-----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, IykyXlOn4uRIaUBQ4WJLOxRM28bN2T4MUM8Q0t82JTjUhuYTLoS9Rt2oBGT1gqdE KPoEgYvZJbZGtch/dOH0eQ== 0001011693-99-000005.txt : 19990817 0001011693-99-000005.hdr.sgml : 19990817 ACCESSION NUMBER: 0001011693-99-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: SEC FILE NUMBER: 333-64679 FILM NUMBER: 99693180 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, 1999 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- ------------------------ Commission file number 01-14358 -------------------- 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 August 13, 1999: 7,261,332. HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES Table of Contents
Page Part I. Financial Information Condensed Consolidated Balance Sheets December 31, 1998 and June 30, 1999 3 Condensed Consolidated Statements of Operations For the Three Months and the Six Months Ended June 30, 1998 and 1999 4 Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the Six Months Ended June 30, 1999 5 Condensed Consolidated Statements of Cash Flows For the Six Months Ended June 30, 1998 and 1999 6 Notes to Condensed Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Part II Other Information 22 Signatures 23
-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, 1998 1999 ------------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents ....................................................... $ 896 $ 3,744 Accounts receivable, net of allowances for doubtful accounts of $2,864 and $2,275, respectively ................................. 49,946 50,399 Prepaid expenses and other ...................................................... 10,934 15,931 Prepaid income taxes ............................................................ 3,873 9,190 Deferred income taxes ........................................................... 4,084 4,084 --------- --------- Total current assets ......................................................... 69,733 83,348 Restricted cash .................................................................. 2,110 2,410 Property and equipment, net ...................................................... 160,504 164,339 Deferred financing and other non-current assets, net ............................. 18,173 17,771 Other assets, net ................................................................ 4,300 3,700 Note receivable................................................................... 7,487 7,487 Deferred income taxes ............................................................ 2,229 2,229 --------- --------- Total assets ................................................................... $ 264,536 $ 281,284 ========= ========= LIABILITIES Current liabilities: Current maturities of long-term debt ............................................ $ 207 $ 213 Current portion of capital lease obligation ..................................... 4,278 4,452 Accounts payable ................................................................ 7,401 10,242 Employee compensation and benefits .............................................. 13,220 13,818 Other accrued liabilities ....................................................... 7,485 6,723 Accrued interest ................................................................ 62 115 Current portion of deferred income .............................................. 677 677 --------- --------- Total current liabilities ..................................................... 33,330 36,240 Long-term portion of deferred income ............................................. 3,104 2,766 Long-term debt ................................................................... 134,473 158,098 Long-term portion of capital lease obligation .................................... 51,253 50,586 --------- --------- Total liabilities ............................................................. 222,160 247,690 --------- --------- Exchangeable preferred stock, redeemable, $.01 par value with a liquidation value of $1,000 per share; 500,000 shares authorized; 42,293 and 45,185 issued and outstanding ..................... 42,293 45,185 --------- --------- STOCKHOLDERS' EQUITY (DEFICIT) Common stock, $.01 par value, 19,000,000 shares authorized, 7,261,332 shares issued and outstanding ............................. 146 146 Additional paid-in capital ........................................................ 204,607 201,705 Less common stock in treasury, at cost, 7,349,832 shares .......................... (183,746) (183,746) Accumulated deficit ............................................................... (20,924) (29,696) --------- --------- Total stockholders' equity (deficit) .......................................... 83 (11,591) --------- --------- Total liabilities and stockholders' equity (deficit) .......................... $ 264,536 $ 281,284 ========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements. -3- HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (dollars in thousands, except per share amounts)
For the three months For the six months ended June 30, ended June 30, 1998 1999 1998 1999 ---- ----- ---- ----- Total net revenues ....................... $ 76,186 $ 75,016 $ 148,640 $ 146,720 --------- --------- --------- --------- Expenses: Facility operating ..................... 59,649 61,347 117,030 124,052 General and administrative ............. 4,110 4,589 7,475 9,381 Service charges paid to former affiliate 315 277 628 573 Amortization of prepaid management fee . -- 300 -- 600 Depreciation and amortization .......... 1,178 2,563 2,263 5,104 Facility rent .......................... 6,065 5,593 11,621 11,204 --------- --------- --------- --------- Total expenses ....................... 71,317 74,669 139,017 150,914 --------- --------- --------- --------- Income (loss) from operations ............ 4,869 347 9,623 (4,194) Other: Interest expense, net .................. 1,552 5,056 3,202 9,856 Other expense .......................... 41 267 72 330 --------- --------- --------- --------- Income (loss) before income taxes ........ 3,276 (4,976) 6,349 (14,380) Income tax expense (benefit) ............. 1,278 (1,940) 2,476 (5,608) --------- --------- --------- --------- Net income (loss) ........................ $ 1,998 $ (3,036) $ 3,873 $ (8,772) ========= ========= ========= ========= Earnings (loss) per common share: Basic ............................. $ 0.25 $ (0.62) $ 0.48 $ (1.61) ========= ========= ========= ========= Diluted ........................... $ 0.24 $ (0.62) $ 0.47 $ (1.61) ========= ========= ========= =========
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 (DEFICIT) (Unaudited) (dollars in thousands)
Additional Common Paid-In Treasury Retained Total Stock Capital Stock Deficit Stockholders' equity (deficit), December 31, 1998 $ 146 $ 204,607 $ (183,746) $ (20,924)$ 83 ------ --------- ---------- ----------- --------- Preferred stock dividends ....................... -- (2,902) -- -- (2,902) Net loss for the six months ended June 30, 1999 ................................. -- -- -- (8,772) (8,772) ------ --------- ---------- ---------- --------- Stockholders' equity (deficit), June 30, 1999 ... $ 146 $ 201,705 $ (183,746) $ (29,696) $ (11,591) ====== ========= ========== ========== =========
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 (Unaudited) (dollars in thousands)
For the six months ended June 30, 1998 1999 ---- ---- Operating activities: Net income (loss) ................................................................... $ 3,873 $ (8,772) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation of property and equipment ............................................. 1,895 3,279 Amortization of deferred financing and other non-current assets ....................................................... 368 1,825 Amortization of prepaid management fee ............................................. -- 600 Amortization of deferred income .................................................... (255) (338) Accretion of senior subordinated discount notes .................................... -- 5,732 Amortization of loan costs and fees ................................................ 108 78 Accretion of interest on capital lease obligation .................................. 1,532 1,655 -------- -------- 7,521 4,059 Changes in operating assets and liabilities: (Increase) in accounts receivable .................................................. (9,068) (453) (Increase) in prepaid expenses and other ........................................... (1,755) (4,997) Increase in accounts payable ....................................................... 688 2,841 Increase in employee compensation and benefits ..................................... 2,955 598 Increase (decrease) in accrued interest ............................................ (52) 53 Increase (decrease) in other accrued liabilities ................................... 1,369 (762) (Increase) in prepaid income taxes ................................................. -- (5,317) -------- -------- Net cash provided (used) by operating activities ..................................... 1,658 (3,978) -------- -------- Investing activities: Additions to property and equipment ................................................ (7,071) (7,114) Additions to deferred financing and other non-current assets ....................... (1,586) (1,501) Transfers to restricted cash, net .................................................. (1,571) (300) -------- -------- Net cash used by investing activities ............................................... (10,228) (8,915) -------- -------- Financing activities: Borrowings under revolving line of credit........................................... 3,000 18,000 Payment of long-term debt .......................................................... (94) (101) Principal payments of capital lease obligation ..................................... (2,019) (2,148) Receipt of cash in connection with lease............................................ 1,935 -- Exercise of stock options .......................................................... 29 -- Dividends paid on exchangeable preferred stock -- (10) -------- -------- Net cash provided by financing activities 2,851 15,741 -------- -------- Net increase (decrease) in cash and cash equivalents ................................. (5,719) 2,848 Cash and cash equivalents, beginning of period ....................................... 8,747 896 -------- -------- Cash and cash equivalents, end of period ............................................. $ 3,028 $ 3,744 ======== ======== Supplemental Disclosure: Interest paid ...................................................................... $ 2,128 $ 2,891 ======== ======== Income taxes paid .................................................................. $ 2,923 $ 113 ======== ========
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 (Unaudited) A. General Harborside Healthcare Corporation and its subsidiaries (the "Company") operate long-term care facilities and provide rehabilitation therapy services. As of June 30, 1999, the Company owned twenty-two facilities, operated twenty-seven additional facilities under various leases, managed one facility and owned a rehabilitation therapy services company. The Company accounts for its investment in one 75% owned facility using the equity method. B. Basis of Presentation The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1998. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company's financial position as of June 30, 1999, the results of its operations for the three-month and six-month periods ended June 30, 1998 and 1999 and its cash flows for the six-month periods ended June 30, 1998 and 1999. The results of operations for the three-month and six-month period ended June 30, 1999 are not necessarily indicative of the results which may be expected for the full year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report. C. Earnings (Loss) Per Common Share The following table sets forth the computation of basic and diluted earnings (loss) per Common Share for the periods ended June 30, 1998 and 1999:
Three Months Ended Six Months Ended June 30, June 30, 1998 1999 1998 1999 ---- ---- ---- ---- Numerator: Net income (loss) .................................... $ 1,998,000 $ (3,036,000) $ 3,873,000 $ (8,772,000) Preferred Stock dividends ............................ -- (1,475,000) -- (2,902,000) ------------ ------------ ------------- ------------ Earnings (loss) available for Common Shares .............. $ 1,998,000 $ (4,511,000) $ 3,873,000 $(11,674,000) ============ ============ ============= ============ Denominator: Denominator for basic earnings (loss) per Common Share - weighted average shares .............. 8,062,000 7,261,000 8,061,000 7,261,000 Effect of dilutive securities - employee stock options 289,000 -- 267,000 -- ------------ ------------ ------------- ------------ Denominator for diluted earnings (loss) per Common Share - adjusted weighted-average shares and assumed conversions ................................ 8,351,000 7,261,000 8,328,000 7,261,000 ============ ============ ============= ============ Basic earnings (loss) per Common Share ................. $ 0.25 $ (0.62) $ 0.48 $ (1.61) ============ ============ ============= ============ Diluted earnings (loss) per Common Share ................ $ 0.24 $ (0.62) $ 0.47 $ (1.61) ============ ============ ============= ============
-7- D. Condensed Consolidating Financial Information Certain of the Company's subsidiaries are precluded from guaranteeing the debt of the parent company (the "Non-Guarantors"), based on current agreements in effect. The Company's remaining subsidiaries (the "Guarantors") are not restricted from serving as guarantors of the parent company debt. The Guarantors are comprised of Harborside Healthcare Limited Partnership, Belmont Nursing Center Corp., Orchard Ridge Nursing Center Corp., Oakhurst Manor Nursing Center Corp., Riverside Retirement Limited Partnership, Harborside Toledo Limited Partnership, Harborside Connecticut Limited Partnership, Harborside of Florida Limited Partnership, Harborside of Ohio Limited Partnership, Harborside Healthcare Baltimore Limited Partnership, Harborside of Cleveland Limited Partnership, Harborside of Dayton Limited Partnership, Harborside Massachusetts Limited Partnership, Harborside of Rhode Island Limited Partnership, Harborside North Toledo Limited Partnership, Harborside Healthcare Advisors Limited Partnership, Harborside Toledo Corp., KHI Corporation, Harborside Danbury Limited Partnership, Harborside Acquisition Limited Partnership V, Harborside Acquisition Limited Partnership VI, Harborside Acquisition Limited Partnership VII, Harborside Acquisition Limited Partnership VIII, Harborside Acquisition Limited Partnership IX, Harborside Acquisition Limited Partnership X, Sailors, Inc., New Jersey Harborside Corp., Bridgewater Assisted Living Limited Partnership, Maryland Harborside Corp., Harborside Homecare Limited Partnership, Harborside Rehabilitation Limited Partnership, Harborside Healthcare Network Limited Partnership and Harborside Health I Corporation. The information which follows presents the condensed consolidating financial position as of December 31, 1998 and June 30, 1999; the condensed consolidating results of operations for the three-month and six-month periods ended June 30, 1998 and 1999; and the consolidating cash flows for the six months ended June 30, 1998 and 1999 of (a) the parent company only ("the Parent"), (b) the combined Guarantors, (c) the combined Non-Guarantors, (d) eliminating entries and (e) the Company on a consolidated basis. -8- D. Condensed Consolidating Financial Information (Continued) HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES Condensed Consolidating Balance Sheet As of December 31, 1998 (Unaudited) (dollars in thousands, except per share amounts)
Parent Guarantors Non-Guarantors Elimination Consolidated ----------- ---------- -------------- ----------- ----------- ASSETS Current assets: Cash and cash equivalents .................................... $ 51 $ 99 $ 746 $ -- $ 896 Accounts receivable, net of allowance ........................ -- 36,485 15,733 (2,272) 49,946 Intercompany receivable ...................................... 116,555 -- -- (116,555) -- Prepaid expenses and other ................................... 1,268 7,291 2,804 (429) 10,934 Prepaid income taxes ......................................... 3,873 -- -- -- 3,873 Deferred income taxes ........................................ 2,150 1,934 -- -- 4,084 --------- --------- --------- --------- --------- Total current assets ............................................ 123,897 45,809 19,283 (119,256) 69,733 Restricted cash ................................................. -- 2,162 472 (524) 2,110 Investment in limited partnership ............................... 15,584 -- 4,044 (19,628) -- Property and equipment, net ..................................... -- 142,383 18,595 (474) 160,504 Deferred financing and other non-current assets, net ....................................... 10,532 6,176 1,642 (177) 18,173 Other assets, net ............................................... 4,300 -- -- -- 4,300 Note receivable ................................................. -- 7,487 -- -- 7,487 Deferred income taxes ........................................... 71 2,158 -- -- 2,229 --------- --------- --------- --------- --------- Total assets .................................................... $ 154,384 $ 206,175 $ 44,036 $(140,059) $ 264,536 ========= ========= ========= ========= ========= LIABILITIES Current liabilities: Current maturities of long-term debt ....................... $ -- $ 22 $ 185 $ -- $ 207 Current portion of capital lease obligation ................................................. -- 4,278 -- -- 4,278 Accounts payable ............................................. -- 5,010 3,159 (768) 7,401 Intercompany payable ......................................... -- 90,284 8,923 (99,207) -- Employee compensation and benefits ........................... -- 9,853 3,367 -- 13,220 Other accrued liabilities .................................... 3,254 3,306 925 -- 7,485 Accrued interest ............................................. 1,385 3,260 -- (4,583) 62 Current portion of deferred income ........................... -- -- -- 677 677 --------- --------- --------- --------- --------- Total current liabilities ....................................... 4,639 116,013 16,559 (103,881) 33,330 Long-term portion of deferred income ............................ -- 1,202 2,579 (677) 3,104 Long-term debt .................................................. 112,243 2,721 16,109 3,400 134,473 Long-term portion of capital lease obligation .................. -- 54,348 -- (3,095) 51,253 --------- --------- --------- --------- --------- Total liabilities ............................................... 116,882 174,284 35,247 (104,253) 222,160 --------- --------- --------- --------- --------- Exchangeable preferred stock, redeemable, $.01 par value with a liquidation value of $1,000 per share; 500,000 shares authorized; 42,293 shares issued and outstanding ........................... 42,293 -- -- -- 42,293 --------- --------- --------- --------- --------- STOCKHOLDERS' EQUITY (DEFICIT) Common stock, $.01 par value; 19,000,000 shares authorized; 7,261,332 shares issued and outstanding .............................................. 146 2,569 3,885 (6,454) 146 Additional paid-in capital ...................................... 204,381 -- -- 226 204,607 Less common stock in treasury, at cost, 7,349,832 shares ....................................... (183,746) -- -- -- (183,746) Retained earnings (deficit) ..................................... (25,572) 4,567 (2,170) 2,251 (20,924) Partners' equity ................................................ -- 24,755 7,074 (31,829) -- --------- --------- --------- --------- --------- Total stockholders' equity (deficit) ............................ (4,791) 31,891 8,789 (35,806) 83 --------- --------- --------- --------- --------- Total liabilities and stockholders' equity .................... $ 154,384 $ 206,175 $ 44,036 $(140,059) $ 264,536 ========= ========= ========= ========= =========
-9- D. Condensed Consolidating Financial Information (Continued) HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES Condensed Consolidating Balance Sheet As of June 30, 1999 (Unaudited) (dollars in thousands, except per share amounts)
Parent Guarantors Non-Guarantors Elimination Consolidated ----------- ---------- -------------- ----------- ------------ ASSETS Current assets: Cash and cash equivalents .................................... $ 5,962 $ (4,181) $ 1,963 $ -- $ 3,744 Accounts receivable, net of allowance ........................ -- 33,180 17,219 -- 50,399 Intercompany receivable ...................................... 123,317 2,365 -- (125,682) -- Prepaid expenses and other ................................... 1,330 12,237 2,364 -- 15,931 Prepaid income taxes ......................................... 9,190 -- -- -- 9,190 Deferred income taxes ........................................ 2,150 1,934 -- -- 4,084 --------- --------- --------- --------- --------- Total current assets ............................................ 141,949 45,535 21,546 (125,682) 83,348 Restricted cash ................................................. -- 1,864 546 -- 2,410 Investment in limited partnership ............................... 15,584 -- 4,044 (19,628) -- Property and equipment, net ..................................... -- 144,896 19,443 -- 164,339 Deferred financing and other non-current assets, net ....................................... 10,793 5,470 1,508 -- 17,771 Other assets, net ............................................... 3,700 -- -- -- 3,700 Note receivable ................................................. -- 7,487 -- -- 7,487 Deferred income taxes ........................................... 71 2,158 -- -- 2,229 --------- --------- --------- --------- --------- Total assets .................................................... $ 172,097 $ 207,410 $ 47,087 $(145,310) $ 281,284 ========= ========= ========= ========= ========= LIABILITIES Current liabilities: Current maturities of long-term debt ......................... $ -- $ 18 $ 195 $ -- $ 213 Current portion of capital lease obligation ................................................. -- 4,452 -- -- 4,452 Accounts payable ............................................. -- 7,936 2,306 -- 10,242 Intercompany payable ......................................... -- 90,028 14,235 (104,263) -- Employee compensation and benefits ........................... -- 10,318 3,500 -- 13,818 Other accrued liabilities .................................... 3,251 2,605 867 -- 6,723 Accrued interest ............................................. 2,823 4,719 -- (7,427) 115 Current portion of deferred income ........................... -- 677 -- -- 677 --------- --------- --------- --------- --------- Total current liabilities ....................................... 6,074 120,753 21,103 (111,690) 36,240 Long-term portion of deferred income ............................ -- 1,048 2,395 (677) 2,766 Long-term debt .................................................. 130,243 5,601 16,010 6,244 158,098 Long-term portion of capital lease obligation ................... -- 53,767 -- (3,181) 50,586 --------- --------- --------- --------- --------- Total liabilities ............................................... 136,317 181,169 39,508 (109,304) 247,690 --------- --------- --------- --------- --------- Exchangeable preferred stock, redeemable, $.01 par value with a liquidation value of $1,000 per share; 500,000 shares authorized; 45,185 shares issued and outstanding .......................... 45,185 -- -- -- 45,185 --------- --------- --------- --------- --------- 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 ...................................... 201,478 -- -- 227 201,705 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 ............................................. (27,283) (1,083) (3,380) 2,050 (29,696) --------- --------- --------- --------- --------- Total stockholders' equity (deficit) ............................ (9,405) 26,241 7,579 (36,006) (11,591) --------- --------- --------- --------- --------- Total liabilities and stockholders' equity (deficit) $ 172,097 $ 207,410 $ 47,087 $(145,310) $ 281,284 ========= ========= ========= ========= =========
-10- D. Condensed Consolidating Financial Information (Continued) HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES Condensed Consolidating Statements of Operations For the three months ended June 30, 1998 and 1999 (Unaudited) (dollars in thousands) For the three months ended June 30, 1998:
Parent Guarantors Non-Guarantors Elimination Consolidated ------- ---------- -------------- ----------- ------------ Total net revenues ................................. $ -- $ 57,796 $ 25,304 $ (6,914) $ 76,186 -------- -------- -------- -------- -------- Expenses: Facility operating ............................... -- 45,255 21,126 (6,732) 59,649 General and administrative ....................... 101 3,862 147 -- 4,110 Service charges paid to affiliate ................ -- 338 -- (23) 315 Depreciation and amortization .................... 14 791 373 -- 1,178 Facility rent .................................... -- 3,919 2,054 92 6,065 Management fees paid to affiliates ............... -- (1,462) 1,462 -- -- -------- -------- -------- -------- -------- Total expenses ..................................... 115 52,703 25,162 (6,663) 71,317 -------- -------- -------- -------- -------- Income (loss) from operations ...................... (115) 5,093 142 (251) 4,869 Other: Interest expense, net ............................ -- 1,660 146 (254) 1,552 Other expense (income) ........................... -- 72 -- (31) 41 -------- -------- -------- -------- -------- Income (loss) before income taxes .................. (115) 3,361 (4) 34 3,276 Income tax expense (benefit) ....................... (45) 1,311 (2) 14 1,278 -------- -------- -------- -------- -------- Net income (loss) .................................. $ (70) $ 2,050 $ (2) $ 20 $ 1,998 ======== ======== ======== ======== ======== For the three months ended June 30, 1999: Parent Guarantors Non-Guarantors Elimination Consolidated ------- ---------- -------------- ----------- ------------ Total net revenues ................................. $ 17 $ 55,292 $ 24,068 $ (4,361) $ 75,016 -------- -------- -------- -------- -------- Expenses: Facility operating ............................... -- 45,197 20,511 (4,361) 61,347 General and administrative ....................... 16 4,573 -- -- 4,589 Service charges paid to affiliate ................ -- 277 -- -- 277 Amortization of prepaid management fee ........... 300 -- -- -- 300 Depreciation and amortization .................... 406 1,742 415 -- 2,563 Facility rent .................................... -- 3,479 2,114 -- 5,593 Management fees paid to affiliates ............... -- (1,423) 1,423 -- -- -------- -------- -------- -------- -------- Total expenses ..................................... 722 53,845 24,463 (4,361) 74,669 -------- -------- -------- -------- -------- Income (loss) from operations ...................... (705) 1,447 (395) -- 347 Other: Interest expense, net ............................ 726 3,894 436 -- 5,056 Other expense .................................... -- -- -- 267 267 -------- -------- -------- -------- -------- (Loss) before income taxes ......................... (1,431) (2,447) (831) (267) (4,976) Income tax (benefit) ............................... (558) (954) (324) (104) (1,940) -------- -------- -------- -------- -------- Net loss ........................................... $ (873) $ (1,493) $ (507) $ (163) $ (3,036) ======== ======== ======== ======== ========
-11- D. Condensed Consolidating Financial Information (Continued) HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES Condensed Consolidating Statements of Operations For the six months ended June 30, 1998 and 1999 (Unaudited) (dollars in thousands) For the six months ended June 30, 1998:
Parent Guarantors Non-Guarantors Elimination Consolidated ------- ---------- -------------- ----------- ------------ Total net revenues ................................. $ -- $ 111,371 $ 50,867 $ (13,598) $ 148,640 --------- --------- --------- --------- --------- Expenses: Facility operating ............................... -- 88,225 42,403 (13,598) 117,030 General and administrative ....................... 216 7,088 171 -- 7,475 Service charges paid to affiliate ................ -- 628 -- -- 628 Depreciation and amortization .................... 14 1,509 740 -- 2,263 Facility rent .................................... -- 7,454 4,167 -- 11,621 Management fees paid to affiliates ............... -- (3,069) 3,069 -- -- --------- --------- --------- --------- --------- Total expenses ..................................... 230 101,835 50,550 (13,598) 139,017 --------- --------- --------- --------- --------- Income (loss) from operations ...................... (230) 9,536 317 -- 9,623 Other: Interest expense, net ............................ -- 2,909 293 -- 3,202 Other expense .................................... -- 72 -- -- 72 --------- --------- --------- --------- --------- Income (loss) before income taxes .................. (230) 6,555 24 -- 6,349 Income tax expense (benefit) ....................... (90) 2,557 9 -- 2,476 --------- --------- --------- --------- --------- Net income (loss) .................................. $ (140) $ 3,998 $ 15 $ -- $ 3,873 ========= ========= ========= ========= ========= For the six months ended June 30, 1999: Parent Guarantors Non-Guarantors Elimination Consolidated ------- ---------- -------------- ----------- ------------ Total net revenues ................................. $ 24 $ 108,728 $ 47,217 $ (9,249) $ 146,720 --------- --------- --------- --------- --------- Expenses: Facility operating ............................... -- 92,886 40,415 (9,249) 124,052 General and administrative ....................... 26 9,355 -- -- 9,381 Service charges paid to affiliate ................ -- 573 -- -- 573 Amortization of prepaid management fee ........... 600 -- -- -- 600 Depreciation and amortization .................... 780 3,487 837 -- 5,104 Facility rent .................................... -- 6,947 4,257 -- 11,204 Management fees paid to affiliates ............... -- (2,825) 2,825 -- -- --------- --------- --------- --------- --------- Total expenses ..................................... 1,406 110,423 48,334 (9,249) 150,914 --------- --------- --------- --------- --------- Income (loss) from operations ...................... (1,382) (1,695) (1,117) -- (4,194) Other: Interest expense, net ............................ 1,423 7,567 866 -- 9,856 Other expense .................................... -- -- -- 330 330 --------- --------- --------- --------- --------- (Loss) before income taxes ......................... (2,805) (9,262) (1,983) (330) (14,380) Income tax (benefit) ............................... (1,094) (3,612) (773) (129) (5,608) --------- --------- --------- --------- --------- Net loss ........................................... $ (1,711) $ (5,650) $ (1,210) $ (201) $ (8,772) ========= ========= ========= ========= =========
-12- D. Condensed Consolidating Financial Information (Continued) HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES Condensed Consolidating Statement of Cash Flows For the six months ended June 30, 1998 (Unaudited) (dollars in thousands)
Parent Guarantors Non-Guarantors Elimination Consolidated ------- ---------- -------------- ----------- ------------ Operating activities: Net cash provided (used) by operating activities: .. $ (563) $ 5,683 $ (1,069) $ (2,393) $ 1,658 --------- --------- --------- --------- --------- Investing activities: Additions to property and equipment ............ (5) (6,422) (644) -- (7,071) Additions to deferred financing and other non-current assets ........................... (28) (539) (72) (947) (1,586) Transfers (to) from restricted cash, net ....... -- (638) (67) (866) (1,571) --------- --------- --------- --------- --------- Net cash provided (used) by investing activities .... (33) (7,599) (783) (1,813) (10,228) --------- --------- --------- --------- --------- Financing activities: Borrowings under revolving line of credit ...... -- 3,000 -- -- 3,000 Payment of long-term debt ...................... -- (14) (80) -- (94) Principal payments of capital lease obligation -- (2,019) -- -- (2,019) Receipt of cash in connection with lease ....... -- 1,935 -- -- 1,935 Exercise of stock options ...................... 29 -- -- -- 29 -------- -------- -------- -------- -------- Net cash provided (used) by financing activities .... 29 2,902 (80) -- 2,851 -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents (567) 986 (1,932) (4,206) (5,719) Cash and cash equivalents, beginning of period ...... 698 4,383 3,666 -- 8,747 -------- -------- -------- -------- -------- Cash and cash equivalents, end of period ............ $ 131 $ 5,369 $ 1,734 $ (4,206) $ 3,028 ======== ======== ======== ======== ======== Supplemental Disclosure: Interest paid ....................................... $ -- $ 1,933 $ 195 $ -- $ 2,128 ======== ======== ======== ======== ======== Income taxes paid ................................... $ -- $ 2,913 $ 10 $ -- $ 2,923 ======== ======== ======== ======== ========
-13- D. Condensed Consolidating Financial Information (Continued) HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES Condensed Consolidating Statement of Cash Flows For the six months ended June 30, 1999 (Unaudited) (dollars in thousands)
Parent Guarantors Non-Guarantors Elimination Consolidated ------- ---------- -------------- ----------- ------------ Operating activities: Net cash provided (used) by operating activities: .. $ (10,433) $ 2,697 $ 2,760 $ 998 $ (3,978) --------- --------- --------- --------- --------- Investing activities: Additions to property and equipment ............ -- (5,077) (1,563) (474) (7,114) Additions to deferred financing and other non-current assets ............................ (1,646) 140 5 -- (1,501) Transfers (to) from restricted cash, net ....... -- 298 (74) (524) (300) -------- -------- -------- -------- -------- Net cash provided (used) by investing activities .... (1,646) (4,639) (1,632) (998) (8,915) -------- -------- -------- -------- -------- Financing activities: Borrowings under revolving line of credit 18,000 -- -- -- 18,000 Payment of long-term debt ...................... -- (190) 89 -- (101) Principal payments of capital lease obligation -- (2,148) -- -- (2,148) Dividends paid on exchangeable preferred stock . (10) -- -- -- (10) -------- -------- -------- -------- -------- Net cash provided (used) by financing activities .... 17,990 (2,338) 89 -- 15,741 -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents 5,911 (4,280) 1,217 -- 2,848 Cash and cash equivalents, beginning of period ...... 51 99 746 -- 896 -------- -------- -------- -------- -------- Cash and cash equivalents, end of period ............ $ 5,962 $ (4,181) $ 1,963 $ -- $ 3,744 ======== ======== ======== ======== ======== Supplemental Disclosure: Interest paid ....................................... $ 417 $ 2,220 $ 254 $ -- $ 2,891 ======== ======== ======== ======== ======== Income taxes paid ................................... $ 113 $ -- $ -- $ -- $ 113 ======== ======== ======== ======== ========
-14- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements including those concerning Management's expectations regarding future financial performance and future events. These forward-looking statements involve significant risk and uncertainties, including those described herein and included under "Special Note Regarding Forward-Looking Statements" below. Actual results may differ materially from those anticipated by such forward-looking statements. OVERVIEW Harborside Healthcare Corporation, ("Harborside" or the "Company") is a leading provider of high-quality long-term care and specialty medical services in the eastern United States. The Company has focused on establishing strong local market positions with high-quality facilities in five principal regions: the Southeast (Florida), the Midwest (Ohio and Indiana), New England (Massachusetts, New Hampshire and Rhode Island), the Northeast (Connecticut), and the Mid-Atlantic (New Jersey and Maryland). As of June 30, 1999, the Company operated 50 facilities (22 owned, 27 leased and one managed) with a total of 6,124 licensed beds. The Company provides a broad continuum of medical services including: (i) traditional skilled nursing care and (ii) specialty medical services, including a variety of subacute care programs such as orthopedic rehabilitation, CVA/stroke care, cardiac recovery, pulmonary rehabilitation and wound care, as well as distinct programs for the provision of care to Alzheimer's and hospice patients. As part of its subacute services, the Company provides physical, occupational and speech rehabilitation therapy services, both at Company-operated and non-affiliated facilities, through its wholly owned subsidiary, Theracor. The following table sets forth the number of facilities and the number of licensed beds operated by the Company:
As of June 30, 1998 1999 ---- ---- Facilities operated (1) 49 50 Licensed beds (1) 5,983 6,124
The following table sets forth certain operating data for the periods indicated:
For the three months For the six months ended June 30, ended June 30, ----------------------- --------------------- 1998 1999 1998 1999 ---- ---- ---- ---- Patient days (2): Private and other .................. 126,029 122,052 246,132 246,081 Medicare ........................... 50,976 56,068 99,198 106,810 Medicaid ........................... 290,944 305,068 555,773 608,858 --------- --------- --------- -------- Total ................................ 467,949 483,188 901,103 961,749 ========= ========= ========= ======== Total net revenues: Private and other................... 31.3% 29.6% 31.8% 30.2% Medicare............................ 25.8% 22.0% 26.2% 21.5% Medicaid ........................... 42.9% 48.4% 42.0% 48.3% --------- --------- --------- -------- Total ................................ 100.0% 100.0% 100.0% 100.0% ========= ========= ========= ======== Average Occupancy rate (3) ........... 92.2% 90.5% 92.6% 90.6% Quality Mix (4) ...................... 57.1% 51.6% 58.0% 51.7%
(1) Includes two managed facilities with 178 licensed beds on June 30, 1998 and one managed facility with 106 licensed beds on June 30, 1999. (2) "Patient Days" includes billed bed days for facilities operated by the Company excluding billed bed days of managed facilities and the one facility accounted for using the equity method. (3) "Average Occupancy Rate" is computed by dividing the number of billed bed days by the total number of available licensed bed days during each of the periods indicated. This calculation includes all facilities operated by the Company excluding managed facilities. (4) "Quality Mix" consists of the percentage of revenues derived from Medicare, commercial insurers and other private payors. -15- 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, 1998 Compared to Three Months Ended June 30, 1999 Total Net Revenues. Total net revenues decreased by $1,170,000 or 1.5%, from $76,186,000 in the second quarter of 1998 to $75,016,000 in the second quarter of 1999. This reduction was partially offset by the following revenue increases at facilities acquired in 1998: $1,240,000 from the acquisition of two Rhode Island facilities (the "Rhode Island Facilities") on May 8, 1998, and $1,972,000 from the acquisition of two Danbury, Connecticut facilities (the "Danbury Facilities") on December 1, 1998. The reduction in total revenues from 1998 to 1999 was primarily the result of lower occupancy and lower average revenues per patient day. The average occupancy rate at all of the Company's facilities decreased from 92.2% during the second quarter of 1998 to 90.5% during the second quarter of 1999. Average net patient service revenues per patient day at "same store" facilities decreased from $153.93 in the second quarter of 1998 to $152.47 in the second quarter of 1999. This decrease in average net patient service revenues per patient day was a result of the implementation of the new Medicare Prospective Payment System ("PPS") which became effective at all of the Company's facilities on January 1, 1999. Implementation of PPS caused the Company's average Medicare Part A per diem rate to decrease from $358 per Medicare patient day in the second quarter of 1998 to $282 per Medicare patient day in the second quarter of 1999. During the second quarter of 1999, the Company also experienced reduced revenues generated through the provision of Medicare Part B services to residents at its facilities. PPS established certain annual per patient limitations on the amount of Part B therapy that is reimbursable through the Medicare program. Management believes that the introduction of these annual limits resulted in reduced revenues during the second quarter of 1999 as affected parties adapted to the new regulatory environment. The Company's quality mix of private, Medicare and insurance revenues was 57.1% for the three months ended June 30, 1998 as compared to 51.6% during the same period of 1999. This decrease in quality mix of revenues was the result of the decrease in Medicare revenues caused by the implementation of PPS. Facility Operating Expenses. Facility operating expenses increased by $1,698,000, or 2.8%, from $59,649,000 in the second quarter of 1998 to $61,347,000 in the second quarter of 1999 as the result of acquired facilities. Of this increase, $1,666,000 was due to the operations of the Rhode Island Facilities and $1,585,000 was due to the operations of the Danbury Facilities. General and Administrative; Service Charges Paid to Former Affiliate. General and administrative expenses increased by $479,000, or 11.7% from $4,110,000 in the second quarter of 1998 to $4,589,000 in the second quarter of 1999. This increase resulted from the expansion of regional and corporate support, and additional travel, consulting and systems development expenses associated with the Company's growth. The Company reimburses a former affiliate for certain data processing and administrative services provided to the Company. During the second quarter of 1998, such reimbursements totaled $315,000 compared to $277,000 during the second quarter of 1999. Depreciation and Amortization. Depreciation and amortization increased from $1,178,000 in the second quarter of 1998 to $2,563,000 in the second quarter of 1999 primarily due to the amortization of costs related to the leveraged recapitalization and the exercise of purchase options for seven facilities which were financed through synthetic leases prior to the leveraged recapitalization. The exercise of these purchase options was funded through financing arranged in connection with the leveraged recapitalization. Amortization of Prepaid Management Fees. Amortization of prepaid management fees (paid in connection with the merger) was $300,000 during the second quarter of 1999. Facility Rent. Facility rent expense for the second quarter decreased by $472,000 from $6,065,000 in 1998 to $5,593,000 in 1999. The decrease in rent expense is the result of a reduction in rent expense related to the exercise of purchase options on previously leased facilities partially offset by the acquisition of the Danbury Facilities by means of a synthetic lease. Interest Expense, net. Interest expense, net, increased from $1,552,000 in the second quarter of 1998 to $5,056,000 in the second quarter of 1999. This net increase is primarily due to the issuance of $99,500,000 of 11% Senior Subordinated Discount Notes in connection with the leveraged recapitalization. The interest associated with these notes accretes until cash payments begin on August 1, 2003. Income Tax Expense (Benefit). As a result of a loss incurred in the second quarter of 1999, an income tax benefit of $1,940,000 was recognized for that period compared to income tax expense of $1,278,000 for the same period of 1998. Net Income/Loss. Net income was $1,998,000 in the second quarter of 1998 as compared to a loss of $3,036,000 in the second quarter of 1999. -16- Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1999 Total Net Revenues. Total net revenues decreased by $1,920,000 or 1.3%, from $148,640,000 in the first half of 1998 to $146,720,000 in the first half of 1999. This reduction was partially offset by the following revenue increases at facilities acquired in 1998: $2,010,000 from the acquisition of two North Toledo, Ohio facilities (the "North Toledo Facilities") on April 1, 1998; $4,095,000 from the acquisition of two Rhode Island facilities (the "Rhode Island Facilities") on May 8, 1998, and $4,062,000 from the acquisition of two Danbury, Connecticut facilities (the "Danbury Facilities") on December 1, 1998. The reduction in total revenues from 1998 to 1999 was primarily the result of lower occupancy and lower average revenues per patient day. The average occupancy rate at all of the Company's facilities decreased from 92.6% during the first half of 1998 to 90.6% during the first half of 1999. Average net patient service revenues per patient day at "same store" facilities decreased from $155.47 in the first half of 1998 to $151.07 in the first half of 1999. This decrease in average net patient service revenues per patient day was a result of the implementation of the new Medicare Prospective Payment System ("PPS") which became effective at all of the Company's facilities on January 1, 1999. Implementation of PPS caused the Company's average Medicare Part A per diem rate to decrease from $363 per Medicare patient day in the first half of 1998 to $285 per Medicare patient day in the first half of 1999. During the first half of 1999, the Company also experienced reduced revenues generated through the provision of Medicare Part B services to residents at its facilities. This reduction was due partially to lower productivity by Company therapists during the first quarter as they adjusted to the newly implemented Medicare reimbursement system. Additionally, PPS established certain annual per patient limitations on the amount of Part B therapy that is reimbursable through the Medicare program. Management believes that the introduction of these annual limits resulted in reduced revenues during the first half of 1999 as affected parties adapted to the new regulatory environment. Implementation of PPS also caused a decrease in revenues generated by providing rehabilitation therapy services to non-affiliated long-term care facilities. In response to reduced reimbursement from the Medicare program, non-affiliated facilities reduced the amount of therapy services provided at their facilities. Additionally, the Company (consistent with other rehabilitation service providers) has seen reduced pricing levels and the Company also terminated certain low profit contracts with non-affiliated facilities. The Company's quality mix of private, Medicare and insurance revenues was 58.0% for the six months ended June 30, 1998 as compared to 51.7% during the same period of 1999. This decrease in quality mix of revenues was the result of the decrease in Medicare revenues caused by the implementation of PPS. Facility Operating Expenses. Facility operating expenses increased by $7,022,000, or 6.0%, from $117,030,000 for the first half of 1998 to $124,052,000 for the first half of 1999 as the result of acquired facilities. Of this increase, $2,519,000 was due to the operations of the North Toledo Facilities, $4,487,000 was due to the operations of the Rhode Island Facilities, and $3,252,000 was due to the operations of the Danbury Facilities. General and Administrative; Service Charges Paid to Former Affiliate. General and administrative expenses increased by $1,906,000, or 25.5%, from $7,475,000 for the first half of 1998 to $9,381,000 for the first half of 1999. This increase resulted from the expansion of regional and corporate support, and additional travel, consulting and systems development expenses associated with the Company's growth. The Company reimburses a former affiliate for certain data processing and administrative services provided to the Company. During the first half of 1998, such reimbursements totaled $628,000 compared to $573,000 in 1999. Depreciation and Amortization. Depreciation and amortization increased from $2,263,000 for the first half of 1998 to $5,104,000 for the first half of 1999 primarily due to the amortization of costs related to the leveraged recapitalization and the exercise of purchase options for seven facilities which were financed through synthetic leases prior to the leveraged recapitalization. The exercise of these purchase options was funded through financing arranged in connection with the leveraged recapitalization. Amortization of Prepaid Management Fees. Amortization of prepaid management fees (paid in connection with the Merger) was $600,000 during the first half of 1999. Facility Rent. Facility rent expense for the first six months decreased by $417,000 from $11,621,000 in 1998 to $11,204,000 in 1999. The decrease in rent expense is the result of a reduction in rent expense related to the exercise of purchase options on previously leased facilities partially offset by the acquisition of the Danbury Facilities by means of a synthetic lease. Interest Expense, net. Interest expense, net, increased from $3,202,000 for the first half of 1998 to $9,856,000 for the first half of 1999. This net increase is primarily due to the issuance of $99,500,000 of 11% Senior Subordinated Discount Notes in connection with the leveraged recapitalization. The interest associated with these notes accretes until cash payments begin on August 1, 2003. Income Tax Expense (Benefit). As a result of a loss incurred in the first half of 1999, an income tax benefit of $5,608,000 was recognized for that period compared to income tax expense of $2,476,000 for the same period of 1998. Net Income/Loss. Net income was $3,873,000 for the first half of 1998 as compared to a loss of $8,772,000 for the first half of 1999. -17- LIQUIDITY AND CAPITAL RESOURCES The Company's primary cash needs are for acquisitions, capital expenditures, working capital, debt service and general corporate purposes. The Company has historically financed these requirements primarily through a combination of internally generated cash flow, mortgage financing and operating leases, in addition to funds borrowed under a credit facility. In addition, in 1996 the Company financed the acquisition of four facilities located in Ohio by means of a lease which is accounted for as a capital lease for financial reporting purposes. The Company's existing leased facilities are leased from either the owner of the facilities, from a real estate investment trust which has purchased the facilities from the owner, or through synthetic lease borrowings. The Company's existing facility leases generally require it to make monthly lease payments and pay all property operating costs. The Company generally negotiates leases which provide for extensions beyond the initial lease term and an option to purchase the leased facility. In some cases, the option to purchase the leased facility is at a price based on the fair market value of the facility at the time the option is exercised. In other cases, the lease for the facility sets forth a fixed purchase option price which the Company believes is equal to the fair market value of the facility at the inception date of such lease, thus allowing the Company to realize the value appreciation of the facility while maintaining financial flexibility. In connection with the leveraged recapitalization completed on August 11, 1998, the Company obtained gross proceeds of $99.5 million through the issuance of 11% Senior Subordinated Discount Notes (the "Discount Notes") due 2008 and $40 million through the issuance of 13.5% Exchangeable Preferred Stock (the "Preferred Stock") mandatorily redeemable in 2010. Interest on the Discount Notes accretes at 11% per annum with cash interest on the Discount Notes not payable until August 1, 2003. Dividends on the Preferred Stock are payable, at the option of the Company, in additional shares of the Preferred Stock until August 1, 2003. After that date dividends may only be paid in cash. The Company also entered into a new $250 million collateralized credit facility (the "New Credit Facility"). The terms of the New Credit Facility provide up to $75 million on a revolving credit basis plus an additional $175 million initially funded on a revolving basis that converts to a term loan on an annual basis on each anniversary of the closing. During the first four years of the facility, any or all of the full $250 million of availability under the facility may be used for synthetic lease financings. Proceeds of loans under the facility may be used for acquisitions, working capital purposes, capital expenditures and general corporate purposes. Interest is based on either LIBOR or prime rates of interest (plus applicable margins determined by the Company's leverage ratio) at the election of the Company. The New Credit Facility contains various financial and other restrictive covenants and limits aggregate borrowings under the New Credit Facility to a predetermined multiple of EBITDA. During the first quarter of 1999, the Company determined that its anticipated financial results for that quarter would cause the Company to be out of compliance with certain financial covenants of the New Credit Facility. The Company's expected lower first quarter results were attributable to transitional difficulties associated with the implementation of the new Medicare prospective payment system which became effective at all of the Company's facilities on January 1, 1999. Such transitional difficulties resulted in lower than expected revenues, primarily due to fewer than expected Medicare patient days, lower Medicare Part A rates, reduced revenues from therapy services provided to non-affiliated long-term care centers and a reduction in revenues from the provision of Medicare Part B services. In response, during the first quarter the Company initiated additional facility-based training directed towards the documentation requirements of the revised Medicare reimbursement system. The Company also continued to refine its admission and assessment protocols in order to increase patient admissions and introduced a series of targeted initiatives to lower operating expenses. Such initiatives have included wage and staffing reductions (primarily related to the delivery of rehabilitative therapy services and indirect nursing support), renegotiation of vendor contracts and ongoing efforts to reduce the Company's reliance on outside nurse agency personnel. All of the staffing reductions were implemented, on or prior to, April 1, 1999. Effective March 30, 1999, the Company obtained an amendment to the New Credit Facility which limits borrowings under the New Credit Facility to an aggregate of $58,500,000 (exclusive of undrawn letters of credit outstanding as of March 30, 1999) and which modified certain financial covenants. Access to additional borrowings for acquisitions and general corporate purposes under the New Credit Facility are permitted to the extent the Company achieves certain financial targets. The amendment allows the Company access to the entire $250 million facility if the Company's operating performance returns to the level of compliance contemplated by the original financial covenants. As of June 30, 1999, total borrowings under the New Credit Facility (exclusive of undrawn letters of credit outstanding as of March 30, 1999) were approximately $46,652,000 and consisted of $30,750,000 of revolver loans, $13,700,000 of synthetic leasing loans and $2,202,000 of undrawn letters of credit issued after March 30, 1999. As of June 30, 1999 the Company was in compliance with the financial covenants of the New Credit Facility. The Company's operating activities during the first half of 1999 used net cash of $4.0 million as compared to net cash of $1.7 million provided during the same period in 1998. The increase in net cash used by operations during the first six months of 1999 was primarily due to increases in prepaid income taxes and prepaid expenses, partially offset by an increase in accounts payable. Net cash used by investing activities was $8.9 million during the first six months of 1999 as compared to $10.2 million used during the same period in 1998. Net cash invested in each period was used primarily to fund additions to property and equipment at the facilities. Additionally, during the first quarter of 1999, approximately $1,000,000 was expended in connection with obtaining the amendment of the Company's New Credit Facility. Net cash provided by financing activities during the first six months of 1999 was $15.7 million as compared to $2.9 million during the first six months of 1998. During the first six months of 1999 the Company borrowed $18.0 million under the New Credit Facility. In addition to the Discount Notes, as of March 31, 1999, the Company had two mortgage loans outstanding in the aggregate amount of $17.8 million, in addition to advances outstanding under its revolving credit facility and $55.0 million of capital lease obligations. One of the Company's mortgage loans had an outstanding balance of $16.2 million, of which $15.1 million is due at maturity in 2004. This loans bears interest at an annual rate of 10.65% plus additional interest equal to 0.3% of the difference between the annual operating revenues of four mortgaged facilities and the actual revenues of these facilities during a twelve month base period. The Company's other mortgage loan, which encumbers a single facility, had an outstanding principal balance of $1.6 million, of which $1.3 million is due in 2010. -18- The Company had expected that its capital expenditures for 1999, excluding acquisitions of new long-term care facilities, would aggregate approximately $12,000,000. During the second quarter, the Company began a process of identifying which of these projects could be deferred in order to improve cash flow. Capital additions declined from $4,397,000 in the first quarter of 1999 to $2,732,000 during the second quarter of 1999. The Company expects that capital additions for the second half of 1999 will not exceed $6,000,000. The Company's expected capital expenditures relate to maintenance capital expenditures, systems enhancements, special construction projects and other capital improvements. The Company expects that its future facility acquisitions will be financed with borrowings under the Company's revolving credit facility, direct operating leases or assumed debt. The Company may be required to obtain additional equity financing to finance any significant acquisitions in the future. Harborside's principal sources of funds are cash flow from operations and borrowings under the New Credit Facility. These funds are being used to finance working capital, meet debt service and capital expenditure requirements, finance acquisitions and for general corporate purposes. Harborside believes that operating cash flow and availability under the New Credit Facility will be adequate to meet its liquidity needs for the foreseeable future, although no assurance can be given in this regard. During the third quarter of 1999, the Company announced that it would cease providing contract therapy services to non-affiliated facilities during the third quarter of 1999. Harborside, through its subsidiary Theracor, has provided physical, speech and occupational services to non-affiliated skilled nursing facilities since 1995. Significant changes in the contract therapy business, primarily related to reductions in Medicare reimbursement for therapy services caused by the Balanced Budget Act of 1997 led to this decision. The Company expects to record a pre-tax restructuring charge of approximately $5.0 million to $6.5 million during the third quarter as a result of this action. The charge will be substantially non-cash in nature and consists primarily of the write-off of unamortized goodwill and a potential increase to the reserve for uncollectible contract therapy receivables as a result of the Company's termination of non-affiliate contracts. The Company expects that its ongoing EBITDA will not be negatively impacted by this decision. Theracor will continue to be responsible for the delivery of therapy services at facilities operated by Harborside. SEASONALITY The Company's earnings generally fluctuate from quarter to quarter. This seasonality is related to a combination of factors which include the timing and amount of Medicaid rate increases, seasonal census cycles, and the number of days in a given fiscal quarter. INFLATION The healthcare industry is labor intensive. Wages and other labor related costs are especially sensitive to inflation. Certain of the Company's other expense items, such as supplies and real estate costs are also sensitive to inflationary pressures. Shortages in the labor market or general inflationary pressure could have a significant effect on the Company. In addition, suppliers pass along rising costs to the Company in the form of higher prices. When faced with increases in operating costs, the Company has sought to increase its charges for services and its requests for reimbursement from government programs. The Company's private pay customers and third party reimbursement sources may be less able to absorb increased prices for the Company's services. The Company's operations could be adversely affected if it is unable to recover future cost increases or experiences significant delays in increasing rates of reimbursement of its labor or other costs from Medicare and Medicaid revenue sources. The Year 2000 Issue The Company continues to evaluate and address risks that could arise in connection with the potential inability of computer programs to recognize dates that follow December 31, 1999 (the "Year 2000 Issue"). The Company's focus has been on evaluating the impact that the Year 2000 Issue might have on essential equipment and systems of the Company as well as major suppliers, customers and other third parties. The Company has formulated and implemented a remediation plan in connection with those systems that will not be Year 2000 compliant. As of June 30, 1999 the Company has tested and evaluated substantially all of its information technology ("IT") systems and equipment. The Company is also evaluating the compliance of its major suppliers and their respective products with the Year 2000 Issue. With respect to the Year 2000 compliance of critical third parties, the Company derives a significant portion of its revenues from the Medicare and Medicaid programs. The Health Care Finance Administration ("HCFA"), the governmental agency that administers the Medicare program, has publicly stated that it will be Year 2000 compliant by December 31, 1998. HCFA has imposed the same December 31, 1998 deadline on its fiscal intermediaries and has stated that it expects state Medicaid agencies to be compliant by March 1999. The General Accounting Office cannot make any assurances that the government payment systems will be Year 2000 compliant on time. The Company derives its governmental payments through fiscal intermediaries, however, there can be no assurance that the payments from the fiscal intermediaries will not be negatively impacted by any Year 2000 issues not corrected in a timely manner. The Company intends to actively pursue assurances of the status of the remediation efforts and Year 2000 compliance by the government and its fiscal intermediaries. The Company began replacing critical IT systems for Year 2000 issues in connection with a comprehensive evaluation of system wide operational IT efficiencies in 1996. The Company has recently completed the conversion of certain of its financial reporting systems to new software that has been certified as Year 2000 compliant. The Company is in the process of upgrading and consolidating its remaining financial applications to new Year 2000 compliant software by September 30, 1999. Additionally, the Company has received Year 2000 compliance certification from its remaining software suppliers with respect to operating systems that will not be upgraded. The Company's Year 2000 systems conversions and upgrades have been funded from operating cash flow and its credit facility. -19- The Company, as part of its comprehensive ongoing evaluation process, is testing and upgrading where necessary, all local area networks ("LANS"), personal computers and related operating software for compliance with Year 2000 Issues. The Company expects to implement any required remediation by September 30, 1999. The Company plans to remediate any Year 2000 issues discovered in its review of LANS through the installation of upgraded hardware and software. The Company on a going forward basis is endeavoring to ensure that all software and hardware purchased is Year 2000 compliant. The Company has undertaken an evaluation of facility operating systems for potential problems associated with Year 2000 Issues. The Company has evaluated and tested virtually all of its facility heating, cooling and ventilation ("HVAC") systems, life safety and security systems, and mechanical systems for Year 2000 compliance. In connection with the review and testing procedures, the Company has contacted the manufacturer of the respective systems for further assurance of potential exposure to Year 2000 Issues. Based on the results of testing to date, the Company does not believe that above referenced facility operating systems will have any significant risk associated with the Year 2000 Issue. -20- SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Form 10-Q, including information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", constitute "Forward-Looking Statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The Company desires to take advantage of certain "safe harbor" provisions of the Reform Act and is including this special note to enable the Company to do so. Forward-looking statements included in this Form 10-Q, or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, reports to the Company's stockholders and other publicly available statements issued or released by the Company involve known and unknown risks, uncertainties, and other factors which could cause the Company's actual results, performance (financial or operating) or achievements to differ materially from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. The Company believes the following important factors could cause such a material difference to occur: 1. The Company's ability to grow through the acquisition and development of long-term care facilities or the acquisition of ancillary businesses. 2. The Company's ability to identify suitable acquisition candidates, to consummate or complete construction projects, or to profitably operate or successfully integrate enterprises into the Company's other operations. 3. The occurrence of changes in the mix of payment sources utilized by the Company's patients to pay for the Company's services. 4. The adoption of cost containment measures by private pay sources such as commercial insurers and managed care organizations, as well as efforts by governmental reimbursement sources to impose cost containment measures. 5. Changes in the United States healthcare system, including changes in reimbursement levels and the method of reimbursement, under Medicaid and Medicare, and other changes in applicable government regulations that might affect the profitability of the Company. 6. The Company's continued ability to operate in a heavily regulated environment and to satisfy regulatory authorities, thereby avoiding a number of potentially adverse consequences, such as the imposition of fines, temporary suspension of admission of patients, restrictions on the ability to acquire new facilities, suspension or decertification from Medicaid or Medicare programs, and in extreme cases, revocation of a facility's license or the closure of a facility, including as a result of unauthorized activities by employees. 7. The Company's ability to secure the capital and the related cost of such capital necessary to fund its future growth through acquisition and development, as well as internal growth. 8. Changes in certificate of need laws that might increase competition in the Company's industry, including, particularly, in the states in which the Company currently operates or anticipates operating in the future. 9. The Company's ability to staff its facilities appropriately with qualified healthcare personnel, including in times of shortages of such personnel and to maintain a satisfactory relationship with labor unions. 10. The level of competition in the Company's industry, including without limitation, increased competition from acute care hospitals, providers of assisted and independent living and providers of home healthcare and changes in the regulatory system in the state in which the Company operates that facilitate such competition. 11. The continued availability of insurance for the inherent risks of liability in the healthcare industry. 12. Price increases in pharmaceuticals, durable medical equipment and other items. 13. The Company's reputation for delivering high-quality care and its ability to attract and retain patients, including patients with relatively high acuity levels. 14. Changes in general economic conditions, including changes that pressure governmental reimbursement sources to reduce the amount and scope of healthcare coverage. 15. The Company's, its vendors, banks and payors ability to address computer system concerns related to the Year 2000 issue. The foregoing review of significant factors should not be construed as exhaustive or as an admission regarding the adequacy of disclosures previously made by the Company. -21- PART II - OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. -22- 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 16, 1999 -23- EX-27 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-31-1999 JUN-30-1999 3,744 0 52,674 (2,275) 62,802 83,348 189,115 (24,776) 281,284 36,240 211,450 45,185 0 146 (11,737) 281,284 0 146,720 0 0 150,914 0 9,856 (14,380) (5,608) (8,772) 0 0 0 (8,772) (1.61) (1.61) Includes the following assets: prepaid expenses and other of $15,931, prepaid income taxes of $9,190, deferred income taxes--current of $4,084, deferred income taxes--long-term of $2,229, restricted cash of $2,410, deferred financing and other non-current assets, net of $17,771, and note receivable $7,487 and other assets, net of $3,700. Includes the following long-term liabilities: deferred income of $2,766, capital lease obligation of $50,586, and long-term debt of $158,098. Includes the following equity accounts: additional paid-in capital of $201,705 treasury stock of ($183,746) and retained earnings of ($29,696).
-----END PRIVACY-ENHANCED MESSAGE-----