first half increased by $211,000 from $5,098,000 in 1996 to $5,309,000 in 1997. The increase in rent expense is primarily the result of the acquisition of Harford Gardens on March 1, 1997. Interest Expense, net. Interest expense, net, increased from $1,810,000 in the first half of 1996 to $2,756,000 in the first half of 1997. This net increase is due to additional interest expense resulting from the acquisition of the Ohio Facilities partially offset by reduced interest following the repayment of $25,000,000 of long-term debt in June 1996, using proceeds from the Offering. Loss on Investment in Limited Partnership. The Company accounts for its investment in Bowie Center Limited Partnership using the equity method. The Company recorded a loss of $367,000 in the first half of 1996 as compared to a loss of $61,000 during the first half of 1997 in connection with this investment. Extraordinary Loss on Early Retirement of Debt. During the second quarter of 1996, the Company repaid $25,000,000 of long-term debt using proceeds from the Offering. In connection with this early repayment, the Company recorded an extraordinary loss of $2,161,000 ($1,318,000, net of related tax benefit) as the result of a prepayment penalty paid to the lender and the write-off of deferred financing costs. Income Tax Benefit. Income taxes increased from a benefit of $400,000 in the first half of 1996 to an expense of $1,979,000 in the first half of 1997. Prior to the date of the Offering, the Company's financial statements do not include a provision for Federal or state income taxes because the Predecessor Entities were not subject to Federal or state income taxation. The contribution of the Predecessor Entities' interests as part of the Company's corporate reorganization caused the Company to recognize a non-recurring tax benefit of $400,000 as a result of inherited book-tax differences. Net Income (Loss). Net loss was $942,000 in the first half of 1996 as compared to income of $3,095,000 in the first half of 1996. LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its operations and acquisitions growth through a combination of mortgage financing and operating leases. Leased facilities are leased from either the seller of the facilities or from a real estate investment trust which has purchased the facilities from the seller. In addition, in 1996 the Company financed the acquisition of the Ohio Facilities from the seller by means of a lease which is accounted for as a capital lease for financial reporting purposes. The Company's existing facility leases generally require it to make monthly lease payments, establish escrow funds to serve as debt service reserve accounts, and pay all property operating costs. The Company generally negotiates leases which provide for extensions beyond the initial lease term and an option to purchase the leased facility. The Company expects that various forms of leasing arrangements will continue to provide it with an attractive form of financing to support its growth. In April of 1997, the Company obtained a three-year $25 million revolving credit facility from a commercial bank. Borrowings under this facility will be used to provide working capital for existing operations and acquisitions and to finance a portion of future acquisitions. From time to time, the Company expects to pursue certain expansion and new development opportunities associated with existing facilities. In connection with a Certificate of Need received by its Ocala facility, the Company expects to commence construction of a sixty-bed addition and a rehabilitation therapy area during 1997. The costs of this project are estimated to be approximately $4,200,000. The Company has been and will continue to be dependent on third-party financing to fund its acquisition strategy, and there can be no assurances that such financings will be available to the Company on acceptable terms, or at all. The Company expects that cash -13- on hand and generated through operations, as well as funds available through the credit facility will be sufficient to meet its operating requirements through the remainder of 1997. The Company had three mortgage loans outstanding as of June 30, 1997. One mortgage loan had an outstanding principal balance of $16,537,000, 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 a twelve-month base period. The Company's other mortgage loans, which are encumbered by specific facilities, had aggregate principal balances of $1,755,807 at June 30, 1997, of which $1,338,000 is due in 2010. The Company's operating activities during the first half of 1996 generated net cash of $4,259,000 as compared to $1,597,000 in 1997, a decrease of $2,662,000. Most of the reduction in cash provided by operations was the net result, most of which resulted from acquisitions of increases in accounts receivable and prepaid expenses and other assets, most of which resulted from acquisitions. Net cash used by investing activities was $3,340,000 during the first half of 1996 as compared to $876,000 used in 1997. The primary use of invested cash during these periods related to additions to property and equipment ($1,497,000 in 1996 compared to $812,000 in 1997), additions to intangible assets ($1,001,000 in 1996 compared to $1,357,000 in 1997) and the repayment of demand note in 1997 of $1,369,000. Net cash provided (used) by financing activities was a use of $20,340,000 in 1996 as compared to $251,000 provided in 1997. The early retirement of debt and the incurrence of a related prepayment penalty required the use of $26,517,000 in 1996. During the first half of 1996, the Company received $37,731,000 in net proceeds from the Offering and a cash lease inducement of $3,685,000 from the landlord in connection with the leasing of the New Hampshire Facilities. During 1996 the Company also received $803,000 from the sale of equity interests to an officer and a director of the Company. In March of 1996 a liquidating distribution of $33,727,000 was paid to the Unitholders. 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. 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. -14- 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 under Medicaid and Medicare, and other changes in applicable government regulations that might affect the profitability of the Company. 6. The Company's continued ability to operate in a heavily regulated environment and to satisfy regulatory authorities, thereby avoiding a number of potentially adverse consequences, such as the imposition of fines, temporary suspension of admission of patients, restrictions on the ability to acquire new facilities, suspension or decertification from Medicaid or Medicare programs, and in extreme cases, revocation of a facility's license or the closure of a facility, including as a result of unauthorized activities by employees. 7. The Company's ability to secure the capital and the related cost of such capital necessary to fund its future growth through acquisition and development, as well as internal growth. 8. Changes in certificate of need laws that might increase competition in the Company's industry, including, particularly, in the states in which the Company currently operates or anticipates operating in the future. 9. The Company's ability to staff its facilities appropriately with qualified healthcare personnel, including in times of shortages of such personnel and to maintain a satisfactory relationship with labor unions. 10. The level of competition in the Company's industry, including without limitation, increased competition from acute care hospitals, providers of assisted and independent living and providers of home healthcare and changes in the regulatory system in the state in which the Company operates that facilitate such competition. 11. The continued availability of insurance for the inherent risks of liability in the healthcare industry. 12. Price increases in pharmaceuticals, durable medical equipment and other items. 13. The Company's reputation for delivering high-quality care and its ability to attract and retain patients, including patients with relatively high acuity levels. 14. Changes in general economic conditions, including changes that pressure governmental reimbursement sources to reduce the amount and scope of healthcare coverage. 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. -15- 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 The Company's Annual Meeting of Stockholders was held on May 14, 1997. At the meeting, Stephen L. Guillard and David F. Benson were elected to the board of directors for three-year terms with 7,807,360 votes cast in favor and 9,200 votes cast against each of the two directors. Robert T. Barnum, Robert M. Bretholtz, Laurence Gerber and Douglas Krupp continue to serve their terms of office following the meeting. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Number Description ------ ----------- 27.1 Financial Data Schedule (b) Reports on 8-K None -16- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Harborside Healthcare Corporation By: /s/ Stephen L. Guillard -------------------------------- Stephen L. Guillard Chairman, President, and Chief Executive Officer By: /s/ William H. Stephan -------------------------------- William H. Stephan Senior Vice President and Chief Financial Officer DATE: August 13, 1997 -17- EX-27.1 2 FINANCIAL DATA SCHEDULE
5 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. 6-MOS DEC-31-1997 JUN-30-1997 10,694 0 27,561 0 16,209 45,921 94,287 0 148,751 24,807 75,969 0 0 80 47,895 148,751 0 97,676 0 0 89,785 (61) 2,756 5,074 1,979 3,095 0 0 0 3,095 0.39 0.39 Includes the following assets: prepaid expenses and other of $6,086, deferred income taxes--current of $1,580, deferred income taxes--long-term of $376, restricted cash of $3,827, investment in limited partnership of $193, and intangible assets, net of $4,147. Includes the following long-term liabilities: deferred income of $2,763, capital lease obligation of $53,090, and long-term debt of $20,116. Includes the following equity accounts: additional paid-in capital of $48,340 and accumulated deficit of $(445). Includes loss on investment in limited partnership of $61. -18-
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