AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER , 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HARBORSIDE HEALTHCARE CORPORATION
AND OTHER REGISTRANTS*
(Exact name of registrant as specified in its charter)
DELAWARE 8051 04-3307188
(State or other (Primary Standard (IRS Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
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470 ATLANTIC AVENUE
BOSTON, MASSACHUSETTS 02210
(617) 556-1515
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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STEPHEN L. GUILLARD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HARBORSIDE HEALTHCARE CORPORATION
470 ATLANTIC AVENUE
BOSTON, MASSACHUSETTS 02210
(617) 556-1515
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
WITH COPIES TO:
E. MICHAEL GREANEY, ESQ.
GIBSON, DUNN & CRUTCHER LLP
200 PARK AVENUE
NEW YORK, NEW YORK 10166
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
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11% Series A Senior
Subordinated Discount
Notes due 2008......... $170,000,000 59.586% $101,296,200 $29,882
Guarantees of the
Notes.................. $170,000,000 (2) (2) (2)
13 1/2% Series A
Exchangeable Preferred
Stock Mandatorily
Redeemable 2010 ("New
Preferred Stock")...... 40,000(3) $1,000 $40,000,000 $11,800
13 1/2% Subordinated
Exchange Debentures due
2010(4)................ (5) (2) (2) (2)
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(1) Estimated pursuant to Rule 457(f)(2) solely for purposes of calculating
the registration fee, based on the book value of the Old Securities as of
September 29, 1998.
(2) No separate consideration will be received for the Guarantees or the
Exchange Debentures and, pursuant to Rule 457(i) and 457(n), no further
fee is payable with respect thereto.
(3) This Registration Statement also covers an indeterminate number of shares
of New Preferred Stock that may be issued in payment of dividends on
shares of New Preferred Stock pursuant to the terms thereof.
(4) Issuable at the Registrant's option in exchange for the New Preferred
Stock.
(5) An amount equal to the aggregate liquidation preference of, and
accumulated but unpaid dividends on, the New Preferred Stock outstanding
at the time of the exchange, including New Preferred Stock issued in
payment of dividends. This Registration Statement also covers Exchange
Debentures that may be issued in payment of dividends on Exchange
Debentures pursuant to the termes thereof.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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*The exact names of each of the other registrants as specified in their
charters, their states of incorporation or organization and their I.R.S.
employer identification numbers are as follows: Harborside Healthcare Limited
Partnership (MA, 04-2985687), Belmont Nursing Center Corp. (MA, 04-3072217),
Orchard Ridge Nursing Center Corp. (MA, 04-3072231), Oakhurst Manor Nursing
Center Corp. (MA, 04-3072232), Riverside Retirement Limited Partnership (MA,
04-2991629), Harborside Toledo Limited Partnership (MA, 04-3260170),
Harborside Connecticut Limited Partnership (MA, 06-1496629), Harborside of
Florida Limited Partnership (FL, 04-3239093), Harborside of Ohio Limited
Partnership (MA, 04-3189435), Harborside Healthcare Baltimore Limited
Partnership (MA, 52-2013622), Harborside of Cleveland Limited Partnership (MA,
04-3313798), Harborside of Dayton Limited Partnership (MA, 31-1546651),
Harborside Massachusetts Limited Partnership (MA, 04-3364219), Harborside
Rhode Island Limited Partnership (MA, 05-0495209), Harborside North Toledo
Limited Partnership (MA, 34-1855902), Harborside Healthcare Advisors Limited
Partnership (MA, 04-2985690), Harborside Toledo Corporation (MA, 04-3274482),
KHI Corporation (DE, 51-0304577), Harborside Acquisition Limited Partnership
IV (MA, None), Harborside Acquisition Limited Partnership V (MA, None),
Harborside Acquisition Limited Partnership VI (MA, None), Harborside
Acquisition Limited Partnership VII (MA, None), Harborside Acquisition Limited
Partnership VIII (MA, None), Harborside Acquisition Limited Partnership IX
(MA, None), Harborside Acquisition Limited Partnership X (MA, None), Sailors,
Inc. (DE, None), New Jersey Harborside Corporation (MA, 04-3285183),
Bridgewater Assisted Living Limited Partnership (NJ, 04-3331905), Maryland
Harborside Corporation (MA, 04-3168713), Harborside Homecare Limited
Partnership (MA, 04-3276939), Harborside Rehabilitation Limited Partnership
(MA, 04-3209245), Harborside Healthcare Network Limited Partnership (FL,
04-3310886), and Harborside Health I Corporation (DE, 51-0304578). The primary
standard industrial classification code number for each of these other
registrants is 8051.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER , 1998
PROSPECTUS
OFFER FOR ALL OUTSTANDING 11% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2008
IN EXCHANGE FOR
11% SERIES A SENIOR SUBORDINATED DISCOUNT NOTES DUE 2008,
AND FOR ALL OUTSTANDING 13 1/2% EXCHANGEABLE PREFERRED STOCK MANDATORILY
REDEEMABLE 2010
IN EXCHANGE FOR
13 1/2% SERIES A EXCHANGEABLE PREFERRED STOCK MANDATORILY REDEEMABLE 2010, OF
[LOGO HARBORSIDE HEALTHCARE CORPORATION]
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON , 1998, UNLESS EXTENDED
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Harborside Healthcare Corporation (the "Issuer") hereby offers to exchange (i)
up to an aggregate principal amount of $170,000,000 of its 11% Series A Senior
Subordinated Discount Notes due 2008 (the "New Notes") for a like principal
amount of its 11% Senior Subordinated Discount Notes due 2008 outstanding on
the date hereof (the "Old Notes"), and (ii) up to 40,000 shares of its 13 1/2%
Series A Exchangeable Preferred Stock Mandatorily Redeemable 2010 (the "New
Preferred Stock," and together with the New Notes, the "New Securities") for a
like number of shares of its 13 1/2% Exchangeable Preferred Stock Mandatorily
Redeemable 2010 outstanding on the date hereof (the "Old Preferred Stock," and
together with the Old Notes, the "Old Securities"), upon the terms and subject
to the conditions set forth in this Prospectus and in the accompanying Letter
of Transmittal (which together constitute the "Exchange Offer"). The New Notes
and the Old Notes are referred to collectively herein as the "Notes." The New
Preferred Stock and the Old Preferred Stock are referred to collectively herein
as the "Exchangeable Preferred Stock." The New Securities and the Old
Securities are referred to collectively herein as the "Securities."
THE TERMS OF THE NEW SECURITIES ARE IDENTICAL IN ALL MATERIAL RESPECTS TO THOSE
OF THE OLD SECURITIES, EXCEPT FOR CERTAIN TRANSFER RESTRICTIONS, REGISTRATION
RIGHTS AND SPECIAL MANDATORY REDEMPTION PROVISIONS RELATING TO THE OLD
SECURITIES. The New Notes will be issued pursuant to, and entitled to the
benefits of, the Indenture (as defined) governing the Old Notes. The New
Preferred Stock will be issued pursuant to, and entitled to the benefits of,
the Certificate of Designation governing the Old Preferred Stock.
The New Notes, like the Old Notes, will be guaranteed on an unsecured senior
subordinated basis by certain subsidiaries of the Issuer (the "Guarantors").
The New Notes and Note Guarantees will be unsecured senior subordinated
obligations of the Issuer and the Guarantors, will be subordinated in right of
payment to all existing and future Senior Debt, will rank pari passu in right
of payment with all Pari Passu Debt and will be senior in right of payment to
all Subordinated Debt. In addition, the New Notes will be effectively
subordinated to all liabilities (including trade payables) of the subsidiaries
of the Issuer that are not Guarantors. At June 30, 1998, after giving pro forma
effect to the merger and related financings described herein, the Issuer and
the Guarantors would have had approximately $61.5 million of Senior Debt and no
Pari Passu Debt or Subordinated Debt outstanding, and the subsidiaries that are
not Guarantors would have had approximately $29.5 million of liabilities
(excluding amounts owed to the Issuer or any Guarantor), including $16.4
million of indebtedness. In addition, all borrowings under the Issuer's new
$250.0 million credit facility (which is guaranteed by the Guarantors) will
constitute Senior Debt.
The New Notes, like the Old Notes, will each have a principal amount at
maturity of $1,000. Each Old Note had an original issue price of $585.25 and
the Accreted Value (as defined in the Indenture) of each Old Note accretes from
the date of its issuance. The Accreted Value of each New Note will accrete from
the date of issuance, at which time its Accreted Value will equal the Accreted
Value of each Old Note. Cash interest will not accrue on the New Notes until
August 1, 2003. Thereafter, interest on the New Notes will be paid in cash on
each February 1 and August 1, commencing February 1, 2004. The New Notes will
be redeemable, in whole or in part, at the option of the Issuer, at any time on
or after August 1, 2003, at the redemption prices set forth herein.
Dividends on the New Preferred Stock, like in the case of the Old Preferred
Stock, will be cumulative from the date of issuance and are payable quarterly
in cash or, on or prior to August 1, 2003, at the option of the Issuer, in
additional shares of Exchangeable Preferred Stock, on each February 1, May 1,
August 1 and November 1, commencing on the first such date after the issuance
of the New Preferred Stock. The Issuer is required to redeem the New Preferred
Stock out of funds legally available therefor (if any) at the liquidation
preference of $1,000 per share, plus accumulated and unpaid dividends, on
August 1, 2010. The New Preferred Stock will be redeemable, in whole or in
part, at the option of the Issuer, at any time on or after August 1, 2003, at
the redemption prices set forth herein. The New Preferred Stock will be
exchangeable, in whole but not in part, at the option of the Issuer, subject to
certain conditions, into 13 1/2% Subordinated Exchange Debentures due 2010 of
the Issuer (the "Exchange Debentures"). If issued, the Exchange Debentures will
be redeemable, in whole or in part, at the option of the Issuer, at any time on
or after August 1, 2003, at the redemption prices set forth herein.
In addition, at any time, or from time to time, on or prior to August 1, 2001,
up to 35% of the New Notes and up to 35% of the New Preferred Stock or Exchange
Debentures will be redeemable at the option of the Issuer, from the net cash
proceeds of one or more public offerings of common stock of the Issuer at 111%
of their Accreted Value, 113.5% of their liquidation preference or 113.5% of
their principal amount, as the case may be, plus any accrued and unpaid
interest or dividends, as the case may be. In addition, the New Notes, the New
Preferred Stock and the Exchange Debentures will be redeemable on the terms
provided herein upon a Change of Control.
The New Securities are being offered hereunder in order to satisfy certain
obligations of the Issuer contained in the Registration Rights Agreements dated
July 31, 1998 (the "Registration Rights Agreements"), among the Issuer, the
Guarantors and the Placement Agents (as defined), with respect to the initial
sale of the Old Notes and the Old Preferred Stock. Neither the Issuer nor the
Guarantors will receive any proceeds from the Exchange Offer. The Issuer will
pay all the expenses incident to the Exchange Offer. Tenders of Old Securities
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date (as defined) for the Exchange Offer. In the event the Issuer
terminates the Exchange Offer and does not accept for exchange any Old
Securities with respect to the Exchange Offer, the Issuer will promptly return
such Old Securities to the holders thereof. See "The Exchange Offer."
Each broker-dealer that receives New Securities for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Securities. The Letter of Transmittal
states that by so acknowledging and by delivery of a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act of 1933, as amended (the "Securities Act"). This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Securities received in
exchange for Old Securities where such Old Securities were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Issuer has agreed that, for a period of 90 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution."
Prior to the Exchange Offer, there has been no public market for the Old
Securities. If a market for the New Securities should develop, such New
Securities could trade at a discount from their Accreted Value or liquidation
preference, as applicable. The Issuer currently does not intend to list the New
Securities on any securities exchange or to seek approval for quotation through
any automated quotation system and no active public market for the New
Securities is currently anticipated.
The Exchange Offer is not conditioned upon any minimum principal amount of Old
Securities being tendered for exchange pursuant to the Exchange Offer.
SEE "RISK FACTORS" COMMENCING ON PAGE 24 FOR A DISCUSSION OF CERTAIN FACTORS
THAT HOLDERS OF OLD SECURITIES SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE
OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
AVAILABLE INFORMATION
The Issuer and the Guarantors have filed with the Securities and Exchange
Commission (the "Commission") a registration statement relating to the New
Securities offered hereby (herein, together with all amendments and exhibits,
referred to as the "Registration Statement") under the Securities Act. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information, reference is hereby
made to the Registration Statement. Statements made in this Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to such exhibit for a more complete description thereof, and each such
statement shall be deemed qualified in its entirety by such reference.
Upon effectiveness of the Registration Statement, the Issuer and the
Guarantors will be subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith must file periodic reports and other information with the
Commission.
The Registration Statement and the exhibits and schedules thereto and any
periodic reports or other information filed pursuant to the Exchange Act may
be inspected without charge and copied at prescribed rates at the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at 7 World
Trade Center, Suite 1300, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The
Commission maintains a website that contains reports, proxy and information
statements and other information filed electronically with the Commission at
http://www.sec.gov.
Pursuant to the indenture pursuant to which the Old Notes have been issued
and the New Notes will be issued (the "Indenture"), the certificate of
designation pursuant to which Old Preferred Stock has been issued and the New
Preferred Stock will be issued (the "Certificate of Designation") and the
indenture pursuant to which the Exchange Debentures may be issued (the
"Exchange Debenture Indenture"), the Issuer and the Guarantors have agreed to
file with the Securities and Exchange Commission (the "Commission"), to the
extent permitted by the Exchange Act, and provide to the holders of the
Securities, annual reports and the information, documents and other reports
(including quarterly reports) that are specified in Sections 13 and 15(d) of
the Exchange Act. The Issuer has filed a letter with the Commission requesting
that the Guarantors not be required to comply separately with the reporting
requirements specified in Sections 13 and 15(d) of the Exchange Act. If this
request is granted, the Issuer will comply with such reporting requirements
and will include in its reports information with respect to the Guarantors on
a consolidated basis.
FORWARD LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). ALL STATEMENTS REGARDING THE
COMPANY'S EXPECTED FINANCIAL POSITION, BUSINESS AND FINANCING PLANS ARE
FORWARD-LOOKING STATEMENTS. THE COMPANY BELIEVES THAT THE EXPECTATIONS
REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS, AND THE ESTIMATES AND
ASSUMPTIONS ON WHICH THEY ARE BASED, ARE REASONABLE. HOWEVER, ESTIMATES AND
ASSUMPTIONS ARE INHERENTLY UNCERTAIN, AND NO ASSURANCE CAN BE GIVEN THAT THEY
WILL PROVE TO BE CORRECT OR THAT EXPECTATIONS BASED UPON THEM WILL BE
REALIZED. THE COMPANY THEREFORE
2
CANNOT AND DOES NOT WARRANT THAT THE RESULTS CONTEMPLATED BY SUCH FORWARD-
LOOKING STATEMENTS WILL BE ACHIEVED, AND IT IS LIKELY THAT ACTUAL RESULTS WILL
DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS.
ACCORDINGLY, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH FORWARD-LOOKING
STATEMENTS. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS
("CAUTIONARY STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS, INCLUDING, WITHOUT
LIMITATION, IN CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS INCLUDED IN
THIS PROSPECTUS AND UNDER "RISK FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE ISSUER, ITS AFFILIATES OR
PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE
CAUTIONARY STATEMENTS DISCLOSED IN THIS PROSPECTUS.
3
TABLE OF CONTENTS
PAGE
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AVAILABLE INFORMATION.................................................... 2
FORWARD LOOKING STATEMENTS............................................... 2
SUMMARY.................................................................. 5
RISK FACTORS............................................................. 24
USE OF PROCEEDS.......................................................... 37
THE EXCHANGE OFFER....................................................... 38
CAPITALIZATION........................................................... 48
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION................... 49
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA.......................... 64
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 66
BUSINESS................................................................. 77
MANAGEMENT............................................................... 98
PRINCIPAL SHAREHOLDERS................................................... 104
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 107
THE TRANSACTIONS......................................................... 109
DESCRIPTION OF CAPITAL STOCK............................................. 112
DESCRIPTION OF THE NEW CREDIT FACILITY................................... 113
DESCRIPTION OF THE NEW NOTES............................................. 116
DESCRIPTION OF THE NEW PREFERRED STOCK................................... 153
DESCRIPTION OF THE EXCHANGE DEBENTURES................................... 169
U.S. FEDERAL INCOME TAX CONSEQUENCES..................................... 203
PLAN OF DISTRIBUTION..................................................... 208
LEGAL MATTERS............................................................ 209
EXPERTS.................................................................. 209
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................... F-1
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A
SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW
HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT
FILED UNDER CHAPTER 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY
SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A
SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY
WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO,
ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE
MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
4
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless the
context requires otherwise, all references in this Prospectus to the "Issuer"
mean Harborside Healthcare Corporation, a Delaware corporation, its
subsidiaries and their predecessors, or any of them, depending on the context,
after consummation of the merger of Harborside with and into HH Acquisition
Corp. (the "Merger") pursuant to the Agreement and Plan of Merger dated as of
April 15, 1998, and all references to "Harborside" or the "Company" mean
Harborside Healthcare Corporation, a Delaware corporation, its subsidiaries and
their predecessors, or any of them, depending on the context, whether before or
after consummation of the Merger. All references in this Prospectus to the Old
Securities, the New Securities or the Securities include the Exchange
Debentures if issued or if otherwise appropriate in the context. All references
in this Prospectus to "Recent Acquisitions" mean the acquisitions completed by
the Issuer in 1997 and 1998. See "Business--Recent Acquisitions."
THE COMPANY
Harborside 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 Midwest (Ohio and Indiana), New England (Massachusetts
and New Hampshire), the Northeast (Connecticut and Rhode Island), the Southeast
(Florida) and the Mid-Atlantic (New Jersey and Maryland). As of June 30, 1998,
the Company operated 49 long-term care facilities with 5,983 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, cerebrovascular accident ("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.
Since commencing operations in 1988, the Company has successfully grown its
revenues and earnings primarily through: (i) strategic acquisitions in states
which it believes possess favorable demographic and regulatory environments
through which it believes it has achieved a strong regional presence; (ii) the
expansion of the specialty medical services provided at its long-term care
facilities; and (iii) the creation of marketing programs to strengthen
relationships with patient referral sources and payors, including those in the
growing managed care sector. In addition, the Company believes that the demand
for its services has also benefited from favorable industry dynamics and
demographic trends, while the supply of new licensed beds continues to be
restricted by various state regulations. As a result, the Company has achieved
high occupancy rates, a favorable quality mix (non-Medicaid revenues as a
percentage of total net revenues) and consistent, strong growth in total net
revenues and profitability. During the three years ended December 31, 1997, the
Company's total net revenues grew at a compound annual rate of 36.9%, from
$86.4 million in 1994 to $221.8 million in 1997. During the same period, the
Company's EBITDAR (as defined) grew at a compound annual rate of 38.1%, from
$12.8 million in 1994 to $33.7 million in 1997.
INDUSTRY BACKGROUND
The U.S. long-term care industry encompasses a broad range of healthcare
services provided in skilled nursing facilities, including traditional skilled
nursing care and specialty medical services. Revenues generated by the long-
term care industry, which were $87 billion in 1996, have grown at a compound
annual rate of over 10% since 1980. The long-term care industry currently
consists of
5
approximately 17,000 free-standing and hospital-based skilled nursing
facilities and remains highly fragmented, with the fifteen largest publicly-
traded long-term care companies controlling less than 20% of all facilities.
The Company believes that the demand for long-term care will continue to
increase primarily due to: (i) lengthened average life expectancies, which have
increased the number and medical needs of elderly individuals requiring
specialized care; (ii) social changes, including the prevalence of two-income
households and increased disposable income, which have increased the need and
ability to pay for elderly care outside of the home; (iii) payor-driven cost
containment initiatives, which have encouraged shorter stays in acute care
settings and have led to increased admissions to long-term care facilities
which provide subacute care; and (iv) improvements in medical technology, which
have increased the range and cost effectiveness of subacute care services that
long-term care providers can offer. The long-term care industry is also
undergoing considerable consolidation due to its fragmented nature, the
benefits of scale when dealing with patient referral sources and payors and in
generating cost efficiencies, the inability of smaller, less sophisticated
operators to effectively treat higher acuity patients and adapt to the
increasing complexity of the reimbursement and regulatory environment, and
constraints on the supply of new licensed beds. The Company believes that these
and other factors which are driving consolidation will provide the Company with
opportunities for continued growth through acquisitions.
COMPANY STRENGTHS
Portfolio of High-Quality Long-Term Care Facilities. The quality of the
Company's portfolio of facilities is evidenced by the Company's strong
historical operating performance and the high percentage of its facilities that
are accredited by the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO"), a nationally-recognized accreditation agency for
hospitals, skilled nursing facilities and other healthcare organizations. As of
June 30, 1998, 63% of Harborside's long-term care facilities were accredited by
JCAHO, with 35% of the Company's facilities accredited "with Commendation,"
compared to only 13% and 3%, respectively, for the industry as a whole in 1997.
The Company has scheduled accreditation reviews for an additional 16% of its
facilities during the remainder of 1998 and intends to seek accreditation for
substantially all of its remaining non-accredited facilities in the near
future. The Company believes that such recognition not only further improves
its reputation with payors and patient referral sources, but also provides it
with a distinct competitive advantage in securing an increasing number of
managed care and commercial insurance contracts.
Strong Regional Presence in Attractive Markets. The Company has focused its
operations in states that it believes possess favorable demographic and
regulatory environments. All but one of the states in which the Company
operates facilities currently have Certificate of Need ("CON") or other
regulations which restrict the addition of new licensed beds, which the Company
believes provide it with a more favorable competitive environment. Within its
five existing principal regions, the Company has further focused on increasing
its presence in distinct local markets. This regional and local focus has
enabled the Company to establish strong market positions and develop strong
relationships with patient referral sources, including regional managed care
organizations. In addition, the Company believes that its regional
concentrations provide it with significant opportunities to achieve operational
efficiencies through economies of scale, greater leverage of corporate
overhead, more effective regional management and marketing efficiencies. The
Company has made significant investments in developing regional overhead
structures that can support significant additional facilities in a given region
with minimal incremental costs.
Ability to Provide Cost-Effective, High-Quality and High Acuity Care. The
Company believes that its strong operating performance has been attributable
to, among other things, its ability to provide a broad range of high-quality
specialty medical services, which typically generate higher revenues and
profits per patient day than traditional skilled nursing care. In particular,
the Company believes that it
6
can provide subacute care services for substantially less than the cost of such
services when provided by acute care hospitals. Subacute care is comprehensive
care for individuals who have had an acute illness, injury or exacerbation of a
disease process and is typically rendered immediately after, or instead of,
acute hospitalization. The Company provides subacute care services in such
areas as complex medical care, cardiac recovery, digestive care, immuno-
suppressed disease care, post-surgical recovery, wound care, CVA/stroke care,
hemodialysis, infusion therapy, diabetes management and pain management. The
Company has also designed specific proprietary clinical pathways and protocols
in the areas of orthopedic rehabilitation, CVA/stroke recovery, cardiac
recovery, pulmonary rehabilitation and wound care to achieve measurable
outcomes in an efficient, cost-effective and patient-friendly manner. The
Company believes that its subacute care programs and its clinical pathways and
protocols are highly attractive to its patient referral sources, including
commercial insurance and managed care organizations.
Ability to Successfully Evaluate and Integrate Long-Term Care Facility
Acquisitions. The Company has a dedicated acquisition team of six experienced
professionals who work closely with corporate and regional operating management
in the evaluation of acquisition opportunities. The Company believes that the
close working relationship between operating management and its acquisition
team in the evaluation of acquisition opportunities results in better
acquisition decisions and a more effective and timely acquisition integration
process. Prior to the actual acquisition date, the Company begins employee
training regarding the Company's practices and procedures. After an acquisition
is consummated, the acquired facilities are converted to the Company's
financial information systems platform with minimal disruption to facility
operations, and management works closely and immediately with employees at the
new facility to generate operating improvements. Over time, operating
improvements are generated through, among other things, an expanded scope of
higher acuity specialty medical services, enhanced marketing programs and
improved rehabilitation services. Since the beginning of 1996, the Company has
expanded its number of licensed beds by over 140% through the completion of
eight acquisitions representing a total of 29 long-term care facilities with
3,512 licensed beds.
Strong Management Team with Significant Ownership. The Company's senior
management team, led by Stephen L. Guillard, Chairman, CEO and President, has
an average of over 15 years experience in the long-term care sector. In
addition, most of the members of senior management have worked together for the
past ten years. Senior management is highly committed to the growth of the
Company, having reinvested, upon consummation of the Merger, an aggregate value
of $5.6 million of their existing common stock and having retained stock
options which would have had a net value of $1.3 million had such options been
converted into cash in connection with the Merger. In addition, a new stock
option plan was created for senior management and other employees. Assuming the
exercise of all options available under such plan, senior management and other
employees of the Company would own approximately 14% of the Company.
BUSINESS STRATEGY
Selectively Acquire Additional Long-Term Care Facilities. The Company
believes that it will continue to have numerous acquisition opportunities due
primarily to the highly fragmented nature of the long-term care industry and
the inability of smaller, less sophisticated operators to effectively treat
higher acuity patients and adapt to the increasing complexity of the
reimbursement and regulatory environment. The Company will continue to focus
primarily on acquiring facilities in its existing regions where it has
established strong market positions. The Company will also selectively evaluate
new geographic markets possessing favorable demographic and regulatory
environments where it can establish strong market positions. The Company
believes that concentrating its long-term care facilities within selected
geographic regions provides it with greater local market share and more
effective relationships with patient referral sources, as well as the ability
to achieve operational efficiencies
7
through economies of scale, greater leverage of corporate overhead, more
effective regional management and marketing efficiencies. The Company's
acquisition strategy is particularly focused on states with CON programs or
similar regulations limiting the supply of new licensed beds.
Expand High Acuity Specialty Medical Services. The provision of high acuity
specialty medical services allows the Company to better serve its patient
referral sources along a broader continuum of care and take advantage of the
continued increased flow of high acuity patients from hospital settings. The
provision of such services also typically generates higher revenues and profits
per patient day than traditional skilled nursing care services. The Company
expects to continue to expand the range of specialty medical services provided
at both its existing and acquired facilities, with an emphasis on expanding the
number of its specialized subacute programs. Within its specialized subacute
programs, the Company will continue to design and implement clinical pathways
and protocols for its high acuity services. The Company also plans to continue
to develop specialty medical programs for patients with Alzheimer's disease and
hospice units for patients with terminal illnesses.
Expand Ancillary and Other Businesses. The Company intends to seek contracts
for the provision of its physical, occupational and speech rehabilitation
therapy services with additional non-affiliated facilities. The Company is also
evaluating opportunities to acquire additional ancillary businesses (such as
institutional pharmacy and infusion therapy) which would allow the Company to
provide these ancillary services directly to patients at its facilities and
which the Company believes would allow it to reduce its facility operating
costs. Additionally, these ancillary services could be provided to non-
affiliated facilities. The Company will also selectively evaluate opportunities
to acquire assisted living facilities and home health agencies in markets where
it operates facilities. The Company believes that these opportunities would
allow it to provide a broader continuum of care while leveraging its existing
general and administrative expenses.
Continue to Achieve High Occupancy Rates and a Strong Quality Mix. The
Company seeks to continue to achieve high occupancy rates primarily by
continuing to develop new and existing patient referral sources, enhance its
marketing programs and closely monitor census information and other patient
data at the corporate, regional and facility levels. In addition, the Company
seeks to continue to achieve a strong quality mix primarily by continuing to
expand the breadth and improve the quality of its specialty medical services.
An integral part of the Company's acquisition strategy has been to acquire
high-quality facilities from smaller, less sophisticated operators whose
facilities tend to offer lower acuity services than those offered by the
Company, thereby initially diluting the Company's quality mix. The Company
subsequently implements an expanded range of specialty medical services at
these facilities which typically improves its quality mix. For the year ended
December 31, 1997 and six months ended June 30, 1998, the Company's occupancy
rate was 92.3% and 92.6%, respectively, and its quality mix was 60.0% and
58.0%, respectively.
Implement Cost Control Initiatives in Response to Medicare Prospective
Payment System. Beginning January 1, 1999, the Company will be reimbursed for
services it provides to Medicare patients under the Medicare Prospective
Payment System ("Medicare PPS"), which will be phased in over a period of four
years. Medicare PPS will result in the Company being reimbursed under an
acuity-based per diem rate system rather than under the current cost-based
reimbursement system. The Company believes that implementing cost control
initiatives will enable it to maximize its profitability under Medicare PPS.
Accordingly, the Company has identified and intends to implement, among other
things, programs designed to reduce its costs of providing nursing and therapy
services while maintaining quality and outcomes. The Company already has
significant experience providing quality, cost-effective services under acuity-
based prospective payment systems, as 54% of its existing licensed beds are
located in states with acuity-based Medicaid systems.
8
THE TRANSACTIONS
THE RECAPITALIZATION
On April 15, 1998, Harborside entered into an Agreement and Plan of Merger
(the "Merger Agreement") with HH Acquisition Corp. ("MergerCo"), a Delaware
corporation organized on behalf of INVESTCORP S.A. ("Investcorp"), certain
affiliates of Investcorp and other international investors (such affiliates and
other international investors are collectively referred to herein as the "New
Investors") for the sole purpose of effecting the merger of MergerCo with and
into Harborside, with Harborside continuing as the surviving corporation (the
"Merger"). On August 11, 1998 (the "Closing Date"), pursuant to the Merger
Agreement, MergerCo was merged with and into Harborside. As a result of the
Merger:
. The New Investors became the owners of approximately 91% of the post-
Merger common stock of Harborside.
. Certain Harborside stockholders, including certain members of senior
management, retained shares representing approximately 9% of the post-
Merger common stock of Harborside.
. Each other share of Harborside common stock was converted into $25.00 in
cash, representing an aggregate of approximately $183.9 million in cash
payments to Harborside stockholders.
. In general, holders of outstanding Harborside stock options had the
right to retain their options or to have their options converted into
cash at $25.00 per underlying share less the applicable option exercise
price and withholding taxes. Certain members of Harborside senior
management retained a portion of their stock options, representing
options to purchase 109,994 shares in the aggregate. All other options
were converted into cash, resulting in an aggregate of approximately
$7.9 million in cash payments to holders of outstanding Harborside stock
options.
Financing for the Merger, as well as for the repayment of certain existing
indebtedness and the exercise of certain existing purchase options for leased
facilities, was provided by: (i) approximately $139.5 million from the proceeds
of the offering of the Old Securities by MergerCo (the "Old Securities
Offering"); and (ii) cash common equity contributions to MergerCo by the New
Investors of $165.0 million. See "The Transactions." In addition, Harborside
entered into a new $250.0 million senior secured credit facility (the "New
Credit Facility") at the effective time of the Merger. The New Credit Facility,
the Old Securities Offering and the common equity contributions to MergerCo by
the New Investors are collectively referred to herein as the "Recapitalization
Financings." The Recapitalization Financings and the Merger are collectively
referred to herein as the "Recapitalization." As a result of the Merger, the
Issuer succeeded to all obligations of MergerCo with respect to the Old
Securities.
9
THE EXCHANGE OFFER
Issuer...................... Harborside Healthcare Corporation
Securities Offered.......... Up to an aggregate principal amount of
$170,000,000 of its 11% Series A Senior
Subordinated Discount Notes due 2008 (the "New
Notes"), and up to 40,000 shares of its 13 1/2%
Series A Exchangeable Preferred Stock Mandatorily
Redeemable 2010 (the "New Preferred Stock," and
together with the New Notes, the "New
Securities") . The terms of the New Securities
and Old Securities are identical in all material
respects, except for certain transfer
restrictions, registration rights and special
mandatory redemption provisions relating to the
Old Securities.
The Exchange Offer.......... The New Notes are being offered in exchange for a
like principal amount of Old Notes, and the New
Preferred Stock is being offered in exchange for
a like number of shares of Old Preferred Stock.
Old Notes may be exchanged only in integral
multiples of $1,000. The issuance of the New
Securities is intended to satisfy obligations of
the Issuer contained in the Registration Rights
Agreements.
Expiration Date; Withdrawal
of Tender.................. The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1998, or such later date
and time to which it is extended by the Issuer.
The tender of Old Securities pursuant to the
Exchange Offer may be withdrawn at any time prior
to the Expiration Date. Any Old Securities not
accepted for exchange for any reason will be
returned without expense to the tendering holder
thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
Certain Conditions to the
Exchange Offer............. The Issuer's obligation to accept for exchange,
or to issue New Securities in exchange for, any
Old Securities is subject to certain customary
conditions relating to compliance with any
applicable law, order of any governmental agency
or any applicable interpretation by any staff of
the Commission, which may be waived by the Issuer
in its reasonable discretion. The Issuer
currently expects that each of the conditions
will be satisfied and that no waivers will be
necessary. See "The Exchange Offer--Certain
Conditions to the Exchange Offer."
Procedures to Tendering Old
Securities................. Each holder of Old Securities wishing to accept
the Exchange Offer must complete, sign and date
the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver contained herein and therein,
and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with
such Old Securities and any other required
documentation, to
10
the Exchange Agent (as defined) at the address
set forth herein. See "The Exchange Offer--
Procedures for Tendering Old Securities."
Use of Proceeds............. There will be no use of proceeds to the Issuer
from the exchange of Securities pursuant to the
Exchange Offer.
Exchange Agent.............. United States Trust Company of New York is
serving as the Exchange Agent in connection with
the Exchange Offer.
Federal Income Tax
Consequences............... The exchange of Securities pursuant to the
Exchange Offer will not be a taxable event for
federal income tax purposes. See "U.S. Federal
Income Tax Consequences."
CONSEQUENCES OF EXCHANGING OLD SECURITIES PURSUANT TO THE EXCHANGE OFFER
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, holders of Old Securities (other
than any holder who is an "affiliate" of the Issuer within the meaning of Rule
405 under the Securities Act) who exchange their Old Securities for New
Securities pursuant to the Exchange Offer generally may offer such New
Securities for resale, resell such New Securities, and otherwise transfer such
New Securities without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided such New Securities are acquired in
the ordinary course of the holder's business and such holders have no
arrangement or understanding with any person to participate in a distribution
of such New Securities. Each broker-dealer that receives New Securities for its
own account in exchange for Old Securities, where such Old Securities were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Securities. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the New Securities may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Issuer has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the New Securities for
offer and sale under the securities or blue sky laws of such jurisdictions as
any holder of the Securities reasonably requests in writing. If a holder of Old
Securities does not exchange such Old Securities for New Securities pursuant to
the Exchange Offer, such Old Securities will continue to be subject to the
restrictions on transfer contained in the legend thereon. In general, the Old
Securities may not be offered or sold unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. See "The Exchange
Offer--Consequences of Failure to Exchange; Resales of New Securities."
The Old Securities are currently eligible for trading in the Private
Offerings, Resales and Trading through Automated Linkages ("PORTAL") market.
Following commencement of the Exchange Offer but prior to its consummation, the
Old Securities may continue to be traded in the PORTAL market. Following
consummation of the Exchange Offer, the New Securities will not be eligible for
PORTAL trading.
11
THE NEW SECURITIES
The terms of the New Securities are identical in all material respect to the
Old Securities, except for certain transfer restrictions, registration rights
and special mandatory redemption provisions relating to the Old Securities. For
purposes of this Prospectus, the term "Notes" shall refer collectively to the
New Notes and the Old Notes, the term "Exchangeable Preferred Stock" shall
refer collectively to the New Preferred Stock and the Old Preferred Stock and
the term "Securities" shall refer collectively to the New Securities and the
Old Securities.
THE NOTES
Issuer...................... Harborside Healthcare Corporation.
Aggregate Amount............ $170,000,000 principal amount at maturity of 11%
Series A Senior Subordinated Discount Notes.
Maturity.................... August 1, 2008.
Yield and Interest.......... The Old Notes were sold at a substantial discount
from their principal amount at maturity. For a
discussion of the federal income tax treatment of
the Notes and the original issue discount rules,
see "U.S. Federal Income Tax Consequences." The
Notes will fully accrete to face value on August
1, 2003. From and after August 1, 2003, the Notes
will bear interest, which will be payable in
cash, on each February 1 and August 1, commencing
February 1, 2004.
Note Guarantees............. The Issuer's payment obligations under the Notes
are guaranteed on an unsecured senior
subordinated basis (the "Note Guarantees") by
certain of the subsidiaries of the Issuer (the
"Guarantors"). The Note Guarantees are
subordinate in right of payment to all Senior
Debt of the Guarantors, rank pari passu with any
Pari Passu Debt of the Guarantors and are senior
in right of payment to all Subordinated Debt of
the Guarantors. The Guarantors and certain other
subsidiaries of the Issuer are also jointly and
severally liable for all obligations under the
New Credit Facility, which are Senior Debt. See
Note G to the unaudited Condensed Consolidated
Financial Statements of the Issuer as of and for
the six month periods ended June 30, 1998 and
1997 and Note U to the Consolidated Financial
Statements of the Issuer as of and for the years
ended December 31, 1997, 1996 and 1995 for
certain financial information relating to the
Guarantors.
Optional Redemption......... On or after August 1, 2003, the Notes are
redeemable at the option of the Issuer, in whole
or in part, at the redemption prices set forth
herein, plus accrued interest, if any, to the
date of redemption.
Optional Redemption Upon
Public Offering............ At any time, or from time to time, prior to
August 1, 2001, the Issuer may redeem up to 35%
of the aggregate principal amount at maturity of
the Notes with the proceeds of one or
12
more public offerings of common stock of the
Issuer, at 111% of their Accreted Value on the
redemption date, plus accrued and unpaid
interest, if any, to the date of redemption;
provided that after any such redemption at least
65% of the aggregate principal amount at maturity
of Notes remains outstanding. See "Description of
the New Notes--Optional Redemption."
Change of Control........... Upon the occurrence of a Change of Control (as
defined), (i) the Issuer will have the option, at
any time on or prior to August 1, 2003, to redeem
the Notes in whole, but not in part, at a
redemption price equal to 100% of the Accreted
Value of the Notes on the date of redemption plus
the Applicable Premium (as defined), and (ii) if
the Issuer does not so redeem the Notes, or if a
Change of Control occurs after August 1, 2003 and
the Issuer does not redeem the Notes as permitted
at any time after such date, each holder of Notes
will have the right to require the Issuer to
repurchase all or any part of such holder's Notes
at a price equal to 101% of the aggregate
principal amount at maturity thereof plus accrued
and unpaid interest, if any, to the date of
purchase (or if such Change of Control occurs
prior to August 1, 2003, at 101% of the Accreted
Value thereof on the date of purchase). There can
be no assurance that the Issuer will have
sufficient funds available at the time of any
Change of Control to make any required debt
repayment (including repurchases of the Notes).
See "Description of the New Notes--Optional
Redemption" and "--Repurchase at the Option of
Holders--Change of Control."
Ranking..................... The Notes and Note Guarantees are general
unsecured obligations of the Issuer and the
Guarantors, respectively, that are subordinated
in right of payment to all existing and future
Senior Debt, including Debt under the New Credit
Facility. The Notes and Note Guarantees rank pari
passu in right of payment with all Pari Passu
Debt and senior in right of payment to all
Subordinated Debt, including any Exchange
Debentures. The Issuer conducts substantially all
of its operations through subsidiaries. The Notes
are effectively subordinated to all liabilities
(including trade payables) of the Subsidiaries of
the Issuer that are not Guarantors (collectively,
the "Subsidiary Non-Guarantors"). At June 30,
1998, after giving pro forma effect to the
Recapitalization, the outstanding Senior Debt of
the Issuer and the Guarantors would have been
$61.5 million, all of which would have been
Secured Debt (as defined), (ii) the Issuer and
Guarantors would have had no Pari Passu Debt or
Subordinated Debt outstanding, and (iii) the
total liabilities of the Subsidiary Non-
Guarantors (including trade payables and deferred
taxes but excluding amounts owed to the Issuer or
any Guarantor) would have been $29.5 million,
including $16.4 million of indebtedness. After
giving pro forma effect to the Recapitalization,
the Issuer
13
and its Subsidiaries would have had $177.4
million of consolidated Debt. In addition, all
borrowings under the $250.0 million New Credit
Facility will be Senior Debt. See "Description of
the New Notes--Subordination."
Certain Covenants........... The Indenture contains certain covenants which,
among other things, restrict the ability of the
Issuer and its Restricted Subsidiaries to incur
additional Debt; create liens; pay dividends or
make distributions in respect of their capital
stock; make investments and other restricted
payments; sell assets; create restrictions on the
ability of Restricted Subsidiaries to make
certain payments; enter into transactions with
affiliates; incur Debt which is subordinate to
any Senior Debt and senior to the Notes; and
consolidate, merge or sell all or substantially
all of its assets. However, such covenants are
subject to a number of important qualifications
and exceptions. See "Description of the New
Notes--Certain Covenants" and "--Note
Guarantees."
Absence of a Public Market
for the New Notes.......... The New Notes are new securities and there is
currently no established market for the New
Notes. Accordingly, there can be no assurance as
to the development or liquidity of any market for
the New Notes. The Company does not intend to
apply for listing of the New Notes on a
securities exchange.
THE NEW PREFERRED STOCK
Issuer...................... Harborside Healthcare Corporation.
The New Preferred Stock..... 40,000 shares of 13 1/2% Series A Exchangeable
Preferred Stock.
Mandatory Redemption........ The Issuer is required to redeem the Exchangeable
Preferred Stock on August 1, 2010 (subject to the
legal availability of funds therefor) at a
redemption price equal to the liquidation
preference, plus accumulated and unpaid dividends
to the redemption date. See "Description of the
New Preferred Stock--Mandatory Redemption."
Dividends................... Cumulative at 13 1/2% per annum. All dividends
are payable quarterly in cash or, on or prior to
August 1, 2003, at the sole option of the Issuer,
in additional shares of Exchangeable Preferred
Stock, on February 1, May 1, August 1 and
November 1 of each year, commencing on the first
such date after issuance of the New Preferred
Stock. The Indenture restricts, and the Issuer
does not expect to make, payment of dividends in
cash prior to August 1, 2003. See "Description of
the New Notes--Certain Covenants--Restricted
Payments." Dividends on the Exchangeable
Preferred Stock accrue and are cumulative from
the date of issuance of the Old Preferred Stock.
For federal income tax purposes, distributions
with respect to the Exchangeable Preferred Stock,
whether paid in
14
cash or in additional shares of Exchangeable
Preferred Stock, will qualify as dividends to the
extent made out of earnings and profits of the
Issuer as determined under applicable federal
income tax principles. See "U.S. Federal Income
Tax Consequences--The Exchangeable Preferred
Stock--Distributions on Exchangeable Preferred
Stock" and "Risk Factors--Certain Tax
Consequences for Holders of Exchangeable
Preferred Stock."
Liquidation Preference...... $1,000 per share, plus accumulated and unpaid
dividends.
Voting...................... Holders of the Exchangeable Preferred Stock have
no voting rights except as provided by law and as
provided in the Certificate of Designation of the
Issuer (the "Certificate of Designation"). In the
event that dividends are not paid for any six
quarterly periods, whether or not consecutive, or
upon certain other events (including failure to
comply with covenants and failure to pay the
mandatory redemption price when due), then the
number of directors constituting the Issuer's
Board of Directors will be adjusted to permit the
holders of the majority of the then outstanding
Exchangeable Preferred Stock, voting separately
as a class, to elect two directors. See
"Description of the New Preferred Stock--Voting
Rights."
Optional Redemption......... On or after August 1, 2003, the Exchangeable
Preferred Stock is redeemable, at the option of
the Issuer, in whole or in part, at the
redemption prices set forth herein, plus
accumulated and unpaid dividends to the
redemption date. See "Description of the New
Preferred Stock--Optional Redemption."
Optional Redemption Upon
Public Offering............. At any time, or from time to time, prior to
August 1, 2001, the Issuer may, at its option,
redeem up to 35% of the Exchangeable Preferred
Stock at a redemption price equal to 113.5% of
the liquidation preference thereof, plus
accumulated and unpaid dividends to the
redemption date, with the proceeds of one or more
public offerings of common stock of the Issuer.
See "Description of the New Preferred Stock--
Optional Redemption."
Change of Control........... Upon the occurrence of a Change of Control, (i)
the Issuer will have the option, at any time on
or prior to August 1, 2003, to redeem the
Exchangeable Preferred Stock in whole but not in
part, at a redemption price equal to 100% of the
liquidation preference thereof plus the
Applicable Premium, together with accumulated and
unpaid dividends, if any, to the date of
redemption, and (ii) if the Issuer does not so
redeem the Exchangeable Preferred Stock, or if a
Change of Control occurs after August 1, 2003 and
the Issuer does not redeem the Exchangeable
Preferred Stock as permitted at any time after
such date, each holder of Exchangeable Preferred
Stock
15
will have the right to require the Issuer to
repurchase all or any part of such holder's
Exchangeable Preferred Stock at a price equal to
101% of the liquidation preference thereof,
together with accumulated and unpaid dividends,
if any, to the date of purchase. There can be no
assurance that the Issuer will have sufficient
funds available at the time of any Change of
Control to make any required repurchases of the
Exchangeable Preferred Stock. See "Description of
the New Preferred Stock--Repurchase at the Option
of Exchangeable Preferred Stock Holders upon
Change of Control."
Ranking..................... The Exchangeable Preferred Stock ranks (i) senior
to all other classes of capital stock of the
Issuer established after the Issue Date which do
not expressly provide that it ranks on a parity
with the Exchangeable Preferred Stock as to
dividends and as to distributions upon the
liquidation, winding-up and dissolution of the
Issuer; and (ii) on a parity with each series of
preferred stock of the Issuer established after
the Issue Date which expressly provides that such
class or series will rank on a parity with the
Exchangeable Preferred Stock as to dividends and
as to distributions upon the liquidation,
winding-up and dissolution of the Issuer.
Creditors of the Issuer and creditors and
stockholders of the Issuer's subsidiaries will
have priority over the holders of the
Exchangeable Preferred Stock with respect to
claims on the assets of the Issuer and its
Subsidiaries. See "Description of the New
Preferred Stock--Ranking."
Optional Exchange Feature... The Exchangeable Preferred Stock is exchangeable
into Exchange Debentures at the option of the
Issuer, in whole but not in part, subject to such
exchange being permitted by the terms of the
Indenture and the New Credit Facility. See
"Description of the New Preferred Stock--
Exchange."
Certain Covenants........... The Certificate of Designation contains certain
covenants which, among other things, restrict the
ability of the Issuer and its Restricted
Subsidiaries to incur additional Debt; pay
dividends or make distributions in respect of
Junior Equity Interests or Equity Interests of
any Restricted Subsidiary; make investments and
other restricted payments; enter into
transactions with affiliates; and, with respect
to the Issuer, consolidate, merge or sell all or
substantially all of its assets. However, such
covenants are subject to a number of important
qualifications and exceptions. See "Description
of the New Preferred Stock--Certain Covenants."
Absence of a Public Market
for the New Preferred The shares of New Preferred Stock are new
Stock....................... securities and there is currently no established
market for the New Preferred Stock. Accordingly,
there can be no assurance as to the development
or liquidity of any market for the New Preferred
Stock. The Company does not intend to apply for
listing of the New Preferred Stock on a
securities exchange.
16
THE EXCHANGE DEBENTURES
Issuer...................... Harborside Healthcare Corporation.
Exchange Debentures......... 13 1/2% Subordinated Exchange Debentures due 2010
in an aggregate principal amount equal to the
aggregate liquidation preference of, and
accumulated but unpaid dividends on, the
Exchangeable Preferred Stock outstanding on the
Exchange Date.
Interest Payment Dates...... February 1 and August 1 of each year, commencing
with the first of such dates to occur after the
Exchange Date. On or prior to August 1, 2003, the
Issuer may pay interest on the Exchange
Debentures by issuing additional Exchange
Debentures.
Optional Redemption......... On or after August 1, 2003, the Exchange
Debentures are redeemable, at the option of the
Issuer, in whole or in part, at the redemption
prices set forth herein, plus accrued and unpaid
interest to the redemption date. See "Description
of the Exchange Debentures--Optional Redemption."
Optional Redemption Upon
Public Offering............. At any time, or from time to time, prior to
August 1, 2001, the Issuer may, at its option,
redeem up to 35% of the Exchange Debentures at a
redemption price equal to 113.5% of the principal
amount thereof, plus accrued and unpaid interest
to the redemption date, with the proceeds of one
or more public offerings of common stock of the
Issuer. See "Description of the Exchange
Debentures--Optional Redemption."
Change of Control........... Upon the occurrence of a Change of Control, (i)
the Issuer will have the option, at any time on
or prior to August 1, 2003, to redeem the
Exchange Debentures in whole, but not in part, at
a redemption price equal to 100% of the principal
amount of the Exchange Debentures on the date of
redemption plus the Applicable Premium, and (ii)
if the Issuer does not so redeem the Exchange
Debentures, or if a Change of Control occurs
after August 1, 2003 and the Issuer does not
redeem the Exchange Debentures as permitted at
any time after such date, each holder of Exchange
Debentures will have the right to require the
Issuer to repurchase all or any part of such
holder's Exchange Debentures at a price equal to
101% of the aggregate principal amount thereof
plus accrued and unpaid interest, if any, to the
date of purchase. There can be no assurance that
the Issuer will have sufficient funds available
at the time of any Change of Control to make any
required debt repayment (including repurchases of
the Exchange Debentures). See "Description of the
Exchange Debentures--Repurchase at the Option of
Holders--Change of Control."
Ranking..................... The Exchange Debentures will be unsecured and
will be subordinated in right of payment to all
existing and future Senior Debt (as defined in
"Description of the Exchange
17
Debentures") of the Issuer, including Debt under
the New Credit Facility and the Notes. The
Exchange Debentures will not be guaranteed and
therefore will be effectively subordinated to all
obligations of the subsidiaries of the Issuer. At
June 30, 1998, after giving pro forma effect to
the Recapitalization, (i) the outstanding Senior
Debt of the Issuer would have been $103.6
million, $4.1 million of which would have been
Secured Debt and $99.5 million which would have
been Debt represented by the Notes, and (ii) the
total liabilities (including trade payables) of
the subsidiaries of the Issuer would have been
$107.2 million (excluding amounts owed to the
Issuer). After giving pro forma effect to the
Recapitalization, the Issuer and its subsidiaries
would have had $177.4 million of consolidated
Debt. See "Description of the Exchange
Debentures--Subordination."
Certain Covenants........... The Exchange Debenture Indenture contains certain
covenants which, among other things, restrict the
ability of the Issuer and its Restricted
Subsidiaries to incur additional Debt; create
liens; pay dividends or make distributions in
respect of their capital stock; make investments
and other restricted payments; sell assets;
create restrictions on the ability of Restricted
Subsidiaries to make certain payments; enter into
transactions with affiliates; incur Debt which is
subordinate to any Senior Debt (as defined in
"Description of the Exchange Debentures") and
senior to the Exchange Debentures; and, with
respect to the Issuer, consolidate, merge or sell
all or substantially all of its assets. However,
such covenants are subject to a number of
important qualifications and exceptions. See
"Description of the Exchange Debentures--Certain
Covenants."
Registration Requirements... The Exchange Debentures may not be issued unless
such issuance is registered under the Securities
Act or is exempt from registration.
RISK FACTORS
Before making an investment, prospective purchasers of the Securities should
consider carefully all of the information set forth in this Prospectus and, in
particular, the information set forth under "Risk Factors."
----------------
The Issuer is a Delaware corporation. Its principal offices are located at
470 Atlantic Avenue, Boston, Massachusetts 02210, and its telephone number at
that address is (617) 556-1515.
18
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth summary unaudited pro forma consolidated
financial and operating data of the Company as of and for the year ended
December 31, 1997 and as of and for the twelve months ended June 30, 1998. The
pro forma summary statement of operations data reflects adjustments to the
summary historical financial data of the Company to illustrate the effects of
the following, as if each had occurred on January 1, 1997: (i) the "Completed
1997 Acquisitions" which refers, collectively, to the asset acquisition of
Access Rehabilitation, Inc. ("Access Rehabilitation"), the acquisition of four
facilities in Massachusetts (the "Massachusetts Facilities"), the acquisition
of three facilities in Dayton, Ohio (the "Dayton Facilities") and the
acquisition of five facilities in Connecticut (the "Connecticut Facilities"),
all of which were completed during 1997; (ii) the "Completed 1998 Acquisitions"
which refers, collectively, to the acquisition of two facilities in Ohio (the
"Briarfield Facilities") on April 1, 1998 and the acquisition of two facilities
in Rhode Island (the "Rhode Island Facilities") on May 8, 1998; and (iii) the
Recapitalization; and excludes nonrecurring items directly attributable to the
Recapitalization. The pro forma balance sheet data as of June 30, 1998 have
been prepared as if the Recapitalization had occurred on that date. The pro
forma adjustments are based upon available information and certain assumptions
that the Company believes are reasonable. The pro forma statement of operations
data do not purport to present what the Company's results of operations would
actually have been had the Recapitalization, the Completed 1997 Acquisitions
and the Completed 1998 Acquisitions in fact occurred on January 1, 1997, or to
project the Company's results of operations for any future period. The pro
forma balance sheet data do not purport to present what the Company's financial
position actually would have been had the Recapitalization in fact occurred on
June 30, 1998, or to project the Company's financial position at any future
date. The summary unaudited pro forma consolidated financial data set forth
below should be read in conjunction with, and are qualified in their entirety
by, the information set forth in "Unaudited Pro Forma Consolidated Financial
Information," "The Transactions," "Capitalization," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements of the Company and notes thereto included
elsewhere in this Prospectus. The Issuer expects that the Recapitalization will
be treated as a recapitalization for financial accounting purposes.
Accordingly, no pro forma adjustments were made to the historical basis of the
Company's assets and liabilities.
PRO FORMA PRO FORMA
YEAR ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Total net revenues...................... $ 305,365 $ 311,988
Facility operating costs................ 242,864 246,473
Management fees......................... 3,137 2,422
General and administrative expense...... 11,332 13,759
Service charges paid to affiliates (1).. 1,908 2,182
Depreciation and amortization........... 6,541 6,672
Facility rent........................... 19,718 19,998
Net interest expense (2)................ 18,063 18,566
Income before income taxes.............. 221 368
Net income.............................. 136 227
BALANCE SHEET DATA (AS OF PERIOD END):
Cash and cash equivalents............... $ 3,028
Note receivable......................... 7,487
Working capital......................... 21,933
Total assets............................ 254,537
Total debt, including capital lease
obligation (9)......................... 177,386
Net debt (10)........................... 169,899
Exchangeable preferred stock,
redeemable............................. 40,000
Stockholders' equity.................... 3,659
OTHER FINANCIAL DATA:
EBITDA.................................. $ 27,606 $ 28,354
Adjusted EBITDA (3)..................... 31,335 31,117
Adjusted EBITDAR (3).................... 51,053 51,115
Adjusted EBITDAR margin................. 16.7% 16.4%
Net cash interest expense (4)........... $ 3,866 $ 3,637
Ratio of Adjusted EBITDA to net interest
expense................................ 1.7x 1.7x
Ratio of Adjusted EBITDA to net cash
interest expense....................... 8.1x 8.6x
Ratio of net debt to Adjusted EBITDA.... 5.4x 5.5x
Ratio of earnings to combined fixed
charges and preferred stock dividends
(5).................................... -- --
OPERATING DATA (AS OF PERIOD END):
Facilities operated (6)................. 49 49
Licensed beds (6)....................... 5,983 5,983
Average occupancy rate (7).............. 92.8% 92.9%
Patient days............................ 1,905,185 1,920,217
Percentage of total net revenues derived
from:
Private and other (8)................... 33.2% 32.4%
Medicare................................ 24.6% 25.0%
Medicaid................................ 42.2% 42.6%
(footnotes on next page)
19
- --------
(1) Includes $1.2 million of non-cash charges representing the amortization of
prepaid management fees to Investcorp International Inc. ("III"), an
affiliate of the Issuer and of Investcorp.
(2) Represents "Interest expense, net" less amortization of debt issuance
costs of $1,392 and $1,348 for the pro forma year ended December 31, 1997
and the pro forma twelve months ended June 30, 1998, respectively.
(3) EBITDA represents earnings before interest, taxes, depreciation and
amortization (including amortization of $1.2 million of prepaid management
fees paid to III for the pro forma year ended December 31, 1997 and the
pro forma twelve months ended June 30, 1998) and loss on investment in
limited partnership.
The following table presents a reconciliation of EBITDA to Adjusted EBITDA:
PRO FORMA PRO FORMA
YEAR ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------------
EBITDA............................. $27,606 $28,354
Elimination of consulting contract
(i)............................... 160 --
Elimination of related party
management fees (ii).............. 3,137 2,422
Addition to general and
administrative expense (iii)...... (913) (417)
Other adjustments (iv)............. 1,345 758
------- -------
Adjusted EBITDA.................... $31,335 $31,117
======= =======
--------
(i) Reflects the effect of the elimination of a consulting contract
terminated as a condition to closing the Company's acquisition of
Access Rehabilitation, assuming such acquisition had occurred on
January 1, 1997.
(ii) Reflects the effects of the elimination of historical management
fees paid under contracts with related parties that were terminated
as a condition to closing the Company's acquisition of the Dayton,
Connecticut, Briarfield and Rhode Island Facilities, assuming such
acquisitions had occurred on January 1, 1997. Subsequent to the
dates of such acquisitions, no services were provided to the Company
by these related parties.
(iii) Reflects the effect of the addition of general and administrative
expenses that the Company expects it would have incurred had the
Company's acquisition of the Dayton, Connecticut, Briarfield and
Rhode Island Facilities occurred on January 1, 1997.
(iv) Reflects other expected effects of bed occupancy for new
construction, ancillary service and Medicare classification
reimbursement changes for the Connecticut, Briarfield and Rhode
Island acquired businesses, assuming such acquisitions had occurred
on January 1, 1997.
EBITDA is presented because it is commonly used by certain investors to
analyze and determine a company's ability to service and/or incur debt.
Adjusted EBITDA is presented because it gives the Holders of the Notes the
ability to better understand the Company's compliance with certain of the
covenants under the New Credit Facility (because of cross default
provisions, defaults under the New Credit Facility that result in
acceleration of in excess of $15.0 million of indebtedness under the New
Credit Facility are also defaults under the Indenture). These covenants are
based on defined terms that incorporate adjustments based in part on the
reconciling items listed above. Additionally, these type of adjustments
will be applied to all future acquisitions in determining
20
compliance with applicable covenants. As such, management of the Company
believes that the Adjusted EBITDA measure provides relevant and useful
information to investors. However, EBITDA and Adjusted EBITDA should not be
considered in isolation or as a substitute for net income, cash flows or
other income or cash flows data prepared in accordance with generally
accepted accounting principles or as a measure of a company's profitability
or liquidity. In addition, EBITDA and Adjusted EBITDA are not standardized
measurements and may be calculated in various ways. Accordingly, the EBITDA
and Adjusted EBITDA information contained herein may not be comparable to
EBITDA and Adjusted EBITDA information provided by other companies.
Adjusted EBITDAR represents Adjusted EBITDA plus facility rent expense.
(4) "Net cash interest expense" represents net interest expense less the
accretion of interest expense associated with the Notes and the capital
lease obligation.
(5) For purposes of this calculation, "earnings" consist of income before
income taxes and extraordinary loss and fixed charges, and "combined fixed
charges and preferred stock dividends" consist of interest, amortization
of debt issuance costs, the component of facility rent expense believed by
management to be representative of the interest factor thereon and the
amount of pre-tax earnings required to cover accretion on preferred stock
dividends. Earnings for the pro forma year ended December 31, 1997 and for
the pro forma twelve months ended June 30, 1998 would have been inadequate
to cover combined fixed charges and preferred stock dividends for such
periods. The coverage deficiency for such periods would have been $9,089
and $9,284, respectively.
(6) "Facilities operated" and "Licensed beds" include two managed facilities
with 178 total licensed beds.
(7) "Average occupancy rate" excludes managed facilities, and is computed by
dividing the number of billed licensed bed days by the total number of
available bed days during each of the periods indicated.
(8) "Private and other" excludes managed facilities and consists primarily of
total net revenues derived from private pay individuals, managed care
organizations, HMOs, hospice programs, commercial insurers, management
fees from managed facilities, and rehabilitation service therapy revenues
from non-affiliated facilities.
(9) As of June 30, 1998, the Company had $59.3 million of outstanding
obligations drawn under it synthetic lease facility. Pro forma for the
Recapitalization, the Company will have no such outstanding obligations.
(10) Net debt represents total debt, including capital lease obligations, less
the note receivable associated with the Company's acquisition of the
Connecticut Facilities. In connection with this acquisition on December 1,
1997, the Company made a collateralized loan to the seller of the
Connecticut Facilities of approximately $7.5 million. The Company financed
such loan with borrowings under the Existing Credit Facility.
21
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING DATA
The following table presents summary consolidated historical financial and
operating data of the Company for the periods indicated. The summary
consolidated historical financial data as of and for the years ended December
31, 1993, 1994, 1995, 1996 and 1997 have been derived from the audited
consolidated financial statements of the Company, including the related notes
thereto. The summary consolidated historical financial data as of and for the
six months ended June 30, 1997 and June 30, 1998 were derived from the
unaudited consolidated financial statements of the Company which, in the
opinion of management, include all adjustments (consisting only of normal,
recurring adjustments) necessary for a fair presentation of the Company's
consolidated results of operations and financial condition for such periods.
The operating results for the respective six month periods ended June 30, 1997
and June 30, 1998 are not necessarily indicative of results to be expected for
the full fiscal year. The summary historical consolidated financial data set
forth below should be read in conjunction with, and are qualified in their
entirety by, the information set forth in "Selected Consolidated Historical
Financial and Operating Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements of the Company and notes thereto included elsewhere in this
Prospectus.
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- -------- --------- --------- ------- --------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA (1):
Total net revenues..... $75,101 $86,376 $109,425 $ 165,412 $ 221,777 $97,676 $148,640
Facility operating
costs................. 57,412 68,951 89,378 132,207 176,404 77,517 117,030
General and administra-
tive expense.......... 3,092 3,859 5,076 7,811 10,953 4,723 7,475
Service charges paid to
affiliate............. 746 759 700 700 708 354 628
Special compensation
and other............. -- -- -- 1,716 -- -- --
Depreciation and amor-
tization.............. 4,304 4,311 4,385 3,029 4,074 1,882 2,263
Facility rent.......... 525 1,037 1,907 10,223 12,446 5,309 11,621
Interest expense, net.. 4,740 4,609 5,107 4,634 5,853 2,756 3,202
Income before income
taxes
and extraordinary
loss.................. 1,985 374 1,234 4,829 11,150 5,074 6,349
Net income............. 1,211 228 753 2,712 6,803 3,095 3,873
BALANCE SHEET DATA (AS OF PERIOD END) (1):
Cash and cash equiva-
lents................. $10,214 $14,013 $ 40,157 $ 9,722 $ 8,747 $10,694 $ 3,028
Working capital........ 6,511 13,915 10,735 16,826 22,554 21,114 22,275
Total assets........... 85,472 93,876 92,632 141,799 168,562 148,751 181,523
Total debt, including
capital lease
obligation............ 40,708 53,296 43,496 75,485 89,927 77,155 92,346
Stockholders' equity... 4,918 2,866 4,130 44,880 51,783 47,975 55,685
OTHER FINANCIAL DATA:
Cash flow provided by
operations............ $10,521 $ 4,939 $ 1,886 $ 1,405 $ 5,621 $ 1,597 $ 1,658
Cash flow (used in)
provided by
investing............. (142) (6,078) 36,818 (4,050) (19,487) (876) (10,228)
Cash flow (used in)
provided by
financing............. (6,100) 4,938 (12,560) (27,790) 12,891 251 2,851
EBITDA (2)............. 13,326 11,770 12,364 14,471 21,266 9,773 11,886
EBITDAR (2)............ 13,851 12,807 14,271 24,694 33,712 15,082 23,507
EBITDAR margin......... 18.4% 14.8% 13.0% 14.9% 15.2% 15.4% 15.8%
Capital expenditures... $ 1,205 $ 2,585 $ 3,081 $ 5,104 $ 5,274 $ 812 $ 7,071
Ratio of earnings to
fixed charges (3)..... 1.4x 1.1x 1.2x 1.5x 2.0x 2.0x 1.7x
OPERATING DATA (AS OF PERIOD END):
Facilities operated
(4)................... 17 19 20 30 45 31 49
Licensed beds (4)...... 2,149 2,365 2,471 3,700 5,468 3,864 5,983
Average occupancy rate
(5)................... 93.7% 92.6% 92.5% 92.6% 92.3% 91.9% 92.6%
Patient days........... 693,819 739,305 788,920 1,096,814 1,366,811 613,494 921,253
Percentage of total net
revenues derived from:
Private and other (6).. 39.9% 37.4% 35.1% 35.5% 34.1% 33.5% 31.8%
Medicare............... 21.2% 24.8% 31.7% 26.3% 25.9% 28.7% 26.2%
Medicaid............... 38.9% 37.8% 33.2% 38.2% 40.0% 37.8% 42.0%
(footnotes on next page)
22
- --------
(1) In 1993, 1994 and 1995, financial and operating data combine the historical
results of the Predecessor Entities (as defined herein) that became
subsidiaries of the Company through the IPO Reorganization (as defined
herein) that occurred immediately prior to the Company's initial public
offering on June 14, 1996. Prior to the IPO Reorganization, the Predecessor
Entities (primarily partnerships and subchapter S corporations) were not
directly subject to federal or state income taxation. In calculating net
income, a pro forma income tax expense of 39% has been reflected for
periods prior to the IPO Reorganization as if the Company had always owned
the Predecessor Entities.
(2) EBITDA represents earnings before interest, taxes, depreciation and
amortization, and loss on investment in limited partnership and also
excludes for the years prior to 1997 any gain on sale of facilities, loss
on refinancing of debt, minority interest, extraordinary losses and special
compensation associated with the Company's 1996 IPO. EBITDA should not be
considered in isolation or as a substitute for net income, cash flows or
other income or cash flows data prepared in accordance with generally
accepted accounting principles or as a measure of a Company's profitability
or liquidity. In addition, EBITDA is not a standardized measurement and may
be calculated in various ways. Accordingly, the EBITDA information
contained herein may not be comparable to EBITDA information provided by
other companies. EBITDA is included herein because it is commonly used by
certain investors to analyze and determine a company's ability to service
and/or incur debt. EBITDAR represents EBITDA plus facility rent expense.
(3) For purposes of this calculation, "earnings" consist of income before
income taxes and extraordinary loss and fixed charges, and "fixed charges"
consist of interest, amortization of debt issuance costs and the component
of facility rent expense believed by management to be representative of the
interest factor thereon.
(4) "Facilities operated" and "Licensed beds" include two managed facilities
with 178 total licensed beds.
(5) "Average occupancy rate" excludes managed facilities, and is computed by
dividing the number of billed licensed bed days by the total number of
available licensed bed days during each of the periods indicated.
(6) "Private and other" excludes managed facilities and consists primarily of
total net revenues derived from private pay individuals, managed care
organizations, HMOs, hospice programs, commercial insurers, management fees
from managed facilities, and rehabilitation service therapy revenues from
non-affiliated facilities.
23
RISK FACTORS
Prospective purchasers of the Securities should consider carefully the
following risk factors, as well as the other information set forth elsewhere
in this Prospectus. This Prospectus contains, in addition to historical
information, certain forward-looking statements that are subject to risks and
other uncertainties. The Issuer's actual results may differ materially from
those anticipated in these forward-looking statements. Factors that might
cause such a difference include those discussed below, as well as general
economic and business conditions, competition and other factors discussed
elsewhere in this Prospectus. All forward-looking statements attributable to
the Issuer or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements set forth herein.
CONSEQUENCES OF A FAILURE TO EXCHANGE OLD SECURITIES
The Old Securities have not been registered under the Securities Act or any
state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case
in compliance with certain other conditions and restrictions. Old Securities
that remain outstanding after consummation of the Exchange Offer will continue
to be subject to, and to bear a legend reflecting, such restrictions on
transfer. In addition, upon consummation of the Exchange Offer, holders of Old
Securities that remain outstanding will not be entitled to any rights to have
such Old Securities registered under the Securities Act, except under certain
limited circumstances. The Issuer does not intend to register under the
Securities Act any Old Securities that remain outstanding after consummation
of the Exchange Offer. To the extent that Old Securities are not tendered and
accepted in the Exchange Offer, a holder's ability to sell such Old Securities
could be adversely affected.
FAILURE TO COMPLY WITH EXCHANGE OFFER PROCEDURES
To participate in the Exchange Offer and avoid the restrictions on transfer
of the Old Securities, holders of Old Securities must transmit a properly
completed Letter of Transmittal, including all other documents required by
such Letter of Transmittal, to the Exchange Agent at one of the addresses set
forth below under "The Exchange Offer--Exchange Agent" on or prior to the
Expiration Date. In addition, either (i) certificates for such Old Securities
must be received by the Exchange Agent along with the Letter of Transmittal or
(ii) a timely confirmation of a book-entry transfer of such Old Securities, if
such procedure is available, into the Exchange Agent's account at the Book-
Entry Transfer Facility (as defined) pursuant to the procedure for book-entry
transfer described herein, must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the holder must comply with the guaranteed delivery
procedures described herein and in the Letter of Transmittal. The method of
delivery of the Old Securities and the Letter of Transmittal and all other
required documents to the Exchange Agent is at the election and risk of the
holder. Holders of Old Securities desiring to tender such Old Securities in
exchange for New Securities should allow sufficient time to ensure timely
delivery. The Issuer and the Exchange Agent are under no duty to give
notification of defects or irregularities with respect to tenders of Old
Securities for exchange. See "The Exchange Offer."
LACK OF PUBLIC MARKET
The New Securities are new securities for which there currently is no
market. Although the Placement Agents have informed the Issuer that they
currently intend to make a market in the New Securities, they are not
obligated to do so and any such market making may be discontinued at any time
without notice. In addition, such market making activity may be limited during
the pendency of this Exchange Offer. Accordingly, there can be no assurance as
to the development or liquidity of any market for the New Securities. The
Issuer does not intend to apply for listing of the New Securities on any
securities exchange or for quotation through the Nasdaq National Market.
The Old Securities are eligible for trading in the PORTAL market. The Old
Securities have not been registered under the Securities Act, however, and
will continue to be subject to restrictions on
24
transferability to the extent they are not exchanged for New Securities.
Following consummation of the Exchange Offer, the New Securities will not be
eligible for PORTAL trading.
The Exchange Offer is not conditioned upon any minimum or maximum aggregate
principal amount of Old Securities being tendered for exchange. No assurance
can be given as to the liquidity of the trading market for the New Securities,
or, in the case of non-tendering holders of Old Securities, the trading market
for the Old Securities following the Exchange Offer.
The liquidity of, and trading market for, the Securities also may be
adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading markets
independent of the financial performance of, and prospects for, the Issuer.
SUBSTANTIAL LEVERAGE; DEBT SERVICE OBLIGATIONS
As a result of the Recapitalization, the Issuer is highly leveraged. On a
pro forma basis, as of June 30, 1998, the Issuer would have had $177.4 million
of consolidated indebtedness, including the Notes. In addition, the aggregate
liquidation preference of the Exchangeable Preferred Stock (which is
exchangeable at the Issuer's option, subject to certain conditions, for
Exchange Debentures) would have been $40.0 million. In comparison,
Harborside's outstanding consolidated indebtedness as of June 30, 1998 was
$92.3 million. As of June 30, 1998, Harborside also had $59.3 million of
outstanding obligations drawn under its previously existing synthetic lease
facility. On a pro forma basis, the Issuer would have had no such outstanding
obligations. In addition, the Issuer expects to incur material additional
indebtedness in connection with its acquisition strategy and the Indenture
permits the incurrence of substantial amounts of additional indebtedness. See
"Description of the New Notes--Certain Covenants--Incurrence of Debt and
Issuance of Preferred Stock." Earnings for the year ended December 31, 1997
and for the twelve months ended June 30, 1998 would have been inadequate to
cover combined fixed charges and preferred stock dividends for such periods by
$9.1 million and $9.3 million, respectively, on a pro forma basis. See
"Unaudited Pro Forma Consolidated Financial Information."
The Issuer'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 and for general corporate purposes. It is anticipated that these
funds will also be used to finance acquisitions and lease real estate.
However, the Issuer could be required to obtain other debt and/or equity
financing to finance any significant acquisitions or real estate/construction
projects in the future.
Although the Issuer is not required to pay cash interest or dividends for
five years with respect to the Securities, the Issuer's high degree of
leverage may have important consequences for the Issuer, including the
following: (i) the Issuer's ability to obtain additional financing for
acquisitions, working capital, capital expenditures or other purposes may be
impaired or any such financing may not be on terms favorable to the Issuer;
(ii) interest expense may reduce the funds that would otherwise be available
to the Issuer for its operations and business opportunities; (iii) a
substantial decrease in net operating cash flows or an increase in expenses of
the Issuer could make it difficult for the Issuer to meet its debt service
requirements or force it to modify its operations; (iv) substantial leverage
may place the Issuer at a competitive disadvantage and may make it more
vulnerable to a downturn in its business; (v) certain indebtedness of the
Issuer is at variable rates of interest, which causes the Issuer to be
vulnerable to increases in interest rates; (vi) a substantial portion of the
assets of the Issuer is pledged to secure its indebtedness, reducing its
ability to obtain additional financing; (vii) the Issuer may be hindered in
its ability to adjust to rapidly changing market conditions; and (viii) the
New Credit Facility, the Indenture, the Certificate of Designation and other
agreements governing the Issuer's long-term indebtedness contain certain
restrictive financial and operating covenants. In addition, the degree to
which the Issuer is leveraged could prevent it from repurchasing Securities
tendered to it upon the occurrence of a Change of Control.
25
The Issuer's ability to pay principal of and interest on the Notes and
dividends on the Exchangeable Preferred Stock (after the initial five year
period during which it is anticipated that no cash interest or dividends will
be paid thereon) and to satisfy its other debt obligations will depend upon
its future operating performance, which will be affected by financial,
business and other factors, certain of which are beyond its control, as well
as the availability of borrowings under the New Credit Facility or a successor
facility. The Issuer anticipates that its operating cash flow, together with
borrowings under the New Credit Facility, will be sufficient to meet its
operating expenses and capital expenditures and to service its debt
requirements as they become due. However, there can be no assurance that the
Issuer's cash flow, availability under the New Credit Facility and other
capital resources will be sufficient for the payment of principal of and
interest on its indebtedness, including the Notes, for the payment of periodic
cash dividends on the Exchangeable Preferred Stock, for any redemption of the
Exchangeable Preferred Stock for cash or, if the Exchange Debentures have been
issued, for the payment of principal of or cash interest on the Exchange
Debentures. If the Issuer's cash flow, availability under the New Credit
Facility and other capital resources are insufficient to fund the Issuer's
debt service obligations, the Issuer may be forced to reduce or delay capital
expenditures, to sell assets, to restructure or refinance its indebtedness or
to seek additional equity capital. There can be no assurance that any of such
measures could be implemented on satisfactory terms or, if implemented, would
be successful or would permit the Issuer to meet its debt service obligations.
HOLDING COMPANY STRUCTURE; SUBORDINATION OF SECURITIES
The Issuer conducts substantially all of its operations through its
subsidiaries. As a result, the Issuer is required to rely upon its
subsidiaries for the funds necessary to meet its obligations, including the
payment of interest on and principal of the Notes, dividends on the
Exchangeable Preferred Stock and, if issued, interest on and principal of the
Exchange Debentures. The ability of the subsidiaries to make such payments
will be subject to, among other things, applicable state laws. Although the
Note Guarantees provide the holders of the Notes with a direct claim against
the assets of the Guarantors, the Subsidiary Non-Guarantors have not
guaranteed the obligations under the Securities. Claims of creditors of the
Subsidiary Non-Guarantors (including trade creditors) and claims of holders of
preferred stock of such subsidiaries, if any, generally will have priority
with respect to the assets and earnings of such subsidiaries over the claims
of creditors of the Issuer (including holders of the Securities). In addition,
enforcement of the Note Guarantees against any Guarantor may be subject to
legal challenge in a bankruptcy or reorganization case or a lawsuit by or on
behalf of creditors of such Guarantor and would be subject to certain defenses
available to guarantors generally. See "-- Fraudulent Conveyance
Considerations." Although the Indenture contains waivers of most guarantor
defenses, certain of those waivers may not be enforced by a court in a
particular case. To the extent that the Note Guarantees are not enforceable,
the Notes would be effectively subordinated to all liabilities of the
Guarantors, including trade payables of such Guarantors, whether or not such
liabilities constitute Senior Debt under the Indenture.
The Notes and Note Guarantees are general unsecured obligations of the
Issuer and Guarantors that are subordinated in right of payment to all Senior
Debt of the Issuer and Guarantors, including Debt under the New Credit
Facility. Further, the Notes and Note Guarantees are effectively subordinated
to all Secured Debt, to the extent of the collateral securing such Debt, and
to the claims of creditors (including trade creditors) of the Subsidiary Non-
Guarantors. The Notes and Note Guarantees rank pari passu in right of payment
with all Pari Passu Debt and senior in right of payment to all Subordinated
Debt, including any Exchange Debentures. The indebtedness outstanding under
the New Credit Facility is collateralized by liens on a substantial portion of
the assets of the Issuer and its subsidiaries. At June 30, 1998, after giving
pro forma effect to the Recapitalization, (i) the outstanding Senior Debt of
the Issuer and the Guarantors would have been $61.5 million, all of which
would have been Secured Debt, (ii) the Issuer and the Guarantors would have
had no Pari Passu Debt or Subordinated Debt outstanding and (iii) the total
liabilities of the Subsidiary Non-Guarantors
26
(including trade payables but excluding amounts owed to the Issuer or any
Guarantor) would have been $29.5 million, including $16.4 million of
indebtedness. The Indenture permits the Issuer and the Restricted Subsidiaries
to incur a substantial amount of additional indebtedness, all of which may be
Senior Debt. See "Description of the New Notes."
The Issuer and the Guarantors may not pay principal of, premium on, or
interest or Liquidated Damages on, the Notes or Note Guarantees, make any
deposit pursuant to defeasance provisions or repurchase or redeem or otherwise
retire any Notes or Note Guarantees (i) if any Designated Senior Debt (as
defined) is not paid when due or any other default on Designated Senior Debt
occurs and the maturity of such Designated Senior Debt is accelerated in
accordance with its terms or (ii) if any other default on Designated Senior
Debt occurs that permits the holders of such Designated Senior Debt to
accelerate the maturity of such Senior Debt in accordance with its terms and
the Trustee receives notice of such default, unless, in either case, the
default has been cured or waived, any such acceleration has been rescinded or
such Senior Debt has been paid in full or, in the case of any non-payment
default, 179 days have passed since the default notice was given. Upon any
payment or distribution to creditors in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to the Issuer or any
Guarantor or its property, the holders of Senior Debt will be entitled to
receive payment in full in cash or Cash Equivalents (as defined) before the
holders of the Notes or any Note Guarantee will be entitled to receive any
payment (other than in the form of Permitted Junior Securities (as defined)).
See "Description of the New Notes--Subordination."
The Exchangeable Preferred Stock ranks junior in right of payment to all
existing and future indebtedness and other obligations of the Issuer and its
subsidiaries, including the New Credit Facility and the Notes, but not
including common stock and any future class of capital stock which by its
terms provides that it ranks on a parity with or junior to the Exchangeable
Preferred Stock. The Exchange Debentures, if issued, will be general unsecured
obligations of the Issuer and will be subordinated in right of payment to all
existing and future Senior Debt (as defined in "Description of the Exchange
Debentures"), including the New Credit Facility and the Notes. Consequently,
in certain circumstances, including upon the bankruptcy, liquidation or
reorganization of the Issuer, payments may be made with respect to the
Exchangeable Preferred Stock only after the assets of the Issuer have been
used to satisfy all of its obligations to its creditors (including the Notes),
and payments may be made with respect to the Exchange Debentures only after
all of the Senior Debt (as defined in "Description of the Exchange
Debentures"), including the Notes, has been paid in full. See "--Substantial
Leverage; Debt Service Obligations" above, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources," "Description of the New Credit Facility," "Description of
the New Notes," "Description of the New Preferred Stock" and "Description of
the Exchange Debentures."
RESTRICTIVE LOAN COVENANTS
The New Credit Facility includes certain covenants that, among other things,
restrict: (i) the making of investments (including acquisitions), loans and
advances and the paying of dividends and other restricted payments; (ii) the
incurrence of additional indebtedness; (iii) the granting of liens, other than
certain permitted liens; (iv) mergers, consolidations and sales of all or a
substantial part of the Issuer's business or property; (v) the sale of assets;
and (vi) the making of capital expenditures. The Issuer is also required to
maintain certain financial ratios, including cash interest and facility rent
coverage and leverage ratios. All of these restrictive covenants may restrict
the Issuer's ability to expand or to pursue its business strategies. The
ability of the Issuer to comply with these and other provisions of the New
Credit Facility may be affected by changes in business conditions or results
of operations, adverse regulatory developments or other events beyond the
Issuer's control. The breach of any of these covenants could result in a
default under the New Credit Facility, in which case such lenders could elect
to declare all amounts borrowed under the New Credit Facility, together with
27
accrued interest, to be due and payable, and the Issuer could be prohibited
from making payments with respect to other indebtedness until the default is
cured or all indebtedness under the New Credit Facility is paid or satisfied
in full. If the Issuer were unable to repay such borrowings, such lenders
could proceed against their collateral. If the indebtedness under the New
Credit Facility were to be accelerated, there can be no assurance that the
assets of the Issuer would be sufficient to repay in full such indebtedness
and the other indebtedness of the Issuer.
ENCUMBRANCES ON ASSETS
In addition to being subordinated to all existing and future Senior Debt of
the Issuer (and with respect to the Exchangeable Preferred Stock, all other
liabilities of the Issuer), the Securities will not be secured by any of the
Issuer's or its subsidiaries' assets. The Issuer's obligations under the New
Credit Facility are collateralized by first or second priority security
interests in all of the capital stock of certain of the Issuer's subsidiaries
and a substantial portion of the personal and real property of the Issuer and
certain of its subsidiaries, in each case with certain exceptions (including
an exception for stock or assets prohibited by other financing arrangements
from such collateralization). In addition, the Issuer's obligations under
certain mortgage loans and lease agreements are collateralized by security
interests in certain real property and other assets of the Issuer. If the
Issuer becomes insolvent or is liquidated, or if payment under the New Credit
Facility or of other secured obligations is accelerated, the lenders under the
New Credit Facility or the obligors with respect to the other secured
obligations will be entitled to exercise the remedies available to a secured
lender under applicable law and the applicable agreements and instruments.
Accordingly, such lenders will have a prior claim with respect to such assets
and there may not be sufficient assets remaining to pay amounts due on the
Securities then outstanding. See "Description of the New Credit Facility" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DIVIDEND AND REDEMPTION RESTRICTIONS ON EXCHANGEABLE PREFERRED STOCK
The ability of the Issuer to pay cash dividends on the Exchangeable
Preferred Stock after August 1, 2003, or to redeem, purchase or otherwise
acquire the Exchangeable Preferred Stock, will be subject to the terms of the
Indenture and the New Credit Facility. In addition, its ability to pay any
dividends will be subject to applicable provisions of Delaware state law. The
terms of the Indenture and the New Credit Facility permit the Issuer to pay
cash dividends on the Exchangeable Preferred Stock after August 1, 2003 in the
absence of any default under the Indenture or the New Credit Facility. There
can be no assurance that the Issuer's operating performance or any future
financings will permit the Issuer to pay cash dividends on the Exchangeable
Preferred Stock. The terms of the Indenture and the New Credit Facility also
restrict the ability of the Issuer to redeem, purchase or otherwise acquire
the Exchangeable Preferred Stock for cash. Moreover, under Delaware law, a
dividend may be paid only out of the Issuer's surplus or net profits for the
fiscal year in which the dividend is declared and/or the preceding year,
provided the board of directors approves the payment of such dividend.
Similarly, under Delaware law, there are certain restrictions with respect to
the redemption of Exchangeable Preferred Stock. There can be no assurance that
the Issuer will be able to generate a surplus or net profits from which to pay
dividends on or redeem the Exchangeable Preferred Stock.
FRAUDULENT CONVEYANCE CONSIDERATIONS
The incurrence by Harborside or a Guarantor of indebtedness, such as the
Notes, the Exchange Debentures or the Note Guarantee, as the case may be, may
be subject to review under federal bankruptcy law or relevant state fraudulent
conveyance laws if a bankruptcy case or lawsuit is commenced by or on behalf
of unpaid creditors of Harborside or a Guarantor. Under these laws, if, in a
bankruptcy or reorganization case or a lawsuit by or on behalf of unpaid
creditors of Harborside or a Guarantor, a court were to find that, at the time
Harborside or the Guarantor incurred indebtedness,
28
including the Notes, the Exchange Debentures, or the Note Guarantee, as the
case may be, (i) Harborside or such Guarantor incurred such indebtedness with
the intent of hindering, delaying or defrauding current or future creditors or
(ii) (a) Harborside or such Guarantor received less than reasonably equivalent
value or fair consideration for incurring such indebtedness and (b) Harborside
or such Guarantor (1) was insolvent or was rendered insolvent by reason of the
transactions constituting the Recapitalization, or in the case of the Exchange
Debentures, upon the exchange of the Exchangeable Preferred Stock into the
Exchange Debentures, (2) was engaged, or about to engage, in a business or
transactions for which its assets constituted unreasonably small capital, or
(3) intended to incur, or believed that it would incur, debts beyond its
ability to pay as such debts matured (as all of the foregoing terms are
defined in or interpreted under the relevant fraudulent transfer or conveyance
statutes), then such court could avoid or subordinate the amounts owing under
the Notes, the Exchange Debentures, or the Note Guarantee, as the case may be,
to presently existing and future indebtedness of Harborside or such Guarantor,
as the case may be, and take other actions detrimental to the holders of the
Notes, the Exchange Debentures or the Note Guarantee, as the case may be.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law of the jurisdiction that is being applied in any
such proceeding. Generally, however, a company will be considered insolvent
if, at the time it incurred the indebtedness, either (i) the sum of its debts
(including contingent liabilities) is greater than its assets, at a fair
valuation, or (ii) the present fair sale value of its assets is less than the
amount required to pay the probable liability on its total existing debts and
liabilities (including contingent liabilities) as they become absolute and
matured. There can be no assurance as to what standards a court would use to
determine whether Harborside or the Guarantors were solvent at the relevant
time, or whether, whatever standard was used, the Notes, the Exchange
Debentures, or the Note Guarantee, as the case may be, would not be avoided or
further subordinated on another of the grounds set forth above. In rendering
their opinions in connection with the borrowings under the New Credit Facility
and the issuance of the Notes, none of the counsel for Harborside, MergerCo,
the lenders or the Placement Agents expressed any opinion as to the
applicability of federal or state fraudulent transfer and conveyance laws.
Harborside believes that at the time the obligations constituting the Notes
and the Note Guarantees were initially incurred, Harborside and each Guarantor
were each (a) neither insolvent nor rendered insolvent thereby, (b) in
possession of sufficient capital to run its businesses effectively and (c)
incurring debts within its ability to pay as the same mature or become due. In
reaching the foregoing conclusions, Harborside has relied upon its analyses of
internal cash flow projections and estimated values of assets and liabilities
of Harborside. As a condition to Harborside's obligations under the Merger
Agreement, Harborside received an opinion of a firm expert in such matters
confirming the solvency of Harborside after giving effect to the
Recapitalization. There can be no assurance, however, that a court passing on
such questions would reach the same conclusions.
ABILITY TO COMPLETE ACQUISITIONS AND INTEGRATE ACQUIRED OPERATIONS
A principal element of the Issuer's post-Merger business strategy will be to
grow by acquiring additional long-term care facilities. The Issuer is subject
to the risks that the facilities acquired in acquisitions will not perform as
expected and that the returns from such facilities will not support the
indebtedness incurred to acquire, or the capital expenditures needed to
integrate and develop, such facilities. In addition, the expansion of the
Issuer's operations may place a significant strain on the Issuer's management,
financial and other resources and may limit the time available to the Issuer's
management to attend to other operational, financial and strategic issues. The
Issuer's ability to manage future growth will depend upon its ability to
monitor operations, control costs, maintain effective quality controls and
expand the Issuer's systems capabilities, all of which will result in higher
operating expenses. Any failure to expand these areas and to implement and
improve such systems,
29
procedures and controls in an efficient manner at a pace consistent with the
growth of the Issuer's business could have a material adverse effect on the
Issuer's business, financial condition and results of operations. In addition,
the integration of acquired facilities with existing operations may entail
considerable expenses in advance of anticipated revenues and may cause
substantial fluctuations in the Issuer's operating results. This integration
may involve, among other things, integration of billing, accounting, quality
control, management, personnel, payroll, clinical, regulatory compliance and
other systems and operating hardware and software, some or all of which may be
incompatible with the Issuer's existing systems. The failure to effectively
integrate acquired facilities could have a material adverse effect on the
Issuer's financial condition and results of operations and ability to pay
interest and dividends on the Securities.
The Issuer faces competition for the acquisition of long-term care
facilities, and may be required to offer relatively higher prices for acquired
facilities than it has in the past. In addition, due to the continuing
consolidation of the long-term care industry and the acquisition by the Issuer
and other long-term care providers of existing long-term care facilities,
there may be in the future fewer existing long-term care facilities available
for acquisition. There can be no assurance that the Issuer will be able to
find acceptable acquisition candidates or, if such candidates are identified,
that acquisitions can be consummated on terms acceptable to the Issuer.
GOVERNMENTAL REGULATION
The federal government and all the states in which the Issuer operates
regulate various aspects of the Issuer's business. In addition to the
regulation of Medicare and Medicaid reimbursement rates, the development and
operation of long-term care facilities and the provision of long-term care
services are subject to federal, state and local licensure and certification
laws that regulate, among other matters, the number of licensed beds, the
provision of services, the distribution of pharmaceuticals, equipment,
staffing (including professional licensing), operating policies and
procedures, fire prevention measures, environmental matters and compliance
with building and safety codes. The failure to maintain or renew any required
regulatory approvals or licenses could materially adversely affect the
Issuer's ability to provide its services and receive reimbursement of its
expenses. There can be no assurance that federal, state or local governments
will not impose additional restrictions on the Issuer's activities which could
materially adversely affect the Issuer.
Long-term care facilities are subject to periodic inspection by governmental
authorities to assure compliance with the standards established for continued
licensing under state law and for certification under the Medicare or Medicaid
programs, including a review of billing practices and policies. Failure to
comply with these standards could result in the denial of reimbursement, the
imposition of fines, temporary suspension of admission of new patients,
suspension or decertification from the Medicare or Medicaid programs,
restrictions on the Issuer's ability to acquire new facilities or expand
existing facilities and, in extreme cases, the revocation of a facility's
license or closure of a facility. In certain instances, facilities of the
Issuer have been inspected and have received statements of deficiencies, which
the Issuer believes have been corrected. However, there can be no assurance
that the facilities currently owned or leased by the Issuer will continue to
meet the requirements for state licensure or participation in the Medicare or
Medicaid programs nor can there be any assurance that the facilities acquired
or developed by the Issuer in the future will initially meet or continue to
meet these requirements.
Many states, including each state in which the Issuer currently operates
long-term care facilities except Indiana, control the supply of licensed long-
term care beds through CON programs, which require approval for the
construction of new long-term care facilities, the addition of licensed beds
and certain capital expenditures at such facilities. Indiana's CON program
expired on June 30, 1998. To the extent that a CON or other similar approval
is required for the acquisition or construction of new
30
facilities or the expansion of the number of licensed beds, services or
existing facilities, the Issuer could be adversely affected by the failure or
inability to obtain such approval, changes in the standards applicable for
such approval and possible delays and expenses associated with obtaining such
approval. Several of the states in which the Issuer operates have imposed
moratoriums on the issuance of CONs for new skilled nursing facility beds.
Connecticut has imposed a moratorium on the addition of any new skilled
nursing facility beds, including chronic and convalescent nursing facility
beds and rest home beds with nursing supervision, until the year 2002.
Massachusetts has imposed a moratorium on the addition of any new skilled
nursing facility beds until the year 2000, except that an existing facility
can add up to 12 beds without being subject to CON review. New Hampshire has
imposed a moratorium on the addition of any new beds to skilled nursing
facilities, intermediate care homes and rehabilitation homes until December
31, 1998. Legislation has been introduced in New Hampshire to extend this
moratorium until the year 2001, or in the alternative until the year 2003.
Ohio has imposed a moratorium until June 30, 1999 on the addition of any new
skilled nursing facility beds. Rhode Island has imposed a moratorium on the
issuance of any new initial licenses for skilled nursing facilities and on the
increase in the licensed bed capacity of any existing licensed skilled nursing
facility until July 1, 1999, except that an existing facility may increase its
licensed bed capacity to the greater of 10 beds or 10% of the facility's
licensed bed capacity. The other states in which the Issuer conducts business
do not currently have a moratorium on new skilled nursing facility beds in
effect. Although New Jersey does not have a "moratorium" on new skilled
nursing facility beds, with the exception of the Add-a-bed program (in which a
facility may request approval from the state licensure agency to increase
total licensed skilled nursing beds, including hospital based subacute care
beds, by no more than 10 beds or 10% of its licensed bed capacity, whichever
is less, without obtaining CON approval), New Jersey only accepts applications
for a CON for additional skilled nursing facility beds when the state CON
agency issues a call for beds. There is presently no call for additional beds,
and no call is expected to be made until the beginning of 1999 at the
earliest. These actions will restrict the Issuer's ability, and that of its
competitors, to expand its existing facilities or construct new facilities in
these states. In addition, in most states the reduction of the number of
licensed beds or the closure of a facility requires the approval of the
appropriate state regulatory agency and, if the Issuer were to seek to reduce
the number of licensed beds at a facility or to close a facility, the Issuer
could be adversely affected by a failure to obtain or a delay in obtaining
such approval.
The Issuer is also subject to federal and state laws that govern financial
and other arrangements between healthcare providers. Federal laws, as well as
the laws of certain states, prohibit direct or indirect payments or fee
splitting arrangements between healthcare providers that are designed to
induce or encourage the referral of patients to, or the recommendation of, a
particular provider for medical products and services. These laws include the
federal "anti-kickback law" which prohibits, among other things, the offer,
payment, solicitation or receipt of any form of remuneration in return for the
referral of Medicare and Medicaid patients. A wide array of relationships and
arrangements among healthcare providers, including ownership interests in a
company by persons in a position to refer patients and personal service
agreements have, under certain circumstances, been alleged to violate these
provisions. A violation of the federal anti-kickback law could result in the
loss of eligibility to participate in the Medicare or Medicaid programs, or in
civil or criminal penalties for individuals or entities. Violation of state
anti-kickback laws could lead to loss of licensure, significant fines and
other penalties for individuals or entities.
Federal and state authorities are devoting increased attention and resources
to anti-fraud initiatives against healthcare providers. The Balanced Budget
Act (the "BBA") and the Healthcare Insurance Portability and Accountability
Act of 1996 expanded the penalties for healthcare fraud, including broader
provisions for the exclusion of healthcare providers from the Medicare and
Medicaid programs. Further, under Operation Restore Trust, a major anti-fraud
initiative of the Office of the Inspector General (the "OIG") of the U.S.
Department of Health and Human Services, the OIG has focused on detecting
fraudulent billing practices committed by home health agencies, durable
medical
31
equipment suppliers, hospice programs and skilled nursing facilities in
certain states participating in a demonstration project. The initial outcomes
of Operation Restore Trust have led the OIG to expand the demonstration
project to additional states. Currently, the Issuer has operations in three of
the states participating in this project: Massachusetts, New Jersey and Ohio.
While the Issuer believes that the Issuer's billing practices are consistent
with the requirements of the Medicare and Medicaid programs, those criteria
are subject to interpretation. There can be no assurance that such anti-fraud
initiatives will not adversely affect the Issuer.
RISK OF ADVERSE EFFECT OF HEALTHCARE REFORM
The Issuer is subject to extensive governmental healthcare regulation. In
addition, there are generally numerous legislative and executive initiatives
at the federal and state levels for comprehensive reforms affecting the
payment for and availability of healthcare services. Changes in laws, new
interpretations of existing laws or changes in reimbursement methodologies
could have a significant effect on certain or all of the Issuer's services
which are eligible for reimbursement, the costs of providing such services and
the amounts of reimbursement provided for the delivery of eligible services.
It is not clear at this time which legislative proposals, if any, will be
adopted or, if adopted, what effect such proposals would have on the Issuer's
business. There can be no assurance that future changes in enacted legislation
or the administrative practices required to interpret or administer
governmental healthcare programs will not have a material adverse affect on
the Issuer. See "Business--Sources of Revenues" and "--Governmental
Regulation."
REIMBURSEMENT BY THIRD-PARTY PAYORS
The Issuer received approximately 25.9%, 40.0% and 34.1% of its total net
revenues from Medicare patients, Medicaid patients, and private and other
patients, respectively, for the year ended December 31, 1997. The Issuer
typically receives higher payment rates for services provided to private pay
and Medicare patients than for equivalent services provided to patients
eligible for Medicaid. Any material decline in the number of private or
Medicare patients or increases in the number of Medicaid patients could
materially adversely affect the Issuer.
Both governmental and other third-party payors, such as commercial insurers,
managed care organizations, HMOs and PPOs, have employed cost containment
measures designed to limit payments made to healthcare providers such as the
Issuer. These measures include the adoption of initial and continuing
recipient eligibility criteria, the adoption of coverage criteria and the
establishment of payment ceilings. Furthermore, governmental reimbursement
programs are subject to statutory and regulatory changes, retroactive rate
adjustments, administrative rulings and government funding restrictions. There
can be no assurance that payments under state or federal governmental programs
will remain at levels comparable to present levels or will be sufficient to
cover the costs allocable to patients eligible for reimbursement pursuant to
such programs. In addition, there can be no assurance that the Issuer's
facilities or the services provided by the Issuer will continue to meet the
requirements for participation in such programs or that the states in which
the Issuer operates will continue to meet their Medicaid reimbursement
obligations on a timely basis, if at all. Any of the foregoing could
materially adversely affect the Issuer.
The BBA was enacted in August 1997 and significantly amends the
reimbursement methodology of the Medicare program. In addition to offering new
Medicare health plan options and increasing the penalties related to
healthcare fraud and abuse, the BBA provides for a prospective payment system
for skilled nursing facilities to be implemented for cost report periods
beginning on or after July 1, 1998. (See "Business--Governmental Regulation"
for more information about the prospective payment system for skilled nursing
facilities.) The BBA also provides new limits for the reimbursement of Part B
therapy services and requires skilled nursing facilities to institute
"consolidated billing." Regulations regarding the prospective payment system
were published on May 12, 1998. In addition, subsequent
32
to issuance of the regulations, HCFA has issued Program Memoranda impacting
the implementation of PPS, affecting mainly the "consolidated billing"
provisions for Part B. As the regulations were published recently and HCFA
Program Memoranda continue to be issued regarding implementation of PPS, the
Issuer has not been able to fully assess and quantify the potential impact of
the regulations on the Issuer's consolidated financial position, results of
operations or liquidity. Based on a preliminary assessment, the Issuer
believes that the new regulations will result in a reduction of the Issuer's
average Medicare per diem reimbursement rate, which the Issuer expects to be
able to substantially offset primarily through reductions in facility
operating costs. However, no assurance can be given that the Issuer will be
able to reduce such costs.
The Issuer is subject to periodic audits by the Medicare and Medicaid
programs, and the paying agencies for these programs have various rights and
remedies against the Issuer if they assert that the Issuer has overcharged the
programs or failed to comply with program requirements. Such paying agencies
could seek to require the Issuer to repay any overcharges or amounts billed in
violation of program requirements, or could make deductions from future
amounts due to the Issuer. Such agencies could also impose fines, criminal
penalties or program exclusions. Any such action could materially adversely
affect the Issuer. See "Business--Sources of Revenues" and "--Governmental
Regulation."
GEOGRAPHIC CONCENTRATION
The Issuer's long-term care facilities are located in Ohio, Indiana,
Massachusetts, New Hampshire, New Jersey, Connecticut, Florida, Rhode Island
and Maryland. A substantial portion of the Issuer's total net revenues are
derived from its operations in Ohio, Florida and Connecticut. On a pro forma
basis, after giving effect to the Completed 1997 Acquisitions, the Completed
1998 Acquisitions (as such terms are defined under "Selected Consolidated
Historical Financial and Operating Data") and the Recapitalization, the Issuer
derived 32.1%, 17.3% and 15.4%, respectively, of its net patient service
revenues from these three states for the year ended December 31, 1997. Any
adverse changes in the regulatory environment or to the reimbursement rates
paid in the states in which the Issuer operates, particularly in Ohio, Florida
and Connecticut, could have a material adverse effect on the Issuer. See
"Business--Sources of Revenues."
STAFFING AND LABOR COSTS
Staffing and labor costs represent the Issuer's largest expense. The Issuer
competes with other healthcare providers in attracting and retaining qualified
or skilled personnel. The long-term care industry in general, and the Issuer
in particular, have, at times, experienced shortages of qualified personnel.
In addition, the long-term care industry typically experiences high turnover
of less skilled employees. A shortage of nurses or other trained personnel or
general economic inflationary pressures may require the Issuer to enhance its
wage and benefits package in order to compete with other employers. There can
be no assurance that the Issuer's labor costs will not increase or, if they
do, that they can be matched by corresponding increases in reimbursement.
Failure by the Issuer to attract and retain qualified employees, to control
its labor costs or to match increases in its labor expenses with corresponding
increases in revenues could have a material adverse effect on the Issuer.
Approximately 450 employees at five of the Issuer's facilities are covered by
collective bargaining agreements. Although the Issuer believes that it
maintains good working relationships with its employees and the unions that
represent certain of its employees, it cannot predict the impact of continued
or increased union representation or organizational activities on its future
operations. See "Business--Employees."
COMPETITION
The long-term care industry is highly competitive. The Issuer competes with
other providers of long-term care on the basis of the scope and quality of
services offered, the rate of positive medical
33
outcomes, cost-effectiveness and the reputation and appearance of its long-
term care facilities. The Issuer also competes in recruiting qualified
healthcare personnel, in acquiring and developing additional facilities and in
obtaining CONs. The Issuer's current and potential competitors include
national, regional and local long-term care providers, some of whom have
substantially greater financial and other resources and may be more
established in their communities than the Issuer. The Issuer also faces
competition from assisted living facility operators as well as providers of
home healthcare. Certain competitors are operated by not-for-profit
organizations and similar businesses which can finance capital expenditures
and acquisitions on a tax-exempt basis or receive charitable contributions
unavailable to the Issuer. In addition, consolidation in the long-term care
industry has resulted in the Issuer being faced with larger competitors, many
of whom have significant financial and other resources. The Issuer expects
that competition for the acquisition of long-term care facilities may increase
in the future as the demand for long-term care increases and as the industry
trend of consolidation of providers continues.
Construction of new (or the expansion of existing) long-term care facilities
near the Issuer's facilities could adversely affect the Issuer's business.
State regulations, however, generally require a CON before a new long-term
care facility can be constructed or additional licensed beds can be added to
existing facilities. CON legislation is in place in all states in which the
Issuer operates or expects to operate, with the exception of Indiana where the
CON program expired as of June 30, 1998. The Issuer believes that these
regulations reduce the possibility of overbuilding and promote higher
utilization of existing facilities. However, a relaxation of CON requirements
could lead to an increase in competition. In addition, as cost containment
measures have reduced occupancy rates at acute care hospitals, a number of
these hospitals have converted portions of their facilities into subacute
units. In the states in which the Issuer currently operates, except Indiana,
these conversions are subject to state CON regulations. The Issuer believes
that the application of the new Medicare prospective payment system rules will
make such conversions less desirable. New Jersey recently enacted legislation
permitting acute care hospitals to offer subacute care services under their
existing hospital licenses upon obtaining CON approval pursuant to an
expedited CON review process. Ohio has imposed a moratorium on the conversion
of acute care hospital beds into long-term care beds through June 30, 1999.
See "Business--Governmental Regulation" and "--Competition."
CONTROL OF THE ISSUER BY INVESTCORP
Approximately 91% of the outstanding shares of voting common stock of the
Issuer are held by a subsidiary of Investcorp and ten entities which have
entered into revocable management services or similar agreements with an
affiliate of Investcorp, pursuant to which such affiliate has the authority to
direct the voting of such shares for as long as such agreements are in effect.
Accordingly, for so long as such agreements remain in effect, Investcorp and
its affiliates will indirectly control the power to elect all of the Issuer's
directors, to appoint new management and to approve any action requiring the
approval of the holders of the Issuer's capital stock voting as a single
class, including adopting most amendments to the Issuer's certificate of
incorporation and approving mergers or sales of substantially all of the
Issuer's assets. The directors so elected will have the authority to effect
decisions affecting the capital structure of the Issuer, including but not
limited to the issuance of additional capital stock, the implementation of
stock repurchase programs and the declaration of dividends.
LIABILITY, INSURANCE AND LEGAL PROCEEDINGS
The Issuer's business entails an inherent risk of liability. In recent
years, participants in the long-term care industry have been subject to
lawsuits alleging malpractice or related legal theories, many of which involve
large claims and significant legal costs. The Issuer expects that from time to
time it may be subject to such suits as a result of the nature of its
business. The Issuer currently maintains insurance policies in amounts and
with coverage and deductibles it deems appropriate, based on the nature and
risks of its business, historical experience and industry standards. There can
be no
34
assurance, however, that claims in excess of the Issuer's insurance coverage
or claims not covered by insurance will not arise. A successful claim against
the Issuer not covered by, or in excess of, its insurance coverage could have
a material adverse effect on the Issuer. Claims against the Issuer, regardless
of their merit or eventual outcome, may also have a material adverse effect on
the Issuer's business and reputation, may lead to increased insurance premiums
and may require the Issuer's management to devote time and attention to
matters unrelated to the Issuer's business. In addition, the Issuer's
liability insurance policy will be due for renewal in September 2001. There
can be no assurance that the Issuer will be able to obtain liability insurance
coverage in the future on acceptable terms. The Issuer is self-insured
(subject to contributions by covered employees) with respect to most of the
healthcare benefits and workers' compensation benefits available to its
employees. The Issuer believes that it has adequate resources to cover any
self-insured claims and the Issuer maintains excess liability coverage to
protect it against unusual claims in these areas. However, there can be no
assurance that the Issuer will continue to have such resources available to it
or that substantial claims will not be made against the Issuer. See
"Business--Legal Proceedings."
ENVIRONMENTAL AND OCCUPATIONAL HEALTH AND SAFETY MATTERS
The Issuer is subject to a wide variety of federal, state and local
environmental and occupational health and safety laws and regulations. Among
the types of regulatory requirements faced by healthcare providers such as the
Issuer are: air and water quality control requirements, occupational health
and safety requirements, waste management requirements, specific regulatory
requirements applicable to asbestos, polychlorinated biphenyls and radioactive
substances, requirements for providing notice to employees and members of the
public about hazardous materials and wastes and certain other requirements. In
its role as owner and/or operator of properties or facilities, the Issuer may
be subject to liability for investigating and remediating any hazardous
substances that have come to be located on the property, or such substances
that may have migrated off of, or been emitted, discharged, leaked, escaped or
transported from, the property. The Issuer's operations may involve the
handling, use, storage, transportation, disposal and/or discharge of
hazardous, infectious, toxic, radioactive, flammable and other hazardous
materials, wastes, pollutants or contaminants. Such activities may harm
individuals, property or the environment; may interrupt operations and/or
increase their costs; may result in legal liability, damages, injunctions or
fines; may result in investigations, administrative proceedings, penalties or
other governmental agency actions; and may not be covered by insurance. The
cost of any required remediation or removal of hazardous or toxic substances
could be substantial and the liability of an owner or operator for any
property is generally not limited under applicable laws and could exceed the
property's value. Although the Issuer is not aware of any material liability
of the Issuer under any environmental or occupational health and safety laws,
there can be no assurance that the Issuer will not encounter such liabilities
in the future, which could have a material adverse effect on the Issuer. See
"--Governmental Regulation."
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The Notes were issued at a substantial discount from their principal amount.
Consequently, the purchasers of the Notes generally will be required to
include amounts in gross income for U.S. federal income tax purposes in
advance of receipt of any cash payment on the Notes to which the income is
attributable. See "U.S. Federal Income Tax Consequences--The Notes and the
Exchange Debentures" for a more detailed discussion of the federal income tax
consequences to the holders of the Notes with respect to the purchase,
ownership and disposition of the Notes.
If a bankruptcy case is commenced by or against the Company under the United
States Bankruptcy Code (the "Bankruptcy Code") prior to the Full Accretion
Date, the claim of a holder of Notes with respect to the principal amount
thereof will likely be limited to an amount equal to the Accreted Value as of
the commencement of such case.
35
CERTAIN TAX CONSEQUENCES FOR HOLDERS OF EXCHANGEABLE PREFERRED STOCK
If shares of Exchangeable Preferred Stock are exchanged for Exchange
Debentures and the stated redemption price at maturity of such Exchange
Debentures exceeds their issue price by more than a de minimis amount, the
Exchange Debentures will be treated as having original issue discount ("OID")
equal to the entire amount of such excess. Exchange Debentures issued on or
before August 1, 2003, when the Company has the option to pay interest on the
Exchange Debentures in additional Exchange Debentures, will likely have OID.
Each holder of Exchange Debentures with OID will be required to include
amounts in gross income in advance of receipt of cash with respect to such
OID. See "U.S. Federal Income Tax Consequences--The Exchangeable Preferred
Stock" and "U.S. Federal Income Tax Consequences--The Notes and the Exchange
Debentures."
IMPACT OF YEAR 2000 ISSUE
The Year 2000 issue arises as the result of computer programs having been
written, and systems having been designed, using two digits rather than four
to define the applicable year. Consequently, such software has the potential
to recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions, send bills for services or engage in similar normal business
activities. The Issuer is preparing all of its software products and internal
computer systems to be Year 2000 compliant. The Issuer has replaced its
financial reporting and payroll systems with systems that are Year 2000
compliant. The Issuer is in the process of evaluating several clinical
information software products, including one which has been installed in 13 of
its facilities, with the expectation that it will identify a Year 2000
compliant standard clinical information and patient billing system which will
be implemented at each of the Issuer's facilities. The Issuer currently
estimates that it will complete the selection of the standard clinical
information and patient billing software during 1998 and finalize the
conversion of its existing systems to the new platform during 1999. Although
the Issuer does not expect the cost of the conversion of its clinical and
patient billing systems to have a material adverse effect on its business or
future results of operations, there can be no assurance that the Issuer will
not be required to incur significant unanticipated costs in relation to its
compliance obligations. The Issuer currently estimates that full compliance
will be achieved during 1999; however, there can be no assurance that the
Issuer will be able to complete the conversion in a timely manner or that
third party software suppliers will be able to provide Year 2000 compliant
products for the Issuer to install. If the systems of the Issuer, businesses
acquired by the Issuer in the future or other companies on whose services the
Issuer depends or with whom the Issuer's systems interface are not Year 2000
compliant, there could be a material adverse effect on the Issuer's financial
condition or results of operations.
POTENTIAL INABILITY TO FUND A CHANGE OF CONTROL OFFER
A Change of Control would require the Issuer to refinance substantial
amounts of indebtedness. Upon the occurrence of a Change of Control, (i) the
Issuer will have the option, at any time on or prior to August 1, 2003, to
redeem the Notes, the Exchangeable Preferred Stock or the Exchange Debentures,
in each case in whole, but not in part, on the terms provided in this
Prospectus, and (ii) if the Issuer does not so redeem the Notes, the
Exchangeable Preferred Stock or the Exchange Debentures, or if a Change of
Control occurs after August 1, 2003 and the Issuer does not redeem the Notes,
Exchangeable Preferred Stock or Exchange Debentures, as the case may be, as
permitted at any time after such date, each holder of Notes, Exchangeable
Preferred Stock or Exchange Debenture, as the case may be, will have the right
to require the Issuer to repurchase all or any part of such holder's Notes,
Exchangeable Preferred Stock or Exchange Debentures, as the case may be, at
the prices described in this Prospectus. However, the New Credit Facility
prohibits the purchase of the Securities by the Issuer in the event of a
Change of Control, unless and until such time as the
36
indebtedness under the New Credit Facility is repaid in full. The Issuer's
failure to purchase the Securities would result in a default under the
Indenture, the Certificate of Designation and the New Credit Facility. The
inability to repay the indebtedness under the New Credit Facility, if
accelerated, would also constitute a default under the Indenture and a Voting
Rights Triggering Event (as defined in the Certificate of Designation), which
could have adverse consequences to the Issuer and the holders of the
Securities. In the event of a Change of Control, there can be no assurance that
the Issuer would have sufficient funds to satisfy all of its obligations under
the New Credit Facility, the Indenture and the Certificate of Designation.
USE OF PROCEEDS
There will be no proceeds to the Issuer or any of the Guarantors from the
exchange of Securities pursuant to the Exchange Offer.
37
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Exchange Offer is designed to provide holders of Old Securities with an
opportunity to acquire New Securities which, unlike the Old Securities, will
be freely tradable at all times, subject to any restrictions on transfer
imposed by state "blue sky" laws and provided that (i) the holder is not an
affiliate of the Company within the meaning of the Securities Act, and (ii)
the holder represents that the New Securities are being acquired in the
ordinary course of such holder's business and the holder is not engaged in,
and does not intend to engage in, a distribution of the New Securities. The
outstanding Old Notes in the aggregate principal amount at maturity of $170.0
million and the 40,000 outstanding shares of Old Preferred Stock were
originally issued and sold on July 31, 1998 (the "Original Issue Date") in
order to provide financing in connection with the Recapitalization. The
original sale of Old Securities to Morgan Stanley & Co. Incorporated, Chase
Securities Inc. and BT Alex. Brown Incorporated (the "Placement Agents") was
not registered under the Securities Act in reliance upon the exemption
provided by Section 4(2) of the Securities Act and the concurrent resale of
the Old Securities to investors was not registered under the Securities Act in
reliance upon the exemptions provided by Rule 144A and Regulation S
promulgated under the Securities Act. The Old Securities may not be reoffered,
resold or transferred other than pursuant to a registration statement filed
pursuant to the Securities Act or unless an exemption from the registration
requirements of the Securities Act is available. Pursuant to Rule 144, Old
Securities may generally be resold (a) commencing one year after the Original
Issue Date, in an amount up to, for any three-month period, the greater of 1%
of the Old Notes or Old Preferred Stock, as the case may be, then outstanding
or the average weekly trading volume of the Old Notes or Old Preferred Stock,
as the case may be, during the four calendar weeks immediately preceding the
filing of the required notice of sale with the Commission and (b) commencing
two years after the Original Issue Date, in any amount and otherwise without
restriction by a holder who is not, and has not been for the preceding 90
days, an affiliate of the Issuer. The Old Securities are eligible for trading
in the PORTAL Market, and may be resold to certain Qualified Institutional
Buyers pursuant to Rule 144A and to certain non-U.S. persons pursuant to
Regulation S. Certain other exemptions may also be available under other
provisions of the federal securities laws for the resale of the Old
Securities.
In connection with the original issue and sale of the Old Notes and the Old
Preferred Stock, the Issuer and the Guarantors entered into Registration
Rights Agreements, pursuant to which they agreed to file with the Commission a
registration statement covering the exchange by the Issuer of the New
Securities for the Old Securities (the "Exchange Offer Registration
Statement"). The Registration Rights Agreements provide that, unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
(i) the Issuer will file the Exchange Offer Registration Statement with the
Commission on or prior to 90 days after the Original Issue Date, (ii) the
Issuer will use its reasonable best efforts to have the Exchange Offer
Registration Statement declared effective by the Commission on or prior to 180
days after the Original Issue Date, (iii) the Issuer will commence the
Exchange Offer and use its reasonable best efforts to issue on or prior to 30
business days after the date on which the Exchange Offer Registration
Statement is declared effective by the Commission, New Securities in exchange
for all Old Securities tendered prior thereto in the Exchange Offer, and (iv)
if obligated by the Registration Rights Agreements to file a shelf
registration statement covering the Old Securities (a "Shelf Registration
Statement"), the Issuer will use its reasonable best efforts to file the Shelf
Registration Statement with the Commission on or prior to 90 days after such
filing obligation arises, to cause the Shelf Registration Statement to be
declared effective by the Commission on or prior to 135 days after such
obligation arises and, with certain exceptions, to cause such Shelf
Registration Statement to remain effective and usable for a period of two
years following the initial effectiveness thereof. If (a) the Issuer fails to
file any of the registration statements required by the Registration Rights
Agreements on or before the date specified for such filing, (b) any of such
registration statements is not declared effective by the Commission on or
prior to the date specified for such
38
effectiveness, (c) unless the Exchange Offer would not be permitted by
applicable law or Commission policy or the Issuer is otherwise not required to
do so, the Issuer fails to consummate the Exchange Offer within 30 business
days after the date specified for effectiveness of the Exchange Offer
Registration Statement, or (d) the Shelf Registration Statement or the
Exchange Offer Registration Statement is declared effective but thereafter
ceases to be effective or usable in connection with resales of Transfer
Restricted Securities (as defined below) during the periods specified in the
Registration Rights Agreements (each such event referred to in clauses (a)
through (d) above a "Registration Default"), the Issuer and the Guarantors
will pay liquidated damages ("Liquidated Damages") to each holder of Transfer
Restricted Securities (as defined), with respect to the first 90-day period
immediately following the occurrence of such Registration Default in an amount
equal to $.05 per week per $1,000 principal amount, in the case of the Old
Notes, or $1,000 liquidation preference, in the case of the Old Preferred
Stock, of Transfer Restricted Securities held by such person. The amount of
the Liquidated Damages will increase by an additional $.05 per week per $1,000
principal amount or liquidation preference of Transfer Restricted Securities
with respect to each subsequent 90-day period until all Registration Defaults
have been cured up to a maximum amount of Liquidated Damages of $.20 per week
per $1,000 principal amount or liquidation preference of Transfer Restricted
Securities (regardless of whether one or more than one Registration Default is
outstanding). Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease. For purposes of the foregoing, "Transfer
Restricted Securities" means each Old Note, in the case of a Registration
Default with respect to the Old Notes, or each share of Old Preferred Stock,
in the case of a Registration Default with respect to the Old Preferred Stock,
until (i) the date on which such Old Security has been exchanged by a person
other than a broker-dealer for a New Security in the Exchange Offer, (ii) the
date on which such Old Security has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement, (iii) the date on which such Old Security is distributed to the
public pursuant to Rule 144 under the Securities Act, or (iv) following the
exchange by a broker-dealer in the Exchange Offer of an Old Security for a New
Security, the date on which such New Security is sold to a purchaser who
receives from such broker-dealer on or prior to the date of such sale a copy
of a prospectus meeting the requirements of the Securities Act in connection
with resales of securities received by the broker-dealer in any such exchange.
The staff of the Commission has issued certain interpretive letters that
concluded, in circumstances similar to those contemplated by the Exchange
Offer, that new securities issued in a registered exchange for outstanding
securities, which new securities are intended to be substantially identical to
the securities for which they are exchanged, may be offered for resale, resold
and otherwise transferred by a holder thereof (other than (i) a broker-dealer
who purchases such securities from the issuer to resell pursuant to Rule 144A
or any other available exemption under the Securities Act or (ii) a person who
is an affiliate of the issuer within the meaning of Rule 405 under the
Securities Act or (iii) a person participating in the distribution of the
securities without compliance with the registration and prospectus delivery
provisions of the Securities Act), provided that the new securities are
acquired in the ordinary course of such holder's business and such holder has
no arrangement or understanding with any person to participate in the
distribution of the new securities. However, a broker-dealer who holds
outstanding securities that were acquired for its own account as a result of
market-making or other trading activities may be deemed to be an "underwriter"
within the meaning of the Securities Act and must, therefore, deliver a
prospectus meeting the requirements of the Securities Act in connection with
any resales of the new securities received by the broker-dealer in any such
exchange. See "--Consequences of Failure to Exchange; Resales of New
Securities." The Issuer has not requested or obtained an interpretive letter
from the Commission staff with respect to this Exchange Offer, and the Issuer
and the holders are not entitled to rely on interpretive advice provided by
the staff to other persons, which advice was based on the facts and conditions
represented in such letters. However, the Exchange Offer is being conducted in
a manner intended to be consistent with the facts and conditions represented
in such letters. If any holder has any arrangement or
39
understanding with respect to the distribution of the New Securities to be
acquired pursuant to the Exchange Offer, such holder (i) could not rely on the
applicable interpretations of the staff of the Commission and (ii) must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any resale transaction. In addition, each broker-dealer
that receives New Securities for its own account in exchange for the Old
Securities, where such Old Securities were acquired by such broker-dealers as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Securities. See "Plan of Distribution." By delivering the Letter of
Transmittal, a holder tendering Old Securities for exchange will represent and
warrant to the Issuer that the holder is acquiring the New Securities in the
ordinary course of its business and that the holder is not engaged in, and
does not intend to engage in, a distribution of the New Securities. Any holder
using the Exchange Offer to participate in a distribution of the New
Securities to be acquired in the Exchange Offer must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. Holders who do not exchange
their Old Securities pursuant to this Exchange Offer will continue to hold Old
Securities that are subject to restrictions on transfer.
It is expected that the New Securities will be freely transferable by the
holders thereof, subject to the limitations described in the immediately
preceding paragraph and in "--Consequences of Failure to Exchange; Resales of
New Securities." Sales of New Securities acquired in the Exchange Offer by
holders who are "affiliates" of the Issuer within the meaning of the
Securities Act will be subject to certain limitations on resale under Rule 144
of the Securities Act. Such persons will only be entitled to sell New
Securities in compliance with the volume limitations set forth in Rule 144,
and sales of New Securities by affiliates will be subject to certain Rule 144
requirements as to the manner of sale, notice and the availability of current
public information regarding the Issuer. The foregoing is a summary only of
Rule 144 as it may apply to affiliates of the Issuer. Any such persons must
consult their own legal counsel for advice as to any restrictions that might
apply to the resale of their New Securities.
The New Securities otherwise will be substantially identical in all material
respects (including interest or dividend rate, maturity or redemption date,
security and restrictive covenants) to the Old Securities for which they may
be exchanged pursuant to this Exchange Offer. See "Description of the New
Notes" and "Description of the New Preferred Stock."
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD SECURITIES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Issuer will accept for exchange Old Securities which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m.,
New York City time, on , 1998; provided, however, that if the Issuer has
extended the period of time for which the Exchange Offer is open, the term
"Expiration Date" means the latest time and date to which the Exchange Offer
is extended.
As of the date of this Prospectus, $170.0 million aggregate principal amount
at maturity of the Old Notes and 40,000 shares of Old Preferred Stock are
outstanding. This Prospectus, together with the Letter of Transmittal, is
first being sent on or about , 1998, to all holders of Old Securities
known to the Issuer. The Issuer's obligation to accept Old Securities for
exchange pursuant to the Exchange Offer is subject to certain conditions as
set forth under "--Certain Conditions to the Exchange Offer" below.
The Issuer expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Securities, by giving notice
of such extension to the holders thereof. During any such extension, all Old
40
Securities previously tendered will remain subject to the Exchange Offer and
may be accepted for exchange by the Issuer. Any Old Securities not accepted
for exchange for any reason will be returned without expense to the tendering
holder thereof as promptly as practicable after the expiration or termination
of the Exchange Offer.
The Issuer expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Securities not theretofore
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified below under "--Certain Conditions to the Exchange
Offer." The Issuer will give notice of any extension, amendment, non-
acceptance or termination to the holders of the Old Securities as promptly as
practicable, such notice in the case of any extension to be issued no later
than 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Securities being tendered for exchange. The Company reserves the
right in its sole discretion to purchase or make offers for any Old Securities
that remain outstanding after the Expiration Date or, as set forth under "--
Certain Conditions to the Exchange Offer," to terminate the Exchange Offer and
to the extent permitted by applicable law, purchase Old Securities in the open
market, in privately negotiated transactions or otherwise. The terms of any
such purchases or offers could differ from the terms of the Exchange Offer.
Holders of Old Securities do not have any appraisal or dissenters' rights in
connection with the Exchange Offer. Old Securities that are not tendered, or
are tendered but not accepted, in connection with the Exchange Offer will
remain outstanding and continue to accrue interest or dividends in accordance
with their terms. See "Risk Factors--Consequences of a Failure to Exchange Old
Securities."
THE BOARD OF DIRECTORS OF THE COMPANY MAKES NO RECOMMENDATION TO HOLDERS OF
OLD SECURITIES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY
PORTION OF THEIR OLD SECURITIES PURSUANT TO THE EXCHANGE OFFER. IN ADDITION,
NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS OF OLD
SECURITIES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO THE
EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD SECURITIES TO TENDER,
AFTER READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND CONSULTING
WITH THEIR ADVISERS, IF ANY, BASED ON THEIR FINANCIAL POSITION AND
REQUIREMENTS.
PROCEDURES FOR TENDERING OLD SECURITIES
The tender to the Issuer of Old Securities by a holder thereof as set forth
below and the acceptance thereof by the Issuer will constitute a binding
agreement between the tendering holder and the Issuer upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a holder who wishes to
tender Old Securities for exchange pursuant to the Exchange Offer must
transmit a properly completed and duly executed Letter of Transmittal,
including all other documents required by such Letter of Transmittal, to
United States Trust Company of New York (the "Exchange Agent") at one of the
addresses set forth below under "Exchange Agent" on or prior to the Expiration
Date. In addition, either (i) certificates for such Old Securities must be
received by the Exchange Agent along with the Letter of Transmittal, or (ii) a
timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of
such Old Securities, if such procedure is available, into the Exchange Agent's
account at The Depository Trust Company (the "Book-Entry Transfer Facility")
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date, or (iii) the
holder must comply with the guaranteed delivery procedures described below.
THE METHOD OF DELIVERY OF OLD
41
SECURITIES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD SECURITIES SHOULD BE SENT TO
THE ISSUER. THE ISSUER IS NOT ASKING HOLDERS OF OLD SECURITIES FOR A PROXY AND
HOLDERS OF OLD SECURITIES ARE REQUESTED NOT TO SEND THE ISSUER A PROXY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Securities surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Securities
who has not completed the box entitled "Special Issuance Instruction" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution (as defined below). In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantees must be by a firm which
is a member of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. or by a commercial bank or
trust company having an office or correspondent in the United States
(collectively, "Eligible Institutions"). If Old Securities are registered in
the name of a person other than a signer of the Letter of Transmittal, the Old
Securities surrendered for exchange must be endorsed by, or be accompanied by
a written instrument or instruments of transfer or exchange, in satisfactory
form as determined by the Issuer in its sole discretion, duly executed by the
registered holder with the signature thereon guaranteed by an Eligible
Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Securities tendered for exchange will be
determined by the Issuer in its sole discretion, which determination shall be
final and binding. The Issuer reserves the absolute right to reject any and
all tenders of any particular Old Securities not properly tendered or to not
accept any particular Old Securities which acceptance might, in the judgment
of the Issuer or its counsel, be unlawful. The Issuer also reserves the
absolute right to waive any defects or irregularities or conditions of the
Exchange Offer as to any particular Old Securities either before or after the
Expiration Date (including the right to waive the ineligibility of any holder
who seeks to tender Old Securities in the Exchange Offer). The interpretation
of the terms and conditions of the Exchange Offer as to any particular Old
Securities either before or after the Expiration Date (including the Letter of
Transmittal and the instructions thereto) by the Issuer shall be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Securities for exchange must be cured within
such reasonable period of time as the Issuer shall determine. Neither the
Issuer, the Exchange Agent nor any other person shall be under any duty to
give notification of any defect or irregularity with respect to any tender of
Old Securities for exchange, nor shall any of them incur any liability for
failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Securities, such Old Securities must be
endorsed or accompanied by appropriate powers of attorney, in either case
signed exactly as the name or names of the registered holder or holders appear
on the Old Securities.
If the Letter of Transmittal or any Old Securities or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Issuer, proper evidence satisfactory to the Issuer of their authority to
so act must be submitted.
Any beneficial owner of Old Securities that are held by or registered in the
name of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact such entity promptly if such beneficial holder
wishes to participate in the Exchange Offer.
42
By tendering, each broker-dealer holder will represent to the Issuer that,
among other things, the New Securities acquired pursuant to the Exchange Offer
are being obtained in the ordinary course of business of the holder and any
beneficial holder, that neither the holder nor any such beneficial holder has
an arrangement or understanding with any person to participate in the
distribution of such New Securities and that neither the holder nor any such
other person is an "affiliate," as defined under Rule 405 of the Securities
Act, of the Issuer. If the holder is not a broker-dealer, the holder must
represent that it is not engaged in nor does it intend to engage in a
distribution of the New Securities.
ACCEPTANCE OF OLD SECURITIES FOR EXCHANGE; DELIVERY OF NEW SECURITIES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Issuer will accept, promptly after the Expiration Date, all Old Securities
properly tendered and will issue the New Securities promptly after acceptance
of the Old Securities. See "--Certain Conditions to the Exchange Offer" below.
For purposes of the Exchange Offer, the Issuer shall be deemed to have
accepted properly tendered Old Securities for exchange when, as and if the
Issuer has given written notice thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. For each share of Old Preferred Stock accepted for exchange, the
holder of such share will receive a share of New Preferred Stock.
In all cases, issuance of New Securities for Old Securities that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such Old Securities
or a timely Book-Entry Confirmation of such Old Securities into the Exchange
Agent's account at the Book-Entry Transfer Facility, a properly completed and
duly executed Letter of Transmittal and all other required documents. If any
tendered Old Securities are not accepted for any reason set forth in the terms
and conditions of the Exchange Offer or if Old Securities are submitted for a
greater principal amount or number of shares than the holder desires to
exchange, such unaccepted or non-exchanged Old Securities will be returned
without expense to the tendering holder thereof (or, in the case of Old
Securities tendered by book-entry transfer into the Exchange Agent's account
at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described below, such non-exchanged Old Securities will be credited
to an account maintained with such Book-Entry Transfer Facility) as promptly
as practicable after the expiration of the Exchange Offer.
BOOK-ENTRY TRANSFER
Any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Securities by causing
the Book-Entry Transfer Facility to transfer such Old Securities into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance
with such Book-Entry Transfer Facility's procedures for transfer. However,
although delivery of Old Securities may be effected through book-entry
transfer at the Book-Entry Transfer Facility, the Letter of Transmittal or
facsimile thereof with any required signature guarantees and any other
required documents must, in any case, be transmitted to and received by the
Exchange Agent at one of the addresses set forth below under "Exchange Agent"
on or prior to the Expiration Date or the guaranteed delivery procedures
described below must be complied with.
DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Securities desires to tender such Old
Securities and the Old Securities are not immediately available, or time will
not permit such holder's Old Securities or other
43
required documents to reach the Exchange Agent before the Expiration Date, or
the procedure for book-entry transfer cannot be completed on a timely basis, a
tender may be effected if (i) the tender is made through an Eligible
Institution, (ii) prior to the Expiration Date, the Exchange Agent receives
from such Eligible Institution a properly completed and duly executed Letter
of Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery,
substantially in the form provided by the Issuer (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Securities and the amount of Old Securities
tendered, stating that the tender is being made thereby and guaranteeing that
within five New York Stock Exchange ("NYSE") trading days after the date of
execution of the Notice of Guaranteed Delivery, the certificates for all
physically tendered Old Securities, in proper form for transfer, or a Book-
Entry Confirmation, as the case may be, and any other documents required by
the Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent and (iii) the certificates for all physically tendered Old
Securities, in proper form for transfer, or a Book-Entry Confirmation, as the
case may be, and all other documents required by the Letter of Transmittal are
received by the Exchange Agent within five NYSE trading days after the date of
execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Securities may be withdrawn at any time prior to the
Expiration Date. For a withdrawal to be effective, a written notice of
withdrawal must be received by the Exchange Agent at one of the addresses set
forth below under "Exchange Agent." Any such notice of withdrawal must specify
the name of the person having tendered the Old Securities to be withdrawn,
identify the Old Securities to be withdrawn (including the principal amount or
number of shares of such Old Securities), and (where certificates for Old
Securities have been transmitted) specify the name in which such Old
Securities are registered, if different from that of the withdrawing holder.
If certificates for Old Securities have been delivered or otherwise identified
to the Exchange Agent, then, prior to the release of such certificates the
withdrawing holder must also submit the serial numbers of the particular
certificates to be withdrawn and a signed notice of withdrawal with signatures
guaranteed by an Eligible Institution unless such holder is an Eligible
Institution. If Old Securities have been tendered pursuant to the procedure
for book-entry transfer described above, any notice of withdrawal must specify
the name and number of the account at the Book-Entry Transfer Facility to be
credited with the withdrawn Old Securities and otherwise comply with the
procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Issuer, whose determination shall be final and binding on all parties. Any
Old Securities so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Securities that have
been tendered for exchange but that are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Securities tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described above, such Old Securities will be credited to
an account maintained with such Book-Entry Transfer Facility for the Old
Securities) as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Securities may be
retendered by following one of the procedures described under "-- Procedures
for Tendering Old Securities" above at any time on or prior to the Expiration
Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Issuer shall
not be required to accept for exchange, or to issue New Securities in exchange
for, any Old Securities and may terminate or amend the Exchange Offer if at
any time before the acceptance of such Old Securities for exchange or the
exchange of the New Securities for such Old Securities, the Issuer determines
that the Exchange Offer violates applicable law, any applicable interpretation
of the staff of the Commission or any order of any governmental agency or
court of competent jurisdiction.
44
The foregoing conditions are for the sole benefit of the Issuer and may be
asserted by the Issuer regardless of the circumstances giving rise to any such
condition or may be waived by the Issuer in whole or in part at any time and
from time to time in its reasonable discretion. The failure by the Issuer at
any time to exercise any of the foregoing rights shall not be deemed a waiver
of any such right and each such right shall be deemed an ongoing right which
may be asserted at any time and from time to time.
In addition, the Issuer will not accept for exchange any Old Securities
tendered, and no New Securities will be issued in exchange for any such Old
Securities, if at such time any stop order shall be threatened or in effect
with respect to the Registration Statement of which this Prospectus constitutes
a part or the qualification of the Indenture under the Trust Indenture Act of
1939 (the "TIA"). In any such event, the Issuer is required to use every
reasonable effort to obtain the withdrawal of any stop order at the earliest
possible time.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as the Exchange
Agent for the Exchange Offer. All executed Letters of Transmittal should be
directed to the Exchange Agent at one of the addresses set forth below.
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
BY FACSIMILE BY HAND BEFORE 4:30 P.M.
(212) 780-0592 United States Trust Company of New York
Attention: Customer Service 111 Broadway
Confirm by telephone: (800) 548- New York, New York 10006
6565 Attention: Lower Level Corporate Trust
Window
BY MAIL
United States Trust Company of New BY OVERNIGHT COURIER AND BY HAND AFTER 4:30
York P.M. ON THE EXPIRATION DATE ONLY
P.O. Box 843 United States Trust Company of New York
Cooper Station 770 Broadway, 13th Floor
New York, New York 10276 New York, New York 10003
Attention: Corporate Trust
Services
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The Issuer will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Issuer.
The Issuer will pay the reasonable and customary expenses to be incurred in
connection with the Exchange Offer, which includes fees and expenses of the
Exchange Agent and of the trustee under the Indenture, accounting, legal,
printing and related fees and expenses.
ACCOUNTING TREATMENT
The New Securities will be recorded at the same carrying value as the Old
Securities, which, in the case of the Old Notes, is the principal amount less
the unamortized original issue discount as
45
reflected in the Issuer's accounting records on the date of the exchange, and
in the case of the Old Preferred Stock, is their liquidation preference.
Accordingly, no gain or loss for accounting purposes will be recognized. The
expenses of the Exchange Offer will be capitalized for accounting purposes.
TRANSFER TAXES
Holders who tender their Old Securities for exchange will not be obligated
to pay any transfer taxes in connection therewith, except that holders who
instruct the Issuer to register New Securities in the name of, or request that
Old Securities not tendered or not accepted in the Exchange Offer be returned
to, a person other than the registered tendering holder will be responsible
for the payment of any applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE; RESALES OF NEW SECURITIES
Holders of Old Securities who do not exchange their Old Securities for New
Securities pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Old Securities as set forth in the legend
thereon as a consequence of the issuance of the Old Securities pursuant to the
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. Old
Securities not exchanged pursuant to the Exchange Offer will continue to
accrete interest or accrue dividends and will otherwise remain outstanding in
accordance with their terms. In general, the Old Securities may not be offered
or sold unless registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Issuer does not currently anticipate
that it will register the Old Securities under the Securities Act. However, if
(i) the Issuer is not required to file the Exchange Offer Registration
Statement or permitted to consummate the Exchange Offer, (ii) any Old
Securities validly tendered pursuant to the Exchange Offer are not exchanged
for new Securities within 180 days after the Closing Date, or (iii) any holder
of Transfer Restricted Securities notifies the Issuer prior to the 20th day
following consummation of the Exchange Offer that (A) it is prohibited by law
or Commission policy from participating in the Exchange Offer, (B) it may not
resell the New Securities acquired by it in the Exchange Offer to the public
without delivering a prospectus and the prospectus contained in the Exchange
Offer Registration Statement is not appropriate or available for such resales,
(C) it is a Placement Agent and the Transfer Restricted Securities that it
holds are not eligible to be exchanged for New Securities, or (D) it is a
broker-dealer and owns Old Securities acquired directly from the Issuer or an
affiliate of the Issuer, the Issuer is obligated under the Registration Rights
Agreements to file a shelf registration statement on the appropriate form
under the Securities Act relating to the Old Securities held by such persons.
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, New Securities issued pursuant to
the Exchange Offer may be offered for resale, resold or otherwise transferred
by holders thereof (other than (i) any such holder which is an "affiliate" of
the Issuer within the meaning of Rule 405 under the Securities Act or (ii) any
broker-dealer that purchases Securities from the Issuer to resell pursuant to
Rule 144A or any other available exemption) without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that such New Securities are acquired in the ordinary course of such
holders' business and such holders have no arrangement or understanding with
any person to participate in the distribution of such New Securities. If any
holder has any arrangement or understanding with respect to the distribution
of the New Securities to be acquired pursuant to the Exchange Offer, such
holder (i) could not rely on the applicable interpretations of the staff of
the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction. A broker-dealer who holds Old Securities that were
acquired for its own account as a result of market-making or other trading
activities may be deemed to be an "underwriter" within the meaning of the
Securities Act and must, therefore, deliver a prospectus
46
meeting the requirements of the Securities Act in connection with any resale
of New Securities. Each such broker-dealer who receives New Securities for its
own account in exchange for Old Securities, where such Old Securities were
acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge in the Letter of Transmittal that
it will deliver a prospectus in connection with any resale of such New
Securities. See "Plan of Distribution." While the Issuer has an obligation
under the Registration Rights Agreements, subject to certain exceptions, to
update this Prospectus by amendment or supplement for a period of 90 days
following consummation of the Exchange Offer in order to permit this
Prospectus to be used by such broker-dealers, the Issuer has no obligation
thereafter to update this Prospectus and, therefore, holders required to
deliver a prospectus may not thereafter be able to resell because they may be
unable to comply with the prospectus delivery requirements described above.
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the New Securities may not be offered or sold unless they have
been registered or qualified for sale in such jurisdiction or an exemption
from registration or qualification is available and is complied with. The
Issuer has agreed, pursuant to the Registration Rights Agreement and subject
to certain specified limitations therein, to register or qualify the New
Securities for offer or sale under the securities or blue sky laws of such
jurisdictions as any holder of the Securities reasonably requests in writing.
47
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of June 30, 1998 and (ii) the capitalization of the Company as of June 30,
1998 after giving pro forma effect to the Recapitalization as if it had
occurred on June 30, 1998. This table should be read in conjunction with
"Selected Consolidated Historical Financial and Operating Data," "Unaudited
Pro Forma Consolidated Financial Information," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the unaudited
consolidated financial statements and the related notes thereto included
elsewhere in this Prospectus.
AS OF JUNE 30,
1998
------------------
ACTUAL PRO FORMA
-------- ---------
(IN THOUSANDS)
Cash and cash equivalents................................... $ 3,028 $ 3,028
======== ========
Current portion of long-term debt........................... 202 202
Current portion of capital lease obligation................. 4,204 4,204
-------- --------
Total current portion of long-term debt and capital lease
obligation............................................... $ 4,406 $ 4,406
======== ========
Long-term debt (net of current portion):
Mortgage loans ........................................... 17,746 17,746
Previously existing credit facility ...................... 18,600 --
New Credit Facility (1)................................... -- 4,147
Long-term portion of capital lease obligation ............ 51,594 51,594
11% Senior Subordinated Discount Notes due 2008........... -- 99,493
-------- --------
Total long-term debt and capital lease obligation (2)... 87,940 172,980
-------- --------
13 1/2% Exchangeable Preferred Stock........................ -- 40,000
Stockholders' equity:
Common stock.............................................. 80 146
Additional paid-in capital................................ 48,469 213,403
Treasury stock............................................ -- (183,881)
Retained earnings......................................... 7,136 (26,009)
-------- --------
Total stockholders' equity (3).......................... 55,685 3,659
-------- --------
Total capitalization.................................. $143,625 $216,639
======== ========
- --------
(1) As part of the Recapitalization, the Company entered into the $250.0
million New Credit Facility. See "Description of the New Credit Facility."
(2) As of June 30, 1998, the Company had $59.3 million of outstanding
obligations drawn under its existing synthetic lease facility (which are
not included in the amount shown in the table above). Pro forma for the
Recapitalization, the Company will have no such outstanding obligations.
(3) As part of the Recapitalization, the New Investors made a cash equity
investment of $165.0 million, representing approximately 91% of the
outstanding common stock and voting power of Harborside upon consummation
of the Merger. Following the Recapitalization, certain pre-Merger
stockholders continued to own approximately 9% of the outstanding common
stock of Harborside, representing a total value of approximately $16.5
million, based on the price paid by the New Investors.
48
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information (the
"Unaudited Pro Forma Consolidated Financial Information") is based on the
audited historical consolidated financial statements of the Company and the
unaudited historical financial statements of Access Rehabilitation, the
Massachusetts Facilities, the Dayton Facilities, the Connecticut Facilities,
the Briarfield Facilities and the Rhode Island Facilities. The Pro Forma
Financial Information and accompanying notes should be read in conjunction
with the historical financial statements included elsewhere herein pertaining
to the Company, the Massachusetts Facilities and the Dayton Facilities, in
addition to the other financial information included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1997 and the six months and the twelve months ended June
30, 1998 have been prepared to give effect to: (i) the Completed 1997
Acquisitions; (ii) the Completed 1998 Acquisitions; and (iii) the
Recapitalization, as if each had occurred on January 1, 1997; and exclude non-
recurring items directly attributable to the Recapitalization. The unaudited
pro forma balance sheet as of June 30, 1998 has been prepared as if the
Recapitalization had occurred on that date.
The unaudited pro forma adjustments are based upon available information and
certain assumptions that the Company believes are reasonable. The pro forma
statements of operations do not purport to present what the Company's results
of operations would actually have been had the Recapitalization, the Completed
1997 Acquisitions and the Completed 1998 Acquisitions in fact occurred on
January 1, 1997, or to project the Company's results of operations for any
future period. The pro forma balance sheet data do not purport to present what
the Company's financial position actually would have been had the
Recapitalization in fact occurred on June 30, 1998, or to project the
Company's financial position at any future date. The Unaudited Pro Forma
Consolidated Financial Information set forth below should be read in
conjunction with, and are qualified in their entirety by, the information set
forth in "The Transactions," "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements of the Company and notes thereto included
elsewhere in this Prospectus. The Company expects that the Recapitalization
will be treated as a recapitalization for financial accounting purposes.
Accordingly, no pro forma adjustments were made to the historical basis of the
Company's assets and liabilities.
For the purpose of presenting the unaudited pro forma consolidated
statements of operations, "Completed 1997 Acquisitions Combined" refers to the
historical results of operations of the entities acquired as part of the
Completed 1997 Acquisitions, as adjusted, and "Completed 1998 Acquisitions
Combined" refers to the historical results of operations of the entities
acquired as part of the Completed 1998 Acquisitions, as adjusted.
As used in the Unaudited Pro Forma Consolidated Financial Information, (i)
"Pro Forma Before Completed 1998 Acquisitions" gives pro forma effect to the
Completed 1997 Acquisitions, (ii) "Pro Forma Before Recapitalization" gives
pro forma effect to the Completed 1997 Acquisitions and the Completed 1998
Acquisitions and (iii) "Pro Forma" gives pro forma effect to each of the
foregoing acquisitions and the Recapitalization.
49
HARBORSIDE HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------------------------------------------
PRO FORMA
HARBORSIDE COMPLETED BEFORE COMPLETED
HEALTHCARE 1997 COMPLETED 1998 RECAPITALIZATION
CORPORATION ACQUISITIONS 1998 ACQUISITIONS PRO FORMA BEFORE ADJUSTMENTS PRO FORMA
(A) COMBINED (B) ACQUISITIONS COMBINED (C) RECAPITALIZATION (D) (Q)
----------- ------------ ------------ ------------ ---------------- ---------------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Total net
revenues....... $ 221,777 $63,684 $285,461 $19,873 $ 305,334 $ 31 (E) $ 305,365
Expenses:
Facility
operating..... 176,404 51,155 227,559 15,305 242,864 -- 242,864
Management
fees.......... -- 1,384 1,384 1,753 3,137 -- 3,137
General and
administrative.. 10,953 379 11,332 -- 11,332 -- 11,332
Service charges
paid to
affiliates.... 708 -- 708 -- 708 1,200 (F) 1,908
Depreciation
and
amortization.. 4,074 -- 4,074 -- 4,074 2,467 (G) 6,541
Synthetic lease
rent.......... 511 1,173 1,684 2,602 4,286 (4,286)(H) --
Facility rent.. 11,935 7,783 19,718 -- 19,718 -- 19,718
--------- ------- -------- ------- --------- -------- ----------
Total
expenses...... 204,585 61,874 266,459 19,660 286,119 (619) 285,500
--------- ------- -------- ------- --------- -------- ----------
Income from
operations..... 17,192 1,810 19,002 213 19,215 650 19,865
Other:
Interest
expense, net.. (5,853) -- (5,853) -- (5,853) (13,602)(I) (19,455)
Loss on
investment in
limited
partnership... (189) -- (189) -- (189) -- (189)
--------- ------- -------- ------- --------- -------- ----------
Income before
income taxes... 11,150 1,810 12,960 213 13,173 (12,952) 221
Income taxes.... (4,347) (706) (5,053) (83) (5,136) 5,051 (J) (85)
--------- ------- -------- ------- --------- -------- ----------
Net income...... $ 6,803 $ 1,104 $ 7,907 $ 130 $ 8,037 $ (7,901) $ 136
========= ======= ======== ======= ========= ======== ==========
Net income...... $ 6,803 $ 8,037 $ 136
Preferred divi-
dends.......... -- -- (5,680)(K)
--------- --------- ----------
Net income
(loss)
available
(attributable)
to common
stockholders... $ 6,803 $ 8,037 $ (5,544)
========= ========= ==========
Net income (loss) available
(attributable)
to common
stockholders
per share:
Basic.......... $ .85 $ 1.00 $ (.76)
========= ========= ==========
Diluted........ $ .84 $ .99 $ (.76)
========= ========= ==========
Weighted average
number of com-
mon shares used
in per share
computations:
Basic.......... 8,037,026 8,037,026 7,261,332
Diluted........ 8,138,793 8,138,793 7,261,332
See Accompanying Notes to Unaudited Pro Forma Consolidated Statements of
Operations
50
HARBORSIDE HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
--------------------------------------------------------------------
HARBORSIDE COMPLETED
HEALTHCARE 1998 RECAPITALIZATION
CORPORATION ACQUISITIONS PRO FORMA BEFORE ADJUSTMENTS PRO FORMA
(L) COMBINED (M) RECAPITALIZATION (D) (Q)
----------- ------------ ---------------- ---------------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Total net revenues...... $ 148,640 $5,693 $ 154,333 $ 16 (E) $ 154,349
Expenses:
Facility operating.... 117,030 4,504 121,534 -- 121,534
Management fees....... -- 446 446 -- 446
General and
administrative....... 7,475 -- 7,475 -- 7,475
Service charges paid
to affiliates........ 628 -- 628 600 (F) 1,228
Depreciation and
amortization......... 2,263 -- 2,263 984 (G) 3,247
Synthetic lease rent.. 1,501 761 2,262 (2,262)(H) --
Facility rent......... 10,120 -- 10,120 -- 10,120
--------- ------ --------- ------- ---------
Total expenses...... 139,017 5,711 144,728 (678) 144,050
--------- ------ --------- ------- ---------
Income from operations.. 9,623 (18) 9,605 694 10,299
Other:
Interest expense,
net.................. (3,202) -- (3,202) (6,873)(I) (10,075)
Loss on investment in
limited partnership.. (72) -- (72) -- (72)
--------- ------ --------- ------- ---------
Income before income
taxes.................. 6,349 (18) 6,331 (6,179) 152
Income taxes............ (2,476) 7 (2,469) 2,410 (J) (59)
--------- ------ --------- ------- ---------
Net income.............. $ 3,873 $ (11) $ 3,862 $(3,769) $ 93
========= ====== ========= ======= =========
Net income.............. $ 3,873 $ 3,862 $ 93
Preferred dividends..... -- -- (3,135)(K)
--------- --------- ---------
Net income (loss)
available
(attributable) to
common stockholders.... $ 3,873 $ 3,862 $ (3,042)
========= ========= =========
Net income (loss)
available
(attributable) to
common stockholders per
share:
Basic................. $ .48 $ .48 $ (.42)
========= ========= =========
Diluted............... $ .47 $ .46 $ (.42)
========= ========= =========
Weighted average number
of common shares used
in per share
computations:
Basic................. 8,061,329 8,061,329 7,261,332
Diluted............... 8,327,525 8,327,525 7,261,332
See Accompanying Notes to Unaudited Pro Forma Consolidated Statements of
Operations
51
HARBORSIDE HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED JUNE 30, 1998
--------------------------------------------------------------------------------------------------
PRO FORMA
HARBORSIDE COMPLETED BEFORE COMPLETED
HEALTHCARE 1997 COMPLETED 1998 RECAPITALIZATION
CORPORATION ACQUISITIONS 1998 ACQUISITIONS PRO FORMA BEFORE ADJUSTMENTS PRO FORMA
(N) COMBINED (O) ACQUISITIONS COMBINED (P) RECAPITALIZATION (D) (Q)
----------- ------------ ------------ ------------ ---------------- ---------------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Total net
revenues....... $ 272,741 $23,473 $296,214 $15,743 $ 311,957 $ 31 (E) $ 311,988
Expenses:
Facility
operating..... 215,917 18,604 234,521 11,952 246,473 -- 246,473
Management
fees.......... -- 610 610 1,812 2,422 -- 2,422
General and
administrative.. 13,705 54 13,759 -- 13,759 -- 13,759
Service charges
paid to
affiliates.... 982 -- 982 -- 982 1,200 (F) 2,182
Depreciation
and
amortization.. 4,455 -- 4,455 -- 4,455 2,217 (G) 6,672
Synthetic lease
rent.......... 2,012 293 2,305 2,062 4,367 (4,367)(H) --
Facility rent.. 16,746 3,252 19,998 -- 19,998 -- 19,998
--------- ------- -------- ------- --------- -------- ---------
Total
expenses...... 253,817 22,813 276,630 15,826 292,456 (950) 291,506
--------- ------- -------- ------- --------- -------- ---------
Income from
operations..... 18,924 660 19,584 (83) 19,501 981 20,482
Other:
Interest
expense, net.. (6,299) -- (6,299) -- (6,299) (13,615)(I) (19,914)
Loss on
investment in
limited
partnership... (200) -- (200) -- (200) -- (200)
--------- ------- -------- ------- --------- -------- ---------
Income before
income taxes... 12,425 660 13,085 (83) 13,002 (12,634) 368
Income taxes.... (4,844) (257) (5,101) 33 (5,068) 4,927 (J) (141)
--------- ------- -------- ------- --------- -------- ---------
Net income...... $ 7,581 $ 403 $ 7,984 $ (50) $ 7,934 $ (7,707) $ 227
========= ======= ======== ======= ========= ======== =========
Net income...... $ 7,581 $ 7,934 $ 227
Preferred divi-
dends.......... -- -- (6,069)(K)
--------- --------- ---------
Net income
(loss)
available
(attributable)
to common
stockholders... $ 7,581 $ 7,934 $ (5,842)
========= ========= =========
Net income (loss) available
(attributable)
to common
stockholders
per share:
Basic.......... $ .94 $ .99 $ (.80)
========= ========= =========
Diluted........ $ .92 $ .96 $ (.80)
========= ========= =========
Weighted average
number of com-
mon shares used
in per share
computations:
Basic.......... 8,054,199 8,054,199 7,261,332
Diluted........ 8,279,921 8,279,921 7,261,332
See Accompanying Notes to Unaudited Pro Forma Consolidated Statements of
Operations
52
HARBORSIDE HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(A) Represents the historical audited consolidated statement of operations of
the Company for the year ended December 31, 1997.
(B) During 1997, the Company acquired the Massachusetts Facilities, the Dayton
Facilities and the Connecticut Facilities by entering into operating
leases for those facilities, and acquired the assets of Access
Rehabilitation. To reflect the pro forma effect of these acquisitions on
the Company's operations, the schedule below presents the unaudited
historical combined results of operations of the acquired businesses for
the period from January 1, 1997 until their respective acquisitions by the
Company. Specifically, Access Rehabilitation, the Massachusetts
Facilities, the Dayton Facilities and the Connecticut Facilities were
acquired on July 1, August 1, September 1 and December 1, 1997,
respectively.
ACCESS MASSACHUSETTS DAYTON FACILITIES CONNECTICUT
REHABILITATION FOR FACILITIES FOR FOR THE FACILITIES FOR THE COMPLETED
THE SIX MONTHS THE SEVEN MONTHS EIGHT MONTHS ELEVEN MONTHS 1997
ENDED ENDED ENDED AUGUST 31, ENDED PRO FORMA ACQUISITIONS
JUNE 30, 1997 JULY 31, 1997 1997 NOVEMBER 30, 1997 ADJUSTMENTS COMBINED
------------------ ---------------- ----------------- ------------------ ----------- ------------
(IN THOUSANDS)
Total net revenues.... $4,310 $11,102 $8,600 $39,507 $ 165 (1) $63,684
Expenses:
Facility operating... 4,232 9,122 6,921 30,880 -- 51,155
Management fees...... -- -- 432 952 -- 1,384
General and
administrative...... -- 379 -- -- -- 379
Depreciation and
amortization........ 8 172 361 831 (1,372)(2) --
Synthetic lease
rent................ -- -- -- -- 1,173 (2) 1,173
Facility rent........ 8 -- -- 5,316 2,459 (2) 7,783
------ ------- ------ ------- ------- -------
Total expenses....... 4,248 9,673 7,714 37,979 2,260 61,874
------ ------- ------ ------- ------- -------
Income from
operations........... 62 1,429 886 1,528 (2,095) 1,810
Other:
Interest expense,
net................. (16) (68) (544) (1,057) 1,685 (2) --
------ ------- ------ ------- ------- -------
Income before income
taxes................ 46 1,361 342 471 (410) 1,810
Income taxes.......... -- -- -- -- (706)(3) (706)
------ ------- ------ ------- ------- -------
Net income............ $ 46 $ 1,361 $ 342 $ 471 $(1,116) $ 1,104
====== ======= ====== ======= ======= =======
--------
(1) In Ohio, a portion of a facility's Medicaid reimbursement rate is
related to the capital costs incurred to finance the facility. As
facility financing changes as the result of an acquisition, the
reimbursement of such capital costs (and accordingly, a facility's net
revenues) is affected as well. This adjustment represents the aggregate
increase in revenue that is directly attributable to the Company's
acquisition of the Dayton Facilities and the related financing. The
adjustment, which can occur upon a change of facility ownership, is
computed in accordance with the state Medicaid program cost reporting
rules and regulations by substituting the effects of the Company's
financing for the amounts included in the historical Medicaid cost
reports.
(2) Reflects the following adjustments: (a) the elimination of historical
combined amounts recorded by the acquired businesses for depreciation
and amortization expense which had been recorded as a result of the
ownership of the underlying assets; (b) the elimination of historical
combined amounts recorded by the acquired businesses for interest
expense as the Company did not assume the related indebtedness; (c) the
elimination of historical facility rent
53
HARBORSIDE HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS--
(CONTINUED)
expense of Access Rehabilitation and the Connecticut Facilities; and (d)
the synthetic lease and facility rent expense that the Company would
have incurred had the Completed 1997 Acquisitions occurred on January 1,
1997.
(3) Reflects the adjustment to the provision for federal and state income
taxes which the Company would have recorded (based on the Company's
historical effective tax rate of 39%) had the Completed 1997
Acquisitions occurred on January 1, 1997.
(C) During 1998, the Company acquired the Briarfield and Rhode Island
Facilities through synthetic lease financings. To reflect the pro forma
effect of these acquisitions on the Company's operations, the schedule
below presents the unaudited historical statements of operations of the
Briarfield and Rhode Island Facilities, which were acquired on April 1,
1998 and May 8, 1998, respectively, for the period from January 1, 1997
through December 31, 1997.
COMPLETED
RHODE ISLAND 1998
BRIARFIELD FACILITIES PRO FORMA ACQUISITIONS
FACILITIES (1) (2) ADJUSTMENTS COMBINED
-------------- ------------ ----------- ------------
(IN THOUSANDS)
Total net revenues...... $9,290 $10,105 $ 478 (3) $19,873
Expenses:
Facility operating.... 7,095 8,210 -- 15,305
Management fees....... 986 767 -- 1,753
Depreciation and
amortization......... 335 177 (512)(4) --
Synthetic lease rent.. -- -- 2,602 (4) 2,602
------ ------- ------- -------
Total expenses...... 8,416 9,154 2,090 19,660
------ ------- ------- -------
Income from operations.. 874 951 (1,612) 213
Other:
Interest expense,
net.................. (618) (88) 706 (4) --
------ ------- ------- -------
Income before income
taxes.................. 256 863 (906) 213
Income taxes............ -- -- (83)(5) (83)
------ ------- ------- -------
Net income.............. $ 256 $ 863 $ (989) $ 130
====== ======= ======= =======
--------
(1) Reflects the unaudited historical results of operations of the
Briarfield Facilities for the year ended December 31, 1997.
(2) Reflects the unaudited historical results of operations of the Rhode
Island Facilities for the year ended December 31, 1997.
(3) In Ohio and Rhode Island, a portion of a facility's Medicaid
reimbursement rate is related to the capital costs incurred to finance
the facility. As facility financing changes as a result of an
acquisition, the reimbursement of such capital costs (and accordingly,
a facility's net revenues) is affected as well. This adjustment
represents the aggregate increase in revenue that is directly
attributable to the Company's acquisition of the Briarfield and Rhode
Island Facilities and the related financings. The adjustment, which can
occur upon a change of facility ownership, is computed in accordance
with the state Medicaid program cost reporting rules and regulations by
substituting the effects of the Company's financing for the amounts
included in the historical Medicaid cost reports.
(4) Reflects the following adjustments: (a) the elimination of historical
combined amounts recorded by the Briarfield and Rhode Island Facilities
for depreciation and amortization
54
HARBORSIDE HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS--
(CONTINUED)
expense which had been recorded as a result of the ownership of the
underlying assets; (b) the elimination of historical combined amounts
recorded by the Briarfield and Rhode Island Facilities for interest
expense as the Company did not assume the related indebtedness; and (c)
the synthetic lease rent expense that the Company would have incurred
had the Completed 1998 Acquisitions occurred on January 1, 1997.
(5) Reflects the adjustment to the provision for federal and state income
taxes which the Company would have recorded (based on the Company's
historical effective tax rate of 39%) had the Completed 1998
Acquisitions occurred on January 1, 1997.
(D) The Recapitalization adjustments give effect to the Merger and the
Recapitalization Financings which occurred in connection with the Merger.
The Recapitalization Financings included (but were not limited to) the
following: (i) the receipt of cash equity contributions of $165.0 million;
(ii) the issuance of $40.0 million of Exchangeable Preferred Stock; and
(iii) the issuance of the Notes, yielding gross proceeds of approximately
$99.5 million.
A portion of the net proceeds of the Offering were used to refinance all
borrowings under the Company's previously existing credit facility and to
finance the purchase of the Company's facilities described in note (E)
below, which prior to the Merger were leased through the Company's
previously existing synthetic lease facility.
The unaudited pro forma consolidated statements of operations exclude the
following non-recurring items that are directly attributable to the
Recapitalization: (i) $31.2 million of fees and expenses that were incurred
by the Company in connection with the Recapitalization, and a related income
tax benefit of $3.4 million; (ii) the write-off of $.9 million of debt
issuance costs related to existing debt retired in connection with the
Recapitalization, and a related income tax benefit of $.3 million; and (iii)
a $7.9 million compensation charge resulting from the conversion of
outstanding stock options in connection with the Recapitalization, and a
related income tax benefit of $3.1 million.
(E) In connection with the Recapitalization, the previously existing synthetic
lease financings related to the Dayton Facilities, the Briarfield
Facilities and the Rhode Island Facilities were eliminated and the Company
purchased these facilities through the exercise of existing purchase
options using cash available to the Company through the Recapitalization
Financings. In Ohio and Rhode Island, a portion of a facility's Medicaid
reimbursement rate is related to the capital costs incurred to finance the
facility. As facility financing changes as a result of an acquisition, the
reimbursement of such capital costs (and accordingly, a facility's net
revenue) is affected as well. This adjustment represents the following
aggregate increases (decreases) in total net revenues that are directly
attributable to the acquisition and related refinancing of the following
facilities at the time of the Recapitalization:
FOR THE FOR THE FOR THE
YEAR ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998 JUNE 30, 1998
----------------- ---------------- -------------------
(IN THOUSANDS)
Dayton Facilities....... $ 88 $ 44 $ 88
Briarfield Facilities... (87) (43) (87)
Rhode Island
Facilities............. 30 15 30
---- ---- ----
$ 31 $ 16 $ 31
==== ==== ====
55
HARBORSIDE HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS--
(CONTINUED)
(F) Reflects the amortization of prepaid management advisory and consulting
services fees to be paid to Investcorp International Inc.
(G) Depreciation expense related to the purchase of the Dayton Facilities, the
Briarfield Facilities and the Rhode Island Facilities is estimated using
the straight-line method. Had the Dayton Facilities, the Briarfield
Facilities and the Rhode Island Facilities been acquired on January 1,
1997, the resulting depreciation and amortization would have been
approximately $1,967, $984 and $1,967 for the year ended December 31,
1997, the six months ended June 30, 1998 and the twelve months ended June
30, 1998, respectively. In addition, in conjunction with the
Recapitalization, the two principal beneficial stockholders of the Company
prior to the Merger entered into one-year non-compete agreements with the
Company. To reflect the one-year term, amortization of the related $500
non-compete payments has been fully reflected for the year ended December
31, 1997 while only $250 of such amortization is reflected for the twelve
months ended June 30, 1998.
(H) Reflects the elimination of synthetic lease rent expense as a result of
the elimination of the existing synthetic lease financings for the Dayton
Facilities, the Briarfield Facilities and the Rhode Island Facilities. In
connection with the Merger, the Company purchased these facilities for
$59,250 through the exercise of existing purchase options. See note (E)
above.
(I) In connection with the recapitalization, the Company's borrowings under
its existing credit facility were refinanced using a portion of the
proceeds of the Recapitalization Financings. The adjustments to the
Company's interest expense, net, to reflect the refinancing of this debt
as of January 1, 1997 are as follows:
FOR THE FOR THE FOR THE
YEAR ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998 JUNE 30, 1998
----------------- ---------------- -------------------
(IN THOUSANDS)
Elimination of the
historical interest
expense related to the
existing credit
facility and the
historical amortization
of debt issuance costs
related to the
Company's debt and
synthetic lease
arrangements that were
retired in connection
with the
Recapitalization....... $ (420) $ (606) $(1,026)
Interest expense related
to the $250.0 million
New Credit Facility
with an assumed
interest rate of LIBOR
(5.65%) plus 2.25%
(7.90%) (1)............ 1,557 778 1,557
Interest expense
resulting from $99.5
million gross proceeds
of the Notes, at an
interest rate of
11.00%................. 11,245 6,091 11,864
Amortization of debt
issuance costs of $8.5
million associated with
the Recapitalization
Financings over the
respective terms of
indebtedness........... 1,220 610 1,220
------- ------ -------
$13,602 $6,873 $13,615
======= ====== =======
--------
(1) Interest expense is calculated assuming $4.1 million outstanding under
the New Credit Facility and a .5% fee on the unused portion.
56
HARBORSIDE HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS--
(CONTINUED)
(J) Reflects the adjustment to the provision for federal and state income
taxes which the Company would have recorded (based on the Company's
historical effective tax rate of 39%) had the matters described in notes
(E) through (I) occurred at January 1, 1997.
(K) Dividends on the Exchangeable Preferred Stock will accrue quarterly over
the first five years (i.e., dividends will not be paid in cash during this
period) at an annual rate of 13.50%.
(L) Represents the historical unaudited consolidated statement of operations
of the Company for the six months ended June 30, 1998.
(M) During 1998, the Company acquired the Briarfield and Rhode Island
Facilities through synthetic lease financings. To reflect the pro forma
effect of these acquisitions on the Company's operations, the schedule
below presents the unaudited historical statements of operations of the
Briarfield and Rhode Island Facilities, which were acquired on April 1,
1998 and May 8, 1998, respectively, for the period from January 1, 1998
through their respective acquisition dates.
BRIARFIELD RHODE ISLAND
FACILITIES FACILITIES
FOR THE FOR THE
THREE MONTHS FOUR MONTHS COMPLETED
ENDED ENDED 1998
MARCH 31, APRIL 30, PRO FORMA ACQUISITIONS
1998 1998 ADJUSTMENTS COMBINED
------------ ------------ ----------- ------------
(IN THOUSANDS)
Total net revenues...... $2,296 $3,261 $ 136 (1) $5,693
Expenses:
Facility operating.... 1,786 2,718 -- 4,504
Management fees....... 166 280 -- 446
Depreciation and amor-
tization............. 87 56 (143)(2) --
Synthetic lease rent.. -- -- 761 (2) 761
------ ------ ----- ------
Total expenses...... 2,039 3,054 618 5,711
------ ------ ----- ------
Income from operations.. 257 207 (482) (18)
Other:
Interest expense,
net.................. (166) (27) 193 (2) --
------ ------ ----- ------
Income before income
taxes.................. 91 180 (289) (18)
Income taxes............ -- -- 7 (3) 7
------ ------ ----- ------
Net income.............. $ 91 $ 180 $(282) $ (11)
====== ====== ===== ======
--------
(1) In Ohio and Rhode Island, a portion of a facility's Medicaid
reimbursement rate is related to the capital costs incurred to finance
the facility. As facility financing changes as a result of an
acquisition, the reimbursement of such capital costs (and accordingly,
a facility's net revenues) is affected as well. This adjustment
represents the aggregate increase in revenue that is directly
attributable to the Company's acquisition of the Briarfield and Rhode
Island Facilities and the related financings. The adjustment, which can
occur upon a change of facility ownership, is computed in accordance
with the state Medicaid program cost reporting rules and regulations by
substituting the effects of the Company's financing for the amounts
included in the historical Medicaid cost reports.
(2) Reflects the following adjustments: (a) the elimination of historical
combined amounts recorded by the Briarfield and Rhode Island Facilities
for depreciation and amortization expense which had been recorded as a
result of the ownership of the underlying assets;
57
HARBORSIDE HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS --
(CONTINUED)
(b) the elimination of historical combined amounts recorded by the
Briarfield and Rhode Island Facilities for interest expense as the Company
did not assume the related indebtedness; and (c) the synthetic lease rent
expense that the Company would have incurred had the Completed 1998
Acquisitions occurred on January 1, 1997.
(3) Reflects the adjustment to the provision for federal and state income
taxes which the Company would have recorded (based on the Company's
historical effective tax rate of 39%) had the Completed 1998
Acquisitions occurred on January 1, 1997.
(N) Represents the historical results of operations of the Company for the
twelve months ended June 30, 1998.
(O) During the last six months of 1997, the Company acquired the Massachusetts
Facilities, the Dayton Facilities and the Connecticut Facilities by
entering into operating leases for those facilities. To reflect the pro
forma effect of these acquisitions on the Company's operations, the
schedule below presents the unaudited historical combined results of
operations of the acquired businesses for the period from July 1, 1997
until their respective acquisitions by the Company. Specifically, the
Massachusetts Facilities, the Dayton Facilities and the Connecticut
Facilities were acquired on August 1, September 1, and December 1, 1997,
respectively.
MASSACHUSETTS
FACILITIES
FOR DAYTON FACILITIES CONNECTICUT COMPLETED
THE ONE MONTH FOR THE FACILITIES FOR THE 1997
ENDED TWO MONTHS ENDED FIVE MONTHS ENDED PRO FORMA ACQUISITIONS
JULY 31, 1997 AUGUST 31, 1997 NOVEMBER 30, 1997 ADJUSTMENTS COMBINED
------------- ----------------- ------------------ ----------- ------------
(IN THOUSANDS)
Total net revenues...... $1,562 $2,150 $19,733 $ 28 (1) $23,473
Expenses:
Facility operating..... 1,359 1,730 15,515 -- 18,604
Management fees........ -- 108 502 -- 610
General and
administrative........ 54 -- -- -- 54
Depreciation and
amortization.......... 25 90 473 (588)(2) --
Synthetic lease rent... -- -- -- 293 (2) 293
Facility rent.......... -- -- 2,636 616 (2) 3,252
------ ------ ------- ---- -------
Total expenses....... 1,438 1,928 19,126 321 22,813
------ ------ ------- ---- -------
Income from operations.. 124 222 607 (293) 660
Other:
Interest expense,
net................... -- (136) (854) 990 (2) --
------ ------ ------- ---- -------
Income before income
taxes.................. 124 86 (247) 697 660
Income taxes............ -- -- -- (257)(3) (257)
------ ------ ------- ---- -------
Net income.............. $ 124 $ 86 $ (247) $440 $ 403
====== ====== ======= ==== =======
--------
(1) In Ohio, a portion of a facility's Medicaid reimbursement rate is
related to the capital costs incurred to finance the facility. As
facility financing changes as the result of an acquisition, the
reimbursement of such capital costs (and accordingly a facility's net
revenues) is affected as well. This adjustment represents the aggregate
increase in revenue that is directly attributable to the Company's
acquisition of the Dayton Facilities and the related financing. The
adjustment, which can occur upon a change of facility ownership, is
computed in accordance with the state Medicaid program cost reporting
rules and regulations by substituting the effects of the Company's
financing for the amounts included in the historical Medicaid cost
reports.
58
HARBORSIDE HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS --
(CONTINUED)
(2) Reflects the following adjustments: (a) the elimination of historical
combined amounts recorded by the acquired businesses for depreciation
and amortization expense which had been recorded as a result of the
ownership of the underlying assets; (b) the elimination of historical
combined amounts recorded by the acquired businesses for interest
expense as the Company did not assume the related indebtedness; (c) the
elimination of historical facility rent expense of the Connecticut
Facilities; and (d) the synthetic lease and facility rent expense that
the Company would have incurred had the Completed 1997 Acquisitions
occurred on January 1, 1997.
(3) Reflects the adjustment to the provision for federal and state income
taxes which the Company would have recorded (based on the Company's
historical effective tax rate of 39%) had the Completed 1997
Acquisitions occurred on January 1, 1997.
(P) During 1998, the Company acquired the Briarfield and Rhode Island
Facilities through synthetic lease financings. To reflect the pro forma
effect of these acquisitions on the Company's operations, the schedule
below presents the unaudited historical results of operations of the
Briarfield and Rhode Island Facilities, which were acquired on April 1,
1998 and May 8, 1998, respectively, for the period from July 1, 1997
through their respective acquisition dates.
BRIARFIELD RHODE ISLAND
FACILITIES FACILITIES
FOR THE FOR THE COMPLETED
NINE MONTHS TEN MONTHS 1998
ENDED ENDED PRO FORMA ACQUISITIONS
MARCH 31, 1998 APRIL 30, 1998 ADJUSTMENTS COMBINED
--------------- -------------- ----------- ------------
(IN THOUSANDS)
Total net revenues...... $6,945 $8,423 $ 375 (1) $15,743
Expenses:
Facility operating.... 5,424 6,528 -- 11,952
Management fees....... 765 1,047 -- 1,812
Depreciation and
amortization......... 259 145 (404)(2) --
Synthetic lease rent.. -- -- 2,062 (2) 2,062
------ ------ ------ -------
Total expenses...... 6,448 7,720 1,658 (15,826)
------ ------ ------ -------
Income from operations.. 497 703 (1,283) (83)
Other:
Interest expense,
net.................. (464) (70) 534 (2) --
------ ------ ------ -------
Income before income
taxes.................. 33 633 (749) (83)
Income taxes............ -- -- 33 (3) 33
------ ------ ------ -------
Net income.............. $ 33 $ 633 $ (716) $ (50)
====== ====== ====== =======
--------
(1) In Ohio and Rhode Island, a portion of a facility's Medicaid
reimbursement rate is related to the capital costs incurred to finance
the facility. As facility financing changes as a result of an
acquisition, the reimbursement of such capital costs (and accordingly,
a facility's net revenues) is affected as well. This adjustment
represents the aggregate increase in revenue that is directly
attributable to the Company's acquisition of the Briarfield and Rhode
Island Facilities and the related financings. The adjustment, which can
occur upon a change of facility ownership, is computed in accordance
with the state Medicaid program cost reporting rules and regulations by
substituting the effects of the Company's financing for the amounts
included in the historical Medicaid cost reports.
(2) Reflects the following adjustments: (a) the elimination of historical
combined amounts recorded by the Briarfield and Rhode Island Facilities
for depreciation and amortization
59
HARBORSIDE HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS--
(CONTINUED)
expense which had been recorded as a result of the ownership of the
underlying assets; (b) the elimination of historical combined amounts
recorded by the Briarfield and Rhode Island Facilities for interest
expense as the Company did not assume the related indebtedness; and (c)
the synthetic lease rent expense that the Company would have incurred
had the Completed 1998 Acquisitions occurred on January 1, 1997.
(3) Reflects the adjustment to the provision for federal and state income
taxes which the Company would have recorded (based on the Company's
historical effective tax rate of 39%) had the Completed 1998
Acquisitions occurred on January 1, 1997.
(Q) The pro forma financial results exclude the effects of the elimination of
certain contracts terminated as a condition to closing certain of the
Completed 1997 Acquisitions and the Completed 1998 Acquisitions. On a pro
forma basis, the Company would have realized net cost reductions of
$2,384, $446 and $2,005 for the year ended December 31, 1997, the six
months ended June 30, 1998 and the twelve months ended June 30, 1998,
respectively, as a result of the elimination of these historical
contracts. On a pro forma basis, assuming the elimination of these
contracts in connection with such acquisitions on January 1, 1997, the
facility operating, management fees and general and administrative
expenses would have been as follows:
FOR THE FOR THE FOR THE
YEAR ENDED SIX MONTHS TWELVE MONTHS
DECEMBER 31, 1997 ENDED JUNE 30, 1998 ENDED JUNE 30, 1998
----------------- ------------------- -------------------
Facility operat-
ing (1)........ $242,704 $121,534 $246,473
Management fees
(2)............ -- -- --
General and administrative (3).. 12,245 7,475 14,176
--------
(1) Reflects the $160 effect, for the year ended December 31, 1997, of the
elimination of a consulting contract terminated as a condition to
closing the Company's acquisition of Access Rehabilitation, assuming
such acquisition had occurred on January 1, 1997.
(2) Reflects the $3,137, $446 and $2,422 effects for the year ended
December 31, 1997, the six months ended June 30, 1998, and the twelve
months ended June 30, 1998, respectively, of the elimination of
historical management fees paid under contracts with related parties
that were terminated as a condition to closing the Company's
acquisition of the Dayton, Connecticut, Briarfield and Rhode Island
Facilities, assuming such acquisitions had occurred on January 1, 1997.
Subsequent to the dates of such acquisitions, no services were provided
to the Company by these related parties.
(3) Reflects the $913 and $417 effects for the year ended December 31, 1997
and the twelve months ended June 30, 1998, respectively, of the
addition of general and administrative expenses that the Company
expects it would have incurred had the Company's acquisition of the
Dayton, Connecticut, Briarfield and Rhode Island Facilities occurred on
January 1, 1997.
60
HARBORSIDE HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1998
HARBORSIDE
HEALTHCARE
CORPORATION RECAPITALIZATION
(A) ADJUSTMENTS PRO FORMA
----------- ---------------- ---------
ASSETS
Current assets:
Cash and cash equivalents............. $ 3,028 $ -- (B) $ 3,028
Accounts receivable, net.............. 41,484 -- 41,484
Prepaid expenses and other............ 8,466 (342)(C) 8,124
Deferred income taxes................. 2,150 -- 2,150
-------- -------- --------
Total current assets................ 55,128 (342) 54,786
Restricted cash......................... 7,116 -- 7,116
Property and equipment, net............. 102,048 59,250 (D) 161,298
Intangible assets, net.................. 9,673 14,106 (E) 23,779
Note receivable......................... 7,487 -- 7,487
Deferred income taxes................... 71 -- 71
-------- -------- --------
Total assets........................ $181,523 $ 73,014 $254,537
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.. $ 202 -- $ 202
Current portion of capital lease
obligation........................... 4,204 -- 4,204
Accounts payable...................... 7,963 -- 7,963
Employee compensation and benefits.... 13,696 -- 13,696
Other accrued liabilities............. 5,786 -- 5,786
Accrued interest...................... 199 -- 199
Current portion of deferred income.... 803 -- 803
-------- -------- --------
Total current liabilities........... 32,853 -- 32,853
Long-term portion of deferred income.... 5,045 -- 5,045
Long-term debt.......................... 36,346 85,040 (F) 121,386
Long-term portion of capital lease
obligation............................. 51,594 -- 51,594
-------- -------- --------
Total liabilities................... 125,838 85,040 210,878
======== ======== ========
Exchangeable preferred stock,
redeemable............................. -- 40,000 (G) 40,000
Stockholders' Equity
Common stock.......................... 80 66 (H) 146
Additional paid-in capital............ 48,469 164,934 (H) 213,403
Treasury stock, at cost............... -- (183,881)(H) (183,881)
Retained earnings..................... 7,136 (33,145)(H) (26,009)
======== ======== ========
Total stockholders' equity.......... 55,685 (52,026) 3,659
======== ======== ========
Total liabilities and
stockholders' equity............. $181,523 $ 73,014 $254,537
======== ======== ========
See Accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet
61
HARBORSIDE HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Represents the historical unaudited consolidated balance sheet of the
Company as of June 30, 1998.
(B) Reflects the following sources and uses of funds in connection with the
Recapitalization:
Total sources:
Gross proceeds from the issuance of the Notes................... $ 99,493
Proceeds from the issuance of 6,600,000 shares of common stock
at $25.00 per share(1)......................................... 165,000
Gross proceeds from the issuance of the Exchangeable Preferred
Stock.......................................................... 40,000
Borrowings under the New Credit Facility........................ 4,147
--------
$308,640
========
Total uses:
Redemption of existing 7,355,245 shares of Harborside Common
Stock at $25.00 per share...................................... $183,881
Conversion to cash of 648,923 options at a weighted average
exercise price of $12.87....................................... 7,871
Exercise of existing purchase options for leased facilities..... 59,250
Refinancing of existing credit facility......................... 18,600
Transaction fees and expenses of the Recapitalization(2)........ 39,038
--------
$308,640
========
--------
(1) These shares consist of 5,940,000 shares of Harborside Class B Common
Stock, 640,000 shares of Harborside Class C Common Stock and 20,000
shares of Harborside Class D Common Stock to be exchanged on a one-
for-one basis in the Merger for shares of Class B Stock, Class C Stock,
and Class D Stock, respectively, of the Issuer. Shares of Harborside
Class B Common Stock and Harborside Class C Common Stock are non-
voting, while the shares of Harborside Class D Common Stock have 330
votes per share.
(2) The $39.0 million of fees and expenses includes: $8.5 million of debt
issuance costs associated with the Recapitalization Financings, $6.0
million of management fees prepaid to III, a $.5 million payment
related to the Non-Compete Agreements and $30.8 million of other fees
and expenses to be paid in connection with the Recapitalization, less
$6.8 million related to the income tax benefits related to certain of
such fees and expenses, conversion of options, and the write-off of
deferred issuance costs associated with retired debt. The $30.8 million
of fees and expenses paid in connection with the Recapitalization
include standby commitment fees, legal and accounting fees, and
compensation and other charges associated with the recapitalization.
(C) Reflects forgiveness of loans associated with the change of control.
(D) Reflects the exercise of existing purchase options for the Dayton
Facilities, the Briarfield Facilities and the Rhode Island Facilities.
(E) Reflects the following:
Debt issuance costs related to the Recapitalization Financings..... $ 8,503
Management fees prepaid to Investcorp International Inc............ 6,000
Payments related to the Non-Compete Agreement...................... 500
Elimination of debt issuance costs related to retired debt......... (897)
-------
$14,106
=======
62
HARBORSIDE HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET--(CONTINUED)
(F)Reflects the following:
Refinancing of existing credit facility........................... $(18,600)
Borrowings under the New Credit Facility.......................... 4,147
Gross proceeds from the issuance of the Notes..................... 99,493
--------
$ 85,040
========
(G)Reflects the issuance of the Exchangeable Preferred Stock.
(H)Reflects the following:
Issuance of 6,600,000 shares of common stock par value $.01..... $ 66
Issuance of 6,600,000 shares of common stock at $25.00 per
share, additional paid-in-capital.............................. 164,934
Redemption of existing 7,355,245 shares of Harborside Common
Stock at $25.00 per share...................................... (183,881)
Conversion to cash of 648,923 options at a weighted average
exercise price of $12.87....................................... (7,871)
Certain fees and expenses incurred by the Company in connection
with the Recapitalization(1)................................... (32,129)
Tax benefit of management transaction bonuses, standby
commitment fees, conversion of options, and write-off of
deferred issuance costs associated with retired debt........... 6,855
---------
$ (52,026)
=========
--------
(1) Represents $30.8 million in fees and expenses paid in connection with
the Recapitalization, a $.4 million non-cash charge related to the
forgiveness of employee loans, and a $.9 million non-cash charge
associated with the elimination of deferred financing costs related to
retired debt.
63
SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING DATA
The selected consolidated historical financial data set forth below were
derived from the consolidated historical financial statements of the Company.
The selected consolidated historical financial data of the Company as of and
for the years ended December 31, 1993, 1994, 1995, 1996 and 1997 have been
derived from the consolidated historical financial statements of the Company,
including the notes thereto, which have been audited by PricewaterhouseCoopers
LLP, independent certified public accountants. The selected consolidated
historical financial data as of and for the six months ended June 30, 1997 and
June 30, 1998 were derived from the unaudited consolidated financial
statements of the Company which, in the opinion of management, include all
adjustments (consisting only of normal, recurring adjustments) necessary for a
fair presentation of the Company's consolidated results of operations and
financial condition for such periods. The operating results for the respective
six month periods ended June 30, 1997 and June 30, 1998 are not necessarily
indicative of results to be expected for the full fiscal year. The selected
historical consolidated financial data set forth below should be read in
conjunction with, and are qualified in their entirety by, the information set
forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements of the
Company and notes thereto included elsewhere in this Prospectus.
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30
---------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- ---------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA (1):
Total net revenues..... $ 75,101 $ 86,376 $109,425 $ 165,412 $ 221,777 $ 97,676 $148,640
Facility operating
costs................. 57,412 68,951 89,378 132,207 176,404 77,517 117,030
General and adminis-
trative expense....... 3,092 3,859 5,076 7,811 10,953 4,723 7,475
Service charges paid
to affiliate.......... 746 759 700 700 708 354 628
Special compensation
and other............. -- -- -- 1,716 -- -- --
Depreciation and amor-
tization.............. 4,304 4,311 4,385 3,029 4,074 1,882 2,263
Facility rent.......... 525 1,037 1,907 10,223 12,446 5,309 11,621
Interest expense,
net................... 4,740 4,609 5,107 4,634 5,853 2,756 3,202
Income before income
taxes
and extraordinary
loss.................. 1,985 374 1,234 4,829 11,150 5,074 6,349
Net income............. 1,211 228 753 2,712 6,803 3,095 3,873
BALANCE SHEET DATA (AS OF PERIOD END) (1):
Cash and cash equiva-
lents................. $ 10,214 $ 14,013 $ 40,157 $ 9,722 $ 8,747 $ 10,694 $ 3,028
Working capital........ 6,511 13,915 10,735 16,826 22,554 21,114 22,275
Total assets........... 85,472 93,876 92,632 141,799 168,562 148,751 181,523
Total debt, including
capital lease
obligation............ 40,708 53,296 43,496 75,485 89,927 77,155 92,346
Stockholders' equity... 4,918 2,866 4,130 44,880 51,783 47,975 55,685
OTHER FINANCIAL DATA:
Cash flow provided by
operations............ $ 10,521 $ 4,939 $ 1,886 $ 1,405 $ 5,621 $ 1,597 $ 1,658
Cash flow (used in)
provided by
investing............. (142) (6,078) 36,818 (4,050) (19,487) (876) (10,228)
Cash flow (used in)
provided by
financing............. (6,100) 4,938 (12,560) (27,790) 12,891 251 2,851
EBITDA (2)............. 13,326 11,770 12,364 14,471 21,266 9,773 11,886
EBITDAR (2)............ 13,851 12,807 14,271 24,694 33,712 15,082 23,507
EBITDAR margin......... 18.4% 14.8% 13.0% 14.9% 15.2% 15.4% 15.8%
Capital expenditures... $ 1,205 $ 2,585 $ 3,081 $ 5,104 $ 5,274 $ 812 $ 7,071
Ratio of earnings to
fixed charges (3)..... 1.4x 1.1x 1.2x 1.5x 2.0x 2.0x 1.7x
OPERATING DATA (AS OF PERIOD END):
Facilities operated
(4)................... 17 19 20 30 45 31 49
Licensed beds (4)...... 2,149 2,365 2,471 3,700 5,468 3,864 5,983
Average occupancy rate
(5)................... 93.7% 92.6% 92.5% 92.6% 92.3% 91.9% 92.6%
Patient days........... 693,819 739,305 788,920 1,096,814 1,366,811 613,494 921,253
Percentage of total
net revenues derived
from:
Private and other
(6)................. 39.9% 37.4% 35.1% 35.5% 34.1% 33.5% 31.8%
Medicare............. 21.2% 24.8% 31.7% 26.3% 25.9% 28.7% 26.2%
Medicaid............. 38.9% 37.8% 33.2% 38.2% 40.0% 37.8% 42.0%
(footnotes on next page)
64
- --------
(1) In 1993, 1994 and 1995, financial and operating data combine the
historical results of the Predecessor Entities (as defined herein) that
became subsidiaries of the Company through the IPO Reorganization (as
defined herein) that occurred immediately prior to the Company's initial
public offering on June 14, 1996. Prior to the IPO Reorganization, the
Predecessor Entities (primarily partnerships and subchapter S
corporations) were not directly subject to federal or state income
taxation. In calculating net income, a pro forma income tax expense of 39%
has been reflected for periods prior to the IPO Reorganization as if the
Company had always owned the Predecessor Entities.
(2) EBITDA represents earnings before interest, taxes, depreciation and
amortization, and loss on investment in limited partnership and also
excludes for the years prior to 1997 any gain on sale of facilities, loss
on refinancing of debt, minority interest, extraordinary losses and
special compensation associated with the Company's 1996 IPO. EBITDA should
not be considered in isolation or as a substitute for net income, cash
flows or other income or cash flows data prepared in accordance with
generally accepted accounting principles or as a measure of a Company's
profitability or liquidity. In addition, EBITDA is not a standardized
measurement and may be calculated in various ways. Accordingly, the EBITDA
information contained herein may not be comparable to EBITDA information
provided by other companies. EBITDA is included herein because it is
commonly used by certain investors to analyze and determine a company's
ability to service and/or incur debt. EBITDAR represents EBITDA plus
facility rent expense.
(3) For purposes of this calculation, "earnings" consist of income before
income taxes and extraordinary loss and fixed charges, and "fixed charges"
consist of interest, amortization of debt issuance costs and the component
of facility rent expense believed by management to be representative of
the interest factor thereon.
(4) "Facilities operated" and "Licensed beds" include two managed facilities
with 178 total licensed beds.
(5) "Average occupancy rate" excludes managed facilities, and is computed by
dividing the number of billed licensed bed days by the total number of
available licensed bed days during each of the periods indicated.
(6) "Private and other" excludes managed facilities and consists primarily of
total net revenues derived from private pay individuals, managed care
organizations, HMOs, hospice programs, commercial insurers, management
fees from managed facilities, and rehabilitation service therapy revenues
from non-affiliated facilities.
65
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Consolidated Historical Financial and Operating Data," "Unaudited Pro Forma
Consolidated Financial Information" and the Consolidated Financial Statements
of Harborside and the notes thereto included elsewhere in this Prospectus.
This Prospectus contains, in addition to historical information, forward-
looking statements that are subject to risks and other uncertainties.
Harborside's actual results may differ materially from those anticipated in
these forward-looking statements.
OVERVIEW
General
Harborside is a leading provider of high-quality long-term care and
specialty medical services in the Eastern United States. Harborside has
focused on establishing strong local market positions with high quality
facilities in five principal regions: the Midwest (Ohio and Indiana), New
England (Massachusetts and New Hampshire), the Northeast (Connecticut and
Rhode Island), the Southeast (Florida) and the Mid-Atlantic (New Jersey and
Maryland). As of June 30, 1998, Harborside operated 49 long-term care
facilities with 5,983 licensed beds. Harborside 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,
Harborside provides physical, occupational and speech rehabilitation therapy
services, both at Company-operated and non-affiliated facilities, through its
wholly-owned subsidiary, Theracor.
Harborside was created in March 1996, in anticipation of an initial public
offering (the "IPO"), in order to combine under its control the operations of
various long-term care facilities and ancillary businesses (the "Predecessor
Entities") which had conducted operations since 1988. Harborside completed the
IPO on June 14, 1996 and issued 3.6 million shares of common stock at $11.75
per share. The owners of the Predecessor Entities contributed their interests
in such Predecessor Entities to Harborside and received in return an aggregate
of 4.4 million shares of Harborside's common stock (the "IPO Reorganization").
Harborside's financial statements for periods prior to the IPO have been
prepared by combining the historical financial statements of the Predecessor
Entities, similar to a pooling of interests presentation. Harborside's
financial statements for periods prior to the date of the IPO 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. Harborside's financial statements
for periods prior to the date of the IPO do include a pro forma income tax
expense for each period presented, as if Harborside had always owned the
Predecessor Entities. See Note L to the audited consolidated financial
statements of Harborside included elsewhere in this Prospectus.
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. Harborside held a 5% interest in KYP
while the remaining 95% was owned by the limited partners of KYP (the
"Unitholders"). As described in Note P to the audited consolidated financial
statements of Harborside included elsewhere in this Prospectus, effective
December 31, 1995, KYP sold the Seven Facilities and a subsidiary of
Harborside began leasing the facilities from the buyer. Prior to December 31,
1995, the accounts of KYP were included in Harborside's combined financial
statements and the interest of the Unitholders was reflected as minority
interest. The net gain of $4.9 million recognized
66
by KYP in connection with the sale of the Seven Facilities was allocated to
the KYP Unitholders and is reflected in "minority interest in net income." In
March 1996, a liquidating distribution was paid to the Unitholders.
As described in Note D to the audited consolidated financial statements of
Harborside included elsewhere in this Prospectus, Harborside accounts for its
investment in one of its owned facilities using the equity method.
Revenues
Harborside's total net revenues include net patient service revenues, and
beginning in 1995, rehabilitation therapy service revenues from contracts with
non-affiliated long-term care facilities. Harborside derives its net patient
service revenues primarily from private pay sources, the federal Medicare
program for certain elderly and disabled patients and state Medicaid programs
for indigent patients. Harborside's total net revenues are influenced by a
number of factors, including: (i) the licensed bed capacity of its facilities;
(ii) the occupancy rates of its facilities; (iii) the payor mix of its
facilities and the rates of reimbursement among payor categories (private and
other, Medicare and Medicaid); and (iv) the extent to which subacute and other
specialty medical and ancillary services are utilized by patients and paid for
by the respective payment sources. Private net patient service revenues are
recorded at established per diem billing rates. Net patient service revenues
to be reimbursed under contracts with third-party payors, primarily the
Medicare and Medicaid programs, are recorded at amounts estimated to be
realized under these contractual arrangements. Harborside employs specialists
to monitor reimbursement rules, policies and related developments in order to
comply with all reporting requirements and to assist Harborside in receiving
reimbursements. Harborside's rehabilitation service revenues are received
directly from non-affiliated long-term care facilities, which in turn are
reimbursed by Medicare or other payors.
The table set forth below identifies the percentage of Harborside's total
net revenues attributable to each of its payor sources for each of the periods
indicated. The increase in Medicaid revenues as a percentage of total net
revenues during the periods indicated has resulted primarily from the
acquisition of new facilities with a higher percentage of their net revenues
derived from the Medicaid program. An integral part of Harborside's
acquisition strategy has been to acquire high-quality facilities from smaller,
less sophisticated operators whose facilities tend to offer lower acuity
services than those offered by Harborside, thereby initially diluting
Harborside's quality mix. Harborside subsequently implements an expanded range
of specialty medical services at these facilities which typically leads to an
improved quality mix. Harborside believes that, over time, its facilities have
generally experienced stable to increasing percentages of revenues derived
from payor sources other than Medicaid following their acquisition by
Harborside.
TOTAL NET REVENUES (1)
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ------------
1995 1996 1997 1997 1998
------- ------- ------- ----- -----
Private and other...................... 35.1% 35.5% 34.1% 33.5% 31.8%
Medicare............................... 31.7 26.3 25.9 28.7 26.2
Medicaid............................... 33.2 38.2 40.0 37.8 42.0
------- ------- ------- ----- -----
Total................................ 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ===== =====
- --------
(1) Total net revenues exclude net revenues of the Larkin Chase Center which
is owned by Bowie Center Limited Partnership ("Bowie L.P."). Harborside
owns a 75% partnership interest in Bowie L.P. but records its investment
in Bowie L.P. using the equity method. See Note D to Harborside's
consolidated financial statements included elsewhere in this Prospectus.
67
Operating Expenses
Harborside'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. Harborside's facility operating expenses also
include the general and administrative costs associated with the operation of
Harborside's rehabilitation therapy business. Harborside's general and
administrative expenses include all costs associated with its regional and
corporate operations.
Potential Impact of Medicare PPS
Regulations regarding the Medicare prospective payment system were published
on May 12, 1998. (See "Business -- Governmental Regulation" for more
information about the prospective payment system for skilled nursing
facilities.) As the regulations were published recently, Harborside has not
been able to fully assess and quantify the potential impact of the regulations
on Harborside's consolidated financial position, results of operations or
liquidity. Based on a preliminary assessment, Harborside believes that the new
regulations will result in a reduction of Harborside's average Medicare per
diem reimbursement rate, which Harborside expects to be able to substantially
offset primarily through reductions in facility operating costs. However, no
assurance can be given that Harborside will be able to reduce such costs.
RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated the
percentage of total net revenues represented by certain items reflected in
Harborside's consolidated statements of operations:
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ------------
1995 1996 1997 1997 1998
------- ------- ------- ----- -----
Total net revenues................... 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Facility operating costs........... 81.7 79.9 79.5 79.4 78.7
General and administrative ex-
pense............................. 4.6 4.7 4.9 4.8 5.0
Service charges paid to affiliate.. .6 .4 .3 .4 .4
Special compensation and other..... -- 1.0 -- -- --
Depreciation and amortization...... 4.0 1.8 1.8 1.9 1.5
Facility rent...................... 1.7 6.2 5.6 5.4 7.8
Interest expense, net.............. 4.7 2.8 2.6 2.8 2.2
Income before income taxes and ex-
traordinary loss.................... 1.1 2.9 5.0 5.2 4.3
Net income........................... 1.1 1.6 3.1 3.2 2.6
EBITDAR (1).......................... 13.0 14.9 15.2 15.4 15.8
- --------
(1) See note 2 under "Selected Consolidated Historical Financial and Operating
Data" for the definition of EBITDAR.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1998
Total Net Revenues. Total net revenues increased by $50.9 million, or 52.1%,
from $97.7 million in the first half of 1997 to $148.6 million in the first
half of 1998. This increase resulted primarily from the acquisition of four
Massachusetts facilities on August 1, 1997, three Dayton, Ohio facilities on
September 1, 1997, five Connecticut facilities on December 1, 1997, two North
Toledo, Ohio facilities on April 1, 1998 and two Rhode Island facilities on
May 8, 1998. In addition, revenue increased as the
68
result of the generation of additional revenue from rehabilitation therapy
services provided to additional non-affiliated long-term care facilities and
increased net patient service revenues per patient day at Harborside's "same
store" facilities. Of such increase, $9.4 million, or 18.5% of the increase,
resulted from the operation of the Massachusetts facilities, $7.6 million, or
14.9% of the increase, resulted from the operation of the Dayton, Ohio
facilities, $23.0 million, or 45.2% of the increase, resulted from the
operation of the Connecticut facilities, $2.8 million, 5.5% of the increase,
resulted from the operation of the North Toledo facilities and $1.7 million,
or 3.3% of the increase, resulted from the operation of the Rhode Island
facilities. Revenues generated by providing rehabilitation therapy services at
non-affiliated long-term care facilities increased by $1.6 million, or 21.9%,
from $7.3 million in the first half of 1997 to $8.9 million in the first half
of 1998. The remaining $4.8 million, or 9.4% of such increase, is largely
attributable to higher average net patient service revenues per patient day at
Harborside's "same store" facilities and primarily due to 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 $147.46 during the first half of 1997 to $151.84 during the first half of
1998. The average occupancy rate at all of Harborside's facilities increased
from 91.9% during the first half of 1997 to 92.6% during the first half of
1998. Harborside's quality mix of private, Medicare and insurance revenues was
62.2% for the six months ended June 30, 1997 as compared to 58.0% in the same
period of 1998. The decrease in quality mix was primarily attributable to
dilution resulting from the acquisition of new facilities that generated a
lower quality mix.
Facility Operating Expenses. Facility operating expenses increased by $39.5
million, or 51.0%, from $77.5 million for the first half of 1997 to $117.0
million for the first half of 1998. The operation of the Massachusetts
facilities accounted for $7.8 million, or 19.7% of this increase, the
operation of the Dayton, Ohio facilities accounted for $5.9 million, or 14.9%
of this increase, the operation of the Connecticut facilities accounted for
$18.5 million, or 46.8% of this increase, the operation of the North Toledo
facilities accounted for $1.9 million, or 4.8%, and the operation of the Rhode
Island facilities accounted for $1.0 million, or 2.5% of this increase.
Operating expenses associated with additional non-affiliate therapy contracts
increased $.9 million, or 2.3%. The remainder of the increase in facility
operating expenses, $3.5 million, or 8.9%, is primarily 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 $2.8 million, or 59.6%, from $4.7 million
for the first half of 1997 to $7.5 million for the first half of 1998. As a
percentage of total revenues, general and administrative expenses increased
from 4.8% in the first half of 1997 to 5.0% in the first half of 1998. This
increase resulted from the acquisition of new facilities resulting in the
expansion of regional and corporate support, and additional travel, consulting
and systems development expenses associated with Harborside's growth.
Harborside 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 Harborside. During the first half of 1997,
such reimbursements totaled $.4 million compared to $.6 million in 1998.
Depreciation and Amortization. Depreciation and amortization increased from
$1.9 million for the first half of 1997 to $2.3 million for the first half of
1998 primarily as a result of building improvements and investment in new
computers and software.
Facility Rent. Facility rent expense for the first half increased by $6.3
million from $5.3 million in 1997 to $11.6 million in 1998. The increase in
rent expense is due to the acquisition of new facilities in 1997 and 1998.
Interest Expense, net. Interest expense, net, increased from $2.8 million
for the first half of 1997 to $3.2 million for the first half of 1998. This
net increase is primarily due to additional interest expense resulting from
the acquisition of new facilities in 1997 and 1998.
69
Income Tax. Income tax expense increase from $2.0 million in the first half
of 1997 to $2.5 million in the first half of 1998.
Net Income. Net income was $3.1 million for the first half of 1997 as
compared to $3.9 million for the first half of 1998.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Total Net Revenues. Total net revenues increased by $56.4 million, or 34.1%,
from $165.4 million in 1996 to $221.8 million in 1997. This increase resulted
primarily from the acquisition of four facilities in Ohio (the "1996 Ohio
Facilities") on July 1, 1996, the Harford Gardens facility on March 1, 1997,
the Massachusetts Facilities on August 1, 1997, the Dayton Facilities on
September 1, 1997, and the Connecticut Facilities on December 1, 1997.
Additionally, total net revenues increased as a result of the generation of
additional revenues from rehabilitation therapy services provided to non-
affiliated long-term care facilities and increased net patient service
revenues per patient day at Harborside's "same store" facilities. Of such
increase, $19.1 million, or 34.0% of the increase, resulted from the operation
of the 1996 Ohio Facilities for a full year in 1997; $6.2 million, or 11.1% of
the increase, resulted from the operation of the Harford Gardens facility;
$8.1 million, or 14.3% of the increase, resulted from the operation of the
Massachusetts Facilities; $4.5 million, or 8.1% of the increase, resulted from
the operation of the Dayton Facilities, and $3.9 million, or 6.9% of the
increase, resulted from the operation of the Connecticut Facilities. Revenues
generated by providing rehabilitation therapy services to non-affiliated long-
term care facilities increased by $7.4 million, from $10.3 million in 1996 to
$17.7 million in 1997. The remaining $7.2 million, or 12.7% of such increase,
was largely attributable to higher average net patient service revenues per
patient day at Harborside'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 by 7.0%, from $138.31 in 1996 to $147.96 in 1997.
Partially offsetting the increase in total net revenues was a reduction in
occupancy at "same store" facilities from 92.6% in 1996 to 91.7% in 1997. The
average occupancy rate at all of Harborside's facilities decreased from 92.6%
in 1996 to 92.3% in 1997. Harborside's quality mix was 61.8% for the year
ended December 31, 1996 as compared to 60.0% for the year ended December 31,
1997. The decrease in quality mix was primarily attributable to dilution
resulting from the acquisition of new facilities that generated a lower
quality mix.
Facility Operating Expenses. Facility operating expenses increased by $44.2
million, or 33.4%, from $132.2 million in 1996 to $176.4 million in 1997. The
operation of the 1996 Ohio Facilities for a full year in 1997 accounted for
$13.5 million, or 30.5% of this increase; the operation of the Harford Gardens
facility accounted for $4.7 million, or 10.7% of this increase; the operation
of the Massachusetts Facilities accounted for $6.0 million, or 13.7% of this
increase; the operation of the Dayton Facilities accounted for $3.4 million,
or 7.8% of this increase; and the operation of the Connecticut Facilities
accounted for $3.1 million, or 7.0% of this increase. Operating expenses
associated with rehabilitation therapy services provided to non-affiliated
long-term care facilities increased as a result of additional therapy
contracts. Operating expenses associated with these contracts accounted for
$6.4 million, or 14.5%, of the total increase in facility operating expenses.
The remaining $7.1 million of the increase in facility operating expenses was
primarily 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 $3.2 million, or 40.2%, from $7.8 million
in 1996 to $11.0 million in 1997. As a percentage of total net revenues,
general and administrative expenses increased from 4.7% in 1996 to 4.9% in
1997. This increase resulted from the acquisition of new facilities that
resulted in an increase in regional and corporate support, and additional
travel, consulting and systems development
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expenses. Harborside 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 Harborside. Such reimbursements were
not materially different in 1997 as compared with those in 1996.
Special Compensation and Other. In connection with the IPO and IPO
Reorganization, Harborside recorded $1.7 million of non-recurring charges in
1996. Of this amount, $1.5 million consisted of compensation earned by key
members of management as a result of the successful IPO and the IPO
Reorganization.
Depreciation and Amortization. Depreciation and amortization increased by
$1.1 million from $3.0 million in 1996 to $4.1 million in 1997. The increase
in depreciation and amortization was primarily due to the acquisition of the
1996 Ohio Facilities on July 1, 1996.
Facility Rent. Facility rent expense increased by $2.2 million, from $10.2
million in 1996 to $12.4 million in 1997. The increase in facility rent
expense was primarily due to the acquisition of new facilities.
Interest Expense, Net. Interest expense, net, increased by $1.3 million,
from $4.6 million in 1996 to $5.9 million in 1997. This increase was primarily
due to additional interest expense resulting from the acquisition of the 1996
Ohio Facilities.
Loss on Investment in Limited Partnership. Harborside accounts for its
investment in the Larkin Chase Center using the equity method. Harborside
recorded a loss of $.3 million in 1996 as compared to a loss of $.2 million in
1997 in connection with this investment.
Extraordinary Loss on Early Retirement of Debt. During the second quarter
of 1996, Harborside repaid $25.0 million of long-term debt using proceeds from
the IPO. In connection with this early repayment, Harborside recorded an
extraordinary loss of $2.2 million ($1.3 million, net of the related tax
benefit) as the result of a prepayment penalty paid to the lender and the
write-off of deferred financing costs.
Income Taxes. Income tax expense increased by $3.5 million, from $.8 million
in 1996 to $4.3 million in 1997. Prior to the date of the IPO, Harborside's
financial statements did not include a provision for federal or state income
taxes because the Predecessor Entities were not directly subject to federal or
state income taxation. The provision for income taxes in 1996 consisted of a
provision for income taxes for the period after the IPO less a tax benefit
resulting from book-tax differences inherited as part of the IPO
Reorganization.
Net Income. Net income increased by $4.1 million, from $2.7 million in 1996
to $6.8 million in 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total Net Revenues. Total net revenues increased by $56.0 million, or 51.2%,
from $109.4 million in 1995 to $165.4 million in 1996. This increase resulted
primarily from the acquisition of six New Hampshire facilities (the "New
Hampshire Facilities") on January 1, 1996 and the 1996 Ohio Facilities on July
1, 1996, the generation of increased revenues from rehabilitation therapy
services provided under contracts to additional non-affiliated long-term care
facilities and increased net patient service revenues per patient day at
Harborside's "same store" facilities.
Of the $56.0 million increase in total net revenues, $23.2 million, or 41.5%
of the increase, resulted from the operation of the New Hampshire Facilities,
and $17.5 million, or 31.2% of the increase, resulted from the operation of
the 1996 Ohio Facilities. Revenues generated from rehabilitation therapy
services provided to non-affiliated long-term care facilities increased by
$7.3
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million, from $3.0 million in 1995 to $10.3 million in 1996, resulting
primarily from additional therapy contracts. The remaining $8.0 million, or
14.3% of the increase in total net revenues, was attributable to higher
average net patient service revenues per patient day at Harborside's "same
store" facilities, primarily resulting from increased levels of care provided
to patients with higher acuity conditions. Average net patient service
revenues per patient day at "same store" facilities increased by 4.0%, from
$132.99 in 1995 to $138.31 in 1996. The average occupancy rate at all of
Harborside's facilities increased from 92.5% in 1995 to 92.6% in 1996, also
contributing to the increase in total net revenues. Harborside's quality mix
was 66.8% for the year ended December 31, 1995 as compared to 61.8% for the
year ended December 31, 1996. The decrease in the quality mix percentage was
primarily due to the acquisition of the New Hampshire Facilities, which at the
time of their acquisition by Harborside did not participate in the Medicare
program.
Facility Operating Expenses. Facility operating expenses increased by $42.8
million, or 47.9%, from $89.4 million in 1995 to $132.2 million in 1996.
Facility operating expenses as a percentage of total net revenues decreased
from 81.7% in 1995 to 79.9% in 1996. The acquisition of the New Hampshire
facilities accounted for $17.9 million, or 41.8% of the increase in facility
operating expenses while the 1996 Ohio Facilities accounted for $13.7 million,
or 32.0% of this increase. Operating expenses associated with rehabilitation
therapy services provided to non-affiliated long-term care facilities
increased as a result of additional therapy contracts. Operating expenses
associated with these contracts accounted for $4.9 million, or 11.5% of the
total increase in facility operating expenses. The remaining $6.3 million of
the increase in facility operating expenses was 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 $2.7 million, or 53.9%, from $5.1 million
in 1995 to $7.8 million in 1996. As a percentage of total net revenues,
general and administrative expenses increased from 4.6% in 1995 to 4.7% in
1996. Approximately $.8 million of this increase resulted from the acquisition
of the New Hampshire Facilities, and $.3 million resulted from the acquisition
of the 1996 Ohio Facilities. Most of the remainder of this increase was
associated with the expansion of regional and corporate support, increases in
salaries, and additional travel and consulting expenses associated with
Harborside's growth. Harborside 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 Harborside. In 1995 and
1996, such reimbursements totaled $.7 million.
Special Compensation and Other. In connection with the IPO and IPO
Reorganization, Harborside recorded $1.7 million of non-recurring charges in
1996. Of this amount, $1.5 million consisted of compensation earned by key
members of management as a result of the successful IPO and the IPO
Reorganization.
Depreciation and Amortization. Depreciation and amortization decreased by
$1.4 million, from $4.4 million in 1995 to $3.0 million in 1996. This decrease
in depreciation and amortization was primarily due to the sale and subsequent
leaseback of the Seven Facilities effective December 31, 1995 and the
acquisition of the 1996 Ohio Facilities on July 1, 1996, which is accounted
for as a capital lease.
Facility Rent. Facility rent expense increased by $8.3 million, from $1.9
million in 1995 to $10.2 million in 1996. The increase in facility rent
expense was primarily due to the sale and subsequent leaseback of the Seven
Facilities and the acquisition of the New Hampshire Facilities pursuant to an
operating lease financing.
Interest Expense, Net. Interest expense, net, decreased by $.5 million, from
$5.1 million in 1995 to $4.6 million in 1996. This decrease was primarily due
to the pay down of debt associated with the Seven Facilities and the repayment
of $25.0 million of long-term debt using proceeds from the IPO, partially
offset by additional interest expense resulting from the acquisition of the
1996 Ohio Facilities.
72
Loss on Investment in Limited Partnership. Harborside accounts for its
investment in the Larkin Chase Center using the equity method. Harborside
recorded a loss of $.1 million in 1995 as compared to a loss of $.3 million
during 1996 in connection with this investment.
Extraordinary Loss on Early Retirement of Debt. During the second quarter of
1996, Harborside repaid $25.0 million of long-term debt using proceeds from
the IPO. In connection with this early repayment, Harborside recorded an
extraordinary loss of $2.2 million ($1.3 million net of the related tax
benefit) as the result of a prepayment penalty paid to the lender and the
write-off of deferred financing costs.
Income Taxes. Prior to the date of the IPO, Harborside's financial
statements did not include a provision for income taxes because the
Predecessor Entities were not directly subject to federal or state income
taxation. The provision for income taxes in 1996 was $.8 million and consisted
of a provision for income taxes for the period after the IPO less a tax
benefit resulting from book-tax differences inherited as part of the IPO
Reorganization.
Net Income. Net income increased by $1.5 million, from $1.2 million in 1995
to $2.7 million in 1996. This increase in net income was primarily due to
increased operating income in 1996 and the elimination of the minority
interest charge resulting from the liquidation of KYP.
LIQUIDITY AND CAPITAL RESOURCES
Harborside's primary cash needs are for acquisitions, capital expenditures,
working capital, debt service and general corporate purposes. Harborside 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 the previously existing credit facility.
Harborside's leased facilities are currently leased from either the owner of
the facilities or from a real estate investment trust which has purchased the
facilities from the owner, though prior to the Merger some facilities had been
leased through a trust established in conjunction with Harborside's previously
existing synthetic lease facility that was entered into in September 1997. In
addition, in 1996 Harborside financed the acquisition of the 1996 Ohio
Facilities from the owner by means of a lease which is accounted for as a
capital lease for financial reporting purposes. Harborside'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. Harborside 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
exercisable 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 option purchase price which Harborside believes is equal to the
fair market value of the facility at the inception date of such lease, thus
allowing Harborside to realize the value appreciation, if any, of the facility
while maintaining financial flexibility.
Harborside's operating activities during the first half of 1997 generated
net cash of $1.6 million as compared to $1.7 million during the same period in
1998. Harborside's operating activities in 1996 generated net cash of $1.4
million as compared to $5.6 million in 1997, an increase of $4.2 million. Most
of the increase in cash provided by operations was the result of increased net
income.
Net cash used by investing activities was $.9 million during the first half
of 1997 as compared to $10.2 million used during the same period in 1998. The
primary use of cash for investing purposes during these periods related to
additions to property and equipment ($.8 million in 1997 compared to $7.1
million in 1998), additions to intangible assets ($1.4 million in 1997
compared to $1.6 million in 1998) and transfers to restricted cash ($.1
million in 1997 compared to $1.6 million 1998.) Most of the additions to
property and equipment are related to the Massachusetts facilities and a sixty
bed addition to the Ocala, Florida facility which opened in September 1998.
Net cash used by investing activities
73
was $4.1 million during 1996 as compared to $19.5 million used in 1997. The
primary use of invested cash during these periods related to additions to
property and equipment ($5.1 million in 1996 compared to $5.3 million in
1997), additions to intangible assets ($1.0 million in 1996 compared to $6.3
million in 1997) and a collateralized loan to the seller of $7.5 million in
connection with the acquisition of the Connecticut Facilities on December 1,
1997.
Net cash provided by financing activities during the first half of 1997 was
$.3 million as compared to $2.9 million provided during the same period in
1998. The primary source of cash provided by financing activities was related
to the borrowing of $3.0 million under the previously existing credit facility
to finance the Ocala building expansion and the receipt of lease inducements.
Net cash used by financing activities was $27.8 million in 1996 as compared to
$12.9 million provided in 1997. The early retirement of debt and the
incurrence of a related prepayment penalty required the use of $26.5 million
in 1996. During 1996, Harborside received $37.2 million in net proceeds from
the IPO and a cash payment of $3.7 million from the landlord of the New
Hampshire Facilities in connection with the leasing of such Facilities. During
1996, Harborside also received $.8 million from the sale of equity interests
to an officer and a director of Harborside. In March of 1996 a liquidating
distribution of $33.7 million was paid to the KYP Unitholders. During 1997,
Harborside borrowed $15.6 million under the previously existing credit
facility. Such borrowings were primarily used to finance part of the
acquisition of the Connecticut Facilities, as well as the asset acquisition of
Access Rehabilitation, a therapy services company. In addition, during 1997
Harborside made principal payments of $3.9 million on its capital lease
obligation and received cash payments totaling $1.3 million from its landlords
in connection with the lease of the Massachusetts Facilities and the Dayton
Facilities.
At June 30, 1998, Harborside had two mortgage loans outstanding in the
aggregate amount of $18.0 million, in addition to $18.6 million in advances
outstanding under the previously existing credit facility and $55.8 million of
capital lease obligations. One of Harborside's mortgage loans had an
outstanding principal balance of $16.4 million, of which $15.1 million is due
at maturity in 2004. This loan bears interest at an annual rate of 10.65% plus
additional interest equal to .3% of the difference between the annual
operating revenues of the four mortgaged facilities and the actual revenues of
the four mortgaged facilities during the twelve-month base period.
Harborside'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. During the second quarter of 1998, Harborside increased the funds
committed by a bank group through its synthetic leasing facility to $59.3
million. Harborside used this increased commitment to fund the acquisition of
two long-term care facilities (248 licensed beds) in Toledo, Ohio and two
long-term care facilities (267 licensed beds) in Warwick, Rhode Island. The
aggregate purchase price of these two acquisitions was approximately $33.7
million. In May 1998, Harborside also increased funds available from the bank
group through its previously existing credit facility to $40.0 million.
At June 30, 1998, pro forma for the Recapitalization, Harborside would have
had approximately $177.4 million of consolidated indebtedness outstanding,
consisting of $99.5 million of Notes, $55.8 million of capital lease
obligations and $18.0 million of mortgage loans, and $4.1 million of
borrowings outstanding under the New Credit Facility. In addition, Harborside
would have had $40.0 million of Exchangeable Preferred Stock outstanding.
While Harborside has $250.0 million available under the New Credit Facility
(exclusive of outstanding letters of credit), borrowings under it are
restricted by covenants related to maximum senior and total leverage and
minimum EBITDAR coverage of cash interest expense plus facility rent expense.
The New Credit Facility will mature in August 2004 and has no scheduled
interim amortization. For a description of the New Credit Facility, see
"Description of the New Credit Facility." Cash interest will not accrue on the
Notes until August 1, 2003, and dividends on the Exchangeable Preferred Stock
are payable, at the option of Harborside, in additional shares of Exchangeable
Preferred Stock during the same period.
Harborside expects that its capital expenditures for 1998, excluding
acquisitions of new long-term care facilities, will aggregate approximately
$10.0 million, $7.1 million of which had already been
74
invested through June 30, 1998. Harborside expects that its capital
expenditures for 1999, excluding acquisitions of new long-term care
facilities, will also aggregate approximately $10.0 million. Harborside's
expected capital expenditures will relate to, among other things, maintenance
capital expenditures, systems enhancements, special construction projects and
other capital improvements. After the Merger, Harborside expects that the
majority of its facility acquisitions will be financed with borrowings under
the New Credit Facility. However, Harborside may be required to assume debt or
to obtain other debt and/or equity financing to finance any significant
acquisitions or real estate/construction projects 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, and for general corporate purposes. It is anticipated that these
funds will also be used to finance acquisitions and lease real estate. In
addition, a portion of the funds committed under the New Credit Facility is
available for the issuance of letters of credit. 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.
In connection with the Recapitalization, Harborside incurred certain
significant nonrecurring expenses (See "Unaudited Pro Forma Consolidated
Financial Information"). Harborside incurred approximately $30.8 million in
transaction fees and expenses as a result of the Recapitalization, a $.4
million non-cash charge related to the forgiveness of employee loans, and a
$.9 million non-cash charge associated with the elimination of deferred
financing costs related to retired debt. Harborside also incurred a
compensation charge of approximately $7.9 million relating to the conversion
into cash of 648,923 stock options.
SEASONALITY
Harborside's earnings generally fluctuate from quarter to quarter. This
seasonality is related to a combination of factors which include, among other
things, the timing of Medicaid rate increases, seasonal census cycles and the
number of calendar days in a given quarter.
INFLATION
The healthcare industry is labor intensive. Wages and other labor related
costs are especially sensitive to inflation. In addition, suppliers pass along
rising costs to Harborside in the form of higher prices. When faced with
increases in operating costs, Harborside has generally increased its charges
for services. Harborside's operations could be adversely affected if it is
unable to recover future cost increases or if Harborside experiences
significant delays in Medicaid and Medicare revenue sources increasing their
rates of reimbursement.
YEAR 2000 DISCLOSURE
Harborside is preparing all of its software products and internal computer
systems to be Year 2000 compliant. Harborside has replaced its financial
reporting and payroll systems with systems that are Year 2000 compliant.
Harborside is in the process of evaluating several clinical information
software products, including one which has been installed in 13 of its
facilities, with the expectation that it will identify a Year 2000 compliant
standard clinical information and patient billing system which will be
implemented at each of Harborside's facilities. Harborside currently estimates
that it will complete the selection of the standard clinical information and
patient billing software during 1998 and finalize the conversion of its
existing systems to the new platform during 1999. Although Harborside does not
expect the cost of the conversion of its clinical and patient billing systems
to have a material adverse effect on its business or future results of
operations, there can be no assurance that Harborside will not be required to
incur significant unanticipated costs in relation to its compliance
obligations.
75
Harborside currently estimates that compliance will be achieved during 1999;
however, there can be no assurance that Harborside will be able to complete
the conversion in a timely manner or that third party software suppliers will
be able to provide Year 2000 compliant products for Harborside to install.
Harborside currently estimates the cost of replacing the clinical and billing
systems at its existing facilities to be approximately $1.0 million.
Harborside will fund the costs associated with these system conversions
through cash flows from operations or borrowings under the New Credit
Facility. Harborside's ongoing facility acquisition strategy will require it
to evaluate acquisition candidates for Year 2000 compliance. See "Risk
Factors -- Impact of Year 2000 Issue."
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
the retained earnings and additional paid-in equity section of a statement of
financial position. Additionally, in June 1997, the FASB Issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that an enterprise (a) report financial and descriptive information
about its reportable operating segments, (b) report a measure of segment
profit or loss, certain specific revenue and expense items, and segment assets
with reconciliations of such amounts to the enterprise's financial statements
and (c) report information about revenues derived from Harborside's products
or services and information about major customers. Additionally, in February
1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement," which requires that an enterprise (a) revise and
standardize certain footnote disclosure requirements for employers' pensions
and other retiree benefits and (b) reduces the disclosure requirements for
nonpublic entities and participants in multiemployer plans. These
pronouncements are effective for financial statement periods beginning after
December 15, 1997. Harborside does not believe that these new pronouncements
will have a material effect on its financial position or results of
operations.
76
BUSINESS
OVERVIEW
Harborside 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 Midwest (Ohio and Indiana), New
England (Massachusetts and New Hampshire), the Northeast (Connecticut and
Rhode Island), the Southeast (Florida) and the Mid-Atlantic (New Jersey and
Maryland). As of June 30, 1998, the Company operated 49 long-term care
facilities with 5,983 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, and 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.
Since commencing operations in 1988, the Company has successfully grown its
revenues and earnings primarily through (i) strategic acquisitions in states
which it believes possess favorable demographic and regulatory environments
through which it believes it has achieved a strong regional presence: (ii) the
expansion of the specialty medical services provided at its long-term care
facilities; and (iii) the creation of marketing programs to strengthen
relationships with patient referral sources and payors, including those in the
growing managed care sector. In addition, the Company believes that the demand
for its services has also benefited from favorable industry dynamics and
demographic trends, while the supply of new licensed beds continues to be
restricted by various state regulations. As a result, the Company has achieved
high occupancy rates, a favorable quality mix (non-Medicaid revenues as a
percentage of total net revenues) and consistent, strong growth in total net
revenues and profitability. During the three years ended December 31, 1997,
the Company's total net revenues grew at a compound annual rate of 36.9%, from
$86.4 million in 1994 to $221.8 million in 1997. During the same period, the
Company's EBITDAR grew at a compound annual rate of 38.1%, from $12.8 million
in 1994 to $33.7 million in 1997.
INDUSTRY BACKGROUND
The U.S. long-term care industry encompasses a broad range of healthcare
services provided in skilled nursing facilities, including traditional skilled
nursing care and specialty medical services. Revenues generated by the long-
term care industry, which were $87 billion in 1996, have grown at a compound
annual rate of over 10% since 1980. The long-term care industry currently
consists of approximately 17,000 free-standing and hospital-based skilled
nursing facilities and remains highly fragmented, with the fifteen largest
publicly-traded long-term care companies controlling less than 20% of all
facilities. The Company believes that the demand for long-term care will
continue to increase primarily due to demographic trends, social changes,
emphasis on healthcare cost containment and improvements in medical
technology.
Demographic Trends. Advances in medical technology have lengthened average
life expectancies, thereby increasing the number and medical needs of elderly
individuals requiring specialized care and supervision. According to the U.S.
Bureau of the Census, the number of people age 65 and over in the U.S. has
grown from approximately 25.6 million in 1980, or 11.3% of the population, to
approximately 31.1 million in 1990, or 12.5% of the population, and is
projected to grow to 40.1 million, or 13.3% of the population, by the year
2010. In addition, people age 85 and older represent one of the fastest
growing segments of the elderly population and are expected to approximately
double in number between 1990 and 2010. This population segment of people age
85 and older comprises the largest number of consumers of long-term care
services as 42% of skilled nursing facility residents are aged 85 or older and
approximately 25% of the population over the age of 85 currently live in a
nursing home.
77
Social Changes. The increased number of two-income households has made it
more difficult for families to care for elderly parents. Accordingly, the
Company expects the demand for long-term care facilities to increase as these
families seek alternatives to care in the home. In addition, the increase in
overall disposable family income in recent years has generally increased the
ability of families to pay for long-term care.
Emphasis on Healthcare Cost Containment. In response to rapidly rising
healthcare costs, governmental and other payor sources have adopted cost
containment measures that have encouraged shorter stays in acute care
hospitals. As a result, average hospital stays have been shortened, with many
patients being discharged into more cost-effective care settings, leading to
increased admissions into long-term care facilities which provide subacute
care. Long-term care facility admissions have increased from approximately
300,000 in 1983, when Medicare implemented a prospective payment system for
hospitals, to approximately 1.6 million in 1995, representing a compound
annual growth rate of almost 15%. In general, long-term care facilities, such
as those operated by the Company, are able to provide many subacute care
services at substantially lower costs than the cost of such services when
provided by acute care hospitals because of their lower capital costs,
overhead and salary levels.
Improvements in Medical Technology. In addition to lengthening life
expectancies, technological advances have also made long-term care facilities
a more attractive alternative to acute care or rehabilitation hospitals by
enabling them to offer, on a more cost-effective basis, services traditionally
provided by acute care hospitals. This technology, in addition to cost
containment pressures, has led to a growing number of higher acuity patients
with specialized needs being treated in long-term care facilities.
INDUSTRY CONSOLIDATION
The long-term care industry is undergoing considerable consolidation due to
(i) its fragmented nature; (ii) the benefits of scale on a regional basis when
dealing with patient referral sources and payors and in generating cost
efficiencies; (iii) the inability of smaller, less sophisticated operators to
effectively treat higher acuity patients and adapt to the increasing
complexity of the reimbursement and regulatory environment; and (iv)
constraints on the supply of new licensed beds.
Highly Fragmented Industry. The long-term care industry is highly
fragmented. There are approximately 17,000 long-term care facilities serving
1.8 million people in the United States. The fifteen largest publicly-traded
long-term care companies control less than 20% of the industry's total
facilities, with the vast majority of the industry comprised of small chains
and individual facilities.
Benefits of Scale on a Regional Basis. The Company believes that long-term
care providers with large regional market positions are increasingly
attractive to patient referral sources and payors due to their clinical
expertise and their ability to provide a comprehensive range of long-term care
services at multiple locations within a region. In addition, larger long-term
care providers are able to reduce operating costs by leveraging their regional
and corporate overhead.
Pressures on Smaller, Less Sophisticated Operators. Recently, the long-term
care industry has been subject to changes in government reimbursement and the
increased influence of managed care plans. In addition, other alternative care
settings, such as assisted living facilities and home health care, are
increasing the level of competition for lower acuity patients. The increasing
complexity of medical services being provided by the larger, long-term care
facility operators, growing regulatory and compliance requirements and
increasingly complicated reimbursement systems have resulted in the
consolidation of operators that lack sophisticated management information
systems, operating efficiencies and financial resources to compete
effectively.
78
Constraints on Supply. Currently, 43 states, including all but one of the
states in which the Company operates, have CON programs or similar legislation
which act to restrict the supply of long-term care services. These laws
generally limit the construction of long-term care facilities and the addition
of beds or services in existing facilities. High construction costs and
limitations on government reimbursement of costs of construction and start-up
expenses also act to constrain growth in the number of facilities. As a
result, the Company believes that the supply of long-term care facilities may
not be able to keep up with the demand for such facilities. Based on industry
data, the number of nursing beds per thousand for the population over 85 is
expected to decrease to approximately 350 in 2000 from 500 in 1990.
Limitations on the construction of long-term care facilities may force many
companies to generate facility growth through acquisitions versus development.
COMPANY STRENGTHS
Portfolio of High-Quality Long-Term Care Facilities. The quality of the
Company's portfolio of facilities is evidenced by the Company's strong
historical operating performance and the high percentage of its facilities
that are accredited by JCAHO, a nationally-recognized accreditation agency for
hospitals, skilled nursing facilities and other healthcare organizations. As
of June 30, 1998, 63% of Harborside's long-term care facilities were
accredited by JCAHO, with 35% of the Company's facilities accredited "with
Commendation," compared to only 13% and 3%, respectively, for the industry as
a whole in 1997. The Company has scheduled accreditation reviews for an
additional 16% of its facilities during the remainder of 1998 and intends to
seek accreditation for substantially all of its remaining non-accredited
facilities in the near future. The Company believes that such recognition not
only further improves its reputation with payors and patient referral sources,
but also provides it with a distinct competitive advantage in securing an
increasing number of managed care and commercial insurance contracts.
Strong Regional Presence in Attractive Markets. The Company has focused its
operations in nine states that it believes possess favorable demographic and
regulatory environments. All but one of the states in which the Company
operates facilities currently have CON or other regulations which restrict the
addition of new licensed beds, which the Company believes provide it with a
more favorable competitive environment. Within its five existing principal
regions, the Company has further focused on increasing its presence in
distinct local markets. This regional and local focus has enabled the Company
to establish strong market positions and to develop strong relationships with
patient referral sources, including regional managed care organizations. In
addition, the Company believes that its regional concentrations provide it
with significant opportunities to achieve operational efficiencies through
economies of scale, greater leverage of corporate overhead, more effective
regional management and marketing efficiencies. The Company has made
significant investments in developing regional overhead structures that can
support significant additional facilities in a given region with minimal
incremental costs.
Ability to Provide Cost-Effective, High-Quality and High Acuity Care. The
Company believes that its strong operating performance has been attributable
to, among other things, its ability to provide a broad range of high-quality
specialty medical services, which typically generate higher revenues and
profits per patient day than traditional skilled nursing care. In particular,
the Company believes that it can provide subacute care services for
substantially less than the cost of such services when provided by acute care
hospitals. Subacute care is comprehensive care for individuals who have had an
acute illness, injury or exacerbation of a disease process and is typically
rendered immediately after, or instead of, acute care hospitalization. The
Company provides subacute care services in such areas as complex medical care,
cardiac recovery, digestive care, immuno-suppressed disease care, post-
surgical recovery, wound care, CVA/stroke care, hemodialysis, infusion
therapy, diabetes management and pain management. The Company has also
designed specific proprietary clinical pathways and protocols in the areas of
orthopedic rehabilitation, CVA/stroke recovery, cardiac recovery, pulmonary
rehabilitation and wound care to achieve measurable outcomes in an efficient,
cost-effective and
79
patient-friendly manner. The Company believes that its subacute care programs
and its clinical pathways and protocols are highly attractive to its patient
referral sources, including commercial insurance and managed care
organizations.
Ability to Successfully Evaluate and Integrate Long-Term Care Facility
Acquisitions. The Company has a dedicated acquisition team of six experienced
professionals who work closely with corporate and regional operating
management in the evaluation of acquisition opportunities. The Company
believes that the close working relationship between operating management and
its acquisition team in the evaluation of acquisition opportunities results in
better acquisition decisions and a more effective and timely acquisition
integration process. Prior to the actual acquisition date, the Company begins
employee training regarding the Company's practices and procedures. After an
acquisition is consummated, the acquired facilities are converted to the
Company's financial information systems platform with minimal disruption to
facility operations, and management works closely and immediately with
employees at the new facility to generate operating improvements. Over time,
operating improvements are generated through, among other things, an expanded
scope of higher acuity specialty medical services, enhanced marketing programs
and improved rehabilitation services. Since the beginning of 1996, the Company
has expanded its number of licensed beds by over 140% through the completion
of eight acquisitions representing a total of 29 long-term care facilities
with 3,512 licensed beds.
Strong Management Team with Significant Ownership. The Company's senior
management team, led by Stephen L. Guillard, Chairman, CEO and President, has
an average of over 15 years experience in the long-term care sector. In
addition, most of the members of senior management have worked together for
the past ten years. Senior management is highly committed to the growth of the
Company, having agreed to reinvest, upon consummation of the Merger, an
aggregate value of $5.6 million of their existing common stock and retain
stock options which would have had a net value of $1.3 million had such
options been converted into cash in connection with the Merger. In addition, a
new stock option plan will be created for senior management and other
employees. Assuming the exercise of all options available under such plan,
senior management and other employees of the Company would own approximately
14% of the Company.
BUSINESS STRATEGY
Selectively Acquire Additional Long-Term Care Facilities. The Company
believes that it will continue to have numerous acquisition opportunities due
primarily to the highly fragmented nature of the long-term care industry and
the inability of smaller, less sophisticated operators to effectively treat
higher acuity patients and adapt to the increasing complexity of the
reimbursement and regulatory environment. The Company will continue to focus
primarily on acquiring facilities in its existing regions where it has
established strong market positions. The Company will also selectively
evaluate new geographic markets possessing favorable demographic and
regulatory environments where it can establish strong market positions. The
Company believes that concentrating its long-term care facilities within
selected geographic regions provides it with greater local market share and
more effective relationships with patient referral sources, as well as the
ability to achieve operational efficiencies through economies of scale,
greater leverage of corporate overhead, more effective regional management and
marketing efficiencies. The Company's acquisition strategy is particularly
focused on states with CON programs or similar regulations limiting the supply
of new licensed beds.
Expand High Acuity Specialty Medical Services. The provision of high acuity
specialty medical services allows the Company to better serve its patient
referral sources along a broader continuum of care and take advantage of the
continued increased flow of high acuity patients from hospital settings. The
provision of such services also typically generates higher revenues and
profits per patient day than traditional skilled nursing care services. The
Company expects to continue to expand the range of specialty medical services
provided at both its existing and acquired facilities, with an emphasis on
80
expanding the number of its specialized subacute programs. Within its
specialized subacute programs, the Company will continue to design and
implement clinical pathways and protocols for its high acuity services. The
Company also plans to continue to develop specialty medical programs for
patients with Alzheimer's disease and hospice units for patients with terminal
illnesses.
Expand Ancillary and Other Businesses. The Issuer intends to seek contracts
for the provision of its physical, occupational and speech rehabilitation
therapy services with additional non-affiliated facilities. The Company is
also evaluating opportunities to acquire additional ancillary businesses (such
as institutional pharmacy and infusion therapy) which would allow the Company
to provide these ancillary services directly to patients at its facilities and
which the Company believes would allow it to reduce its facility operating
costs. Additionally, these ancillary services could be provided to non-
affiliated facilities. The Company will also selectively evaluate
opportunities to acquire assisted living facilities and home health agencies
in markets where it operates facilities. The Company believes that these
opportunities would allow it to provide a broader continuum of care while
leveraging its existing general and administrative expenses.
Continue to Achieve High Occupancy Rates and a Strong Quality Mix. The
Company seeks to continue to achieve high occupancy rates primarily by
continuing to develop new and existing patient referral sources, enhance its
marketing programs and closely monitor census information and other patient
data at the corporate, regional and facility levels. In addition, the Company
seeks to continue to achieve a strong quality mix primarily by continuing to
expand the breadth and improve the quality of its specialty medical services.
An integral part of the Company's acquisition strategy has been to acquire
high-quality facilities from smaller, less sophisticated operators whose
facilities tend to offer lower acuity services than those offered by the
Company, thereby initially diluting the Company's quality mix. The Company
subsequently implements an expanded range of specialty medical services at
these facilities which typically improves its quality mix. For the year ended
December 31, 1997 and six months ended June 30, 1998, the Company's occupancy
rate was 92.3% and 92.6% respectively, and its quality mix was 60.0% and 58.0%
respectively.
Implement Cost Control Initiatives in Response to Medicare Prospective
Payment System. Beginning January 1, 1999, the Company will be reimbursed for
services it provides to Medicare patients under Medicare PPS, which will be
phased in over a period of four years. Medicare PPS will result in the Company
being reimbursed under an acuity-based per diem rate system rather than under
the current cost-based reimbursement system. The Company believes that
implementing cost control initiatives will enable it to maximize its
profitability under Medicare PPS. Accordingly the Company has identified and
intends to implement, among other things, programs designed to reduce its
costs of providing nursing and therapy services while maintaining quality and
outcomes. The Company already has significant experience providing quality,
cost-effective services under acuity-based prospective payment systems, as 54%
of its existing licensed beds are located in states with acuity-based Medicaid
systems.
RECENT ACQUISITIONS
During 1997 and 1998, the Company acquired 16 skilled nursing facilities
with a total of 1,989 beds (including six assisted living beds), an assisted
living facility with 115 beds and a rehabilitation services company. In
particular, the acquisitions in 1997 consisted of five skilled nursing
facilities in Connecticut with a total of 684 beds, four skilled nursing
facilities in Massachusetts with a total of 401 beds, two skilled nursing
facilities in Ohio with a total of 226 beds (including six assisted living
beds), an assisted living facility in Ohio with 115 beds, one skilled nursing
facility in Maryland with 163 beds and a rehabilitation services company. In
addition, in 1997 the Company entered into contracts to manage two skilled
nursing facilities in Massachusetts with a total of 178 beds. In 1998, the
Company acquired two skilled nursing facilities in Rhode Island with a total
of 267 beds and two skilled nursing facilities in Ohio with a total of 248
beds.
81
PATIENT SERVICES
Traditional Skilled Nursing Care
Traditional skilled nursing care is typically provided to elderly patients
in long-term care facilities to assist with the activities of daily living and
to provide general medical care. The Company provides 24-hour skilled nursing
care by registered nurses, licensed practical nurses and certified nursing
aides in all of its facilities. Each facility is managed by an on-site
licensed administrator who is responsible for the overall operation of the
facility, including the quality of care provided. The medical needs of
patients are supervised by a medical director, who is a licensed physician.
Although treatment of patients is the responsibility of their own attending
physicians, who are not employed by the Company, the medical director for the
facility monitors all aspects of delivery of care. The Company also provides
support services, including dietary services, therapeutic recreational
activities, social services, housekeeping and laundry services, pharmaceutical
and medical supplies and routine rehabilitation therapy.
Each facility offers a number of individualized therapeutic activities
designed to enhance the quality of life of its patients. These activities
include entertainment events, musical productions, trips, arts and crafts and
volunteer and other programs that encourage community interaction.
Specialty Medical Services
Specialty medical services are those services provided to patients with
medically complex needs, who generally require more extensive treatment and a
higher level of skilled nursing care. These services typically generate higher
revenues per patient day than traditional skilled nursing care as a result of
increased levels of care and the provision of ancillary services.
Subacute Care. Subacute care is goal-oriented, comprehensive care designed
for an individual who has had an acute illness, injury, or exacerbation of a
disease process. Subacute care is typically rendered immediately after, or
instead of, acute hospitalization in order to treat one or more specific,
active, complex medical conditions or in order to administer one or more
technically complex treatments. The Company provides subacute care services at
all but two of its existing facilities in such areas as complex medical care,
cardiac recovery, digestive care, immuno-suppressed disease care, post-
surgical recovery, wound care, CVA/stroke care, hemodialysis, infusion
therapy, diabetes management and pain management.
In facilities that have shown strong demand for subacute services, the
Company has developed distinct subacute programs marketed under the name
"COMprehensive Patient Active Subacute System" or "COMPASS." COMPASS programs
are specially staffed and equipped for the delivery of subacute care. COMPASS
patients typically range in age from late teens to the elderly, and typically
require high levels of nursing care and the services of physicians,
therapists, dietitians, clinical pharmacists, clinical psychologists or social
workers. Certain patients may also require life support or monitoring
equipment. Because patient goals are generally rehabilitation-oriented,
lengths of stay for COMPASS programs are generally expected to be less than 30
days each.
The Company has designed clinical pathways for these COMPASS programs in the
areas of orthopedic rehabilitation, CVA/stroke recovery, cardiac recovery,
pulmonary rehabilitation and wound care management. These clinical pathways
are designed to achieve specified measurable outcomes in an efficient, cost-
effective and patient-friendly manner. The Company's COMPASS programs and the
clinical pathways used by these programs are designed to attract commercial
insurance and managed care organizations, such as HMOs and PPOs. The Company
has personnel dedicated to actively marketing its COMPASS programs to
commercial insurers and managed care organizations. The Company will continue
to develop additional clinical pathways based on market opportunities.
Alzheimer's and Hospice Care. The Company has also developed distinct units
that provide care for patients with Alzheimer's disease and hospice units for
patients with terminal illnesses. As of
82
June 30, 1998, the Company operated dedicated Alzheimer's units at eight
facilities. The Company also operates distinct hospice units at three of its
facilities, where it provides care to terminally ill patients and counseling
to their families.
Rehabilitation Therapy Services
The Company currently provides in-house rehabilitation services, including
physical, occupational and speech therapy, at most of the Company's facilities
through the Company's wholly-owned subsidiary, Theracor. As of June 30, 1998,
Theracor also had contracted to provide rehabilitation services to 53 non-
affiliated facilities. The Company also seeks to offer its rehabilitation
therapy services through Theracor at newly acquired facilities.
OPERATIONS
Facility Operations. Each of the Company's facilities is supervised by a
licensed facility administrator who is responsible for all aspects of the
facility's operations. The facility administrator oversees (i) a director of
nursing who supervises a staff of registered nurses, licensed practical nurses
and certified nursing aides, (ii) a director of admissions who is responsible
for developing local marketing strategies and programs, and (iii) various
other departmental supervisors. The Company also contracts with one or more
licensed physicians at each facility to serve as medical directors for the
purpose of supervising the medical management of patients. Facilities with
subacute or specialty medical units or programs may also contract with
physician specialists to serve as rehabilitation or specialty program medical
directors in areas such as physiatry (physical medicine), neurology or gero-
psychology. Facilities may also employ or contract for additional clinical
staff such as case managers, therapists and program directors. Department
supervisors at each of the Company's facilities oversee personnel who provide
dietary, maintenance, laundry, housekeeping, therapy and social services. In
addition, a business office staff at each facility routinely performs
administrative functions, including billing, payroll and accounts payable
processing. The Company's corporate and regional staff provide support
services such as quality assurance, management training, clinical consultation
and support, management information systems, risk management, human resource
policies and procedures, operational support, accounting and reimbursement
expertise.
Regional Operations. The Company seeks to cluster its long-term care
facilities and therapy services in selected geographic regions to establish a
strong competitive position as well as to position the Company as a healthcare
provider of choice to managed care and private payors in these markets. The
Company's facilities currently serve five principal geographic regions: the
Midwest (Ohio and Indiana), New England (Massachusetts and New Hampshire),
Northeast (Connecticut and Rhode Island), the Southeast (Florida) and the Mid-
Atlantic (New Jersey and Maryland). The Company maintains regional operating
offices in Clearwater, Florida; Indianapolis, Indiana; Topsfield,
Massachusetts; West Hartford, Connecticut; and Peterborough, New Hampshire.
Each region is supervised by a regional director of operations who directs the
efforts of a team of professional support staff in the areas of clinical
services, marketing, bookkeeping, human resources and engineering. Other
Company staff, who are principally based in Boston and the above-mentioned
regions, provide support and assistance to all of the Company's facilities in
the areas of subacute services, managed care contracting, reimbursement
services, risk management, data processing and training. Financial control is
maintained through financial and accounting policies established at the
corporate level for use at each facility. The Company has standardized
operating policies and procedures and continually monitors operating
performance to assure consistency and quality of operations. Theracor
maintains offices in Palm Harbor, Florida and Framingham, Massachusetts.
Continuous Quality Improvement Program. The Company has developed a
continuous quality improvement program which is designed to monitor, evaluate
and improve the delivery of patient care. The program is supervised by the
Company's Vice President of Professional Services and consists of
83
the standardization of policies and procedures, routine site visits and
assessments and a quality control system for patient care and physical plant
compliance. Pursuant to its quality control system, the Company routinely
collects information from patients, family members, referral sources,
employees and state survey agencies which is then compiled, analyzed and
distributed throughout the Company in order to monitor the quality of care and
services provided.
The Company's continuous quality improvement program is modeled after
guidelines for long-term care and subacute care facilities promulgated by
JCAHO. The Company believes that JCAHO accreditation is an important factor in
gaining provider contracts from managed care and commercial insurance
companies. Accordingly, in late 1995 the Company began a program to seek
accreditation from JCAHO for the Company's facilities. As of June 30, 1998,
63% of the Company's facilities had received accreditation, and of these 35%
had received accreditation "with Commendation." The Company has scheduled
accreditation reviews for an additional 16% of its facilities during the
remainder of 1998 and intends to seek accreditation for substantially all of
its remaining non-accredited facilities in the near future.
MARKETING
The Company's marketing program is designed to attract patients who will
have a favorable impact on the Company's profits and quality mix. The Company
establishes monthly occupancy and revenue goals for each of its facilities and
maintains marketing objectives to be met by each facility. The Company's Vice
President of Marketing is principally responsible for the development and
implementation of the Company's marketing program. Regional marketing
directors provide routine support to the facility-based admissions directors
through the development of facility-based marketing strategies, competitive
assessments and routine visits.
The Company uses a decentralized marketing approach in order to capitalize
on each facility's strengths and reputation in the community it serves.
Admissions staff at each facility are primarily responsible for marketing
traditional skilled nursing care and developing semi-annual marketing plans in
consultation with the Company's regional marketing and operations staff.
Traditional skilled nursing care is marketed to area physicians, hospital
discharge planning personnel, individual patients and their families and
community referral sources. Facility personnel also market the Company's
specialty medical services to these sources. Corporate and regional personnel
who specialize in subacute care, managed care and reimbursement also assist in
the marketing of specialty medical services.
The Company believes that its occupancy rates and quality mix demonstrate
the effectiveness of its marketing programs. The Company's quality mix was
60.0% for the fiscal year ended December 31, 1997. The Company's average
annual occupancy rates for the fiscal years ended December 31, 1995, 1996 and
1997 were 92.5%, 92.6% and 92.3%, respectively. In comparison, a study of
approximately 1,500 nursing facilities conducted by the U.S. Department of
Health and Human Services found that in 1995 nursing facilities operated at
approximately 87% of capacity. Since June 1994, the Company has maintained a
dedicated managed care marketing group, led by the Senior Vice President of
Marketing and Managed Care, whose primary purpose is to solicit managed care
and commercial insurance contracts. The Company's regional and corporate staff
attend trade shows and events for managed care, commercial insurance companies
and case managers in order to broaden the Company's overall presence and
recognition with these groups.
84
PROPERTIES
The following table summarizes certain information regarding the Issuer's
existing facilities as of June 30, 1998. For a description of the lease and
other financing arrangements regarding the Company's facilities, see Notes D,
H, I, J and T of the notes to the audited consolidated financial statements of
the Company included elsewhere in this Prospectus. The following table also
summarizes certain information regarding facilities in Attleboro and Newton
Upper Falls, Massachusetts that are managed by the Company.
SUMMARY OF FACILITIES
OWNED/ PURCHASE
YEAR LEASED/ OPTION LICENSED
LICENSED FACILITY LOCATION ACQUIRED MANAGED PRICE (1) BEDS
- ----------------- ------------------ -------- ------- --------- --------
MIDWEST REGION
OHIO
Beachwood............. Beachwood 1996 Owned(2) Fixed 274
Broadview Heights..... Broadview Heights 1996 Owned(2) Fixed 159
Dayton................ Dayton 1997 Owned -- 100
Defiance.............. Defiance 1993 Leased Fixed 100
Laurelwood............ Dayton 1997 Owned -- 115(3)
New Lebanon........... New Lebanon 1997 Owned -- 126(3)
Northwestern Ohio..... Bryan 1993 Leased Fixed 189
Perrysburg............ Perrysburg 1990 Owned -- 100
Point Place........... Toledo 1998 Owned -- 98
Swanton............... Swanton 1995 Leased Market 100
Sylvania.............. Sylvania 1998 Owned -- 150
Troy.................. Troy 1989 Leased Market 195
Westlake I............ Westlake 1996 Owned(2) Fixed 153
Westlake II........... Westlake 1996 Owned(2) Fixed 106
INDIANA
Decatur............... Indianapolis 1988 Owned -- 88
Indianapolis.......... Indianapolis 1988 Leased Market 104
New Haven............. New Haven 1990 Leased Market 120
Terre Haute........... Terre Haute 1990 Owned -- 120
-----
2,397
=====
NEW ENGLAND REGION
NEW HAMPSHIRE
Applewood............. Winchester 1996 Leased Market 70
Crestwood............. Milford 1996 Leased Market 82
Milford............... Milford 1996 Leased Market 52
Northwood............. Bedford 1996 Leased Market 147
Pheasant Wood......... Peterborough 1996 Leased Market 99
Westwood.............. Keene 1996 Leased Market 87
MASSACHUSETTS
Amesbury.............. Amesbury 1997 Leased Market 120
Bristol Nursing Home.. Attleboro 1997 Managed -- 72
Cedar Glen............ Danvers 1997 Leased Market 100
Danvers-Twin Oaks..... Danvers 1997 Leased Market 101
North Shore........... Saugus 1997 Leased Market 80
The Stone Institute... Newton Upper Falls 1997 Managed -- 106
-----
1,116
=====
85
OWNED/ PURCHASE
YEAR LEASED/ OPTION LICENSED
LICENSED FACILITY LOCATION ACQUIRED MANAGED PRICE (1) BEDS
- ----------------- --------------- -------- -------- --------- --------
NORTHEAST REGION
CONNECTICUT
Arden House........... Hamden 1997 Leased Fixed 360
Governor's House...... Simsbury 1997 Leased Fixed 73
Madison House......... Madison 1997 Leased Fixed 90
The Reservoir......... West Hartford 1997 Leased Fixed 75
Willows............... Woodbridge 1997 Leased Fixed 86
RHODE ISLAND
Greenwood............. Warwick 1998 Owned -- 136
Pawtuxet Village...... Warwick 1998 Owned -- 131
-----
951
=====
SOUTHEAST REGION
FLORIDA
Brevard............... Rockledge 1994 Leased Market 100
Clearwater............ Clearwater 1990 Owned -- 120
Gulf Coast............ New Port Richey 1990 Owned -- 120
Naples................ Naples 1989 Leased Market 120
Ocala................. Ocala 1990 Owned -- 120(4)
Palm Harbor........... Palm Harbor 1990 Owned -- 120
Pinebrook............. Venice 1989 Leased Market 120
Sarasota.............. Sarasota 1990 Leased Market 120
Tampa Bay............. Oldsmar 1990 Owned -- 120
-----
1,060
=====
MID ATLANTIC REGION
MARYLAND
Harford Gardens....... Baltimore 1997 Leased Fixed 163
Larkin Chase Center... Bowie 1994 Owned (5) -- 120
NEW JERSEY
Woods Edge............ Bridgewater 1988 Leased Market 176
-----
459
TOTAL............... 5,983
=====
- --------
(1) Indicates, for each leased facility, if the Company's option price to
acquire the facility is stated as a fixed amount in the lease ("Fixed") or
is based on the fair market value of the facility at the option exercise
date, which may be subject to a minimum price ("Market"). With regard to
leases with a fixed purchase option price, the Company believes that the
purchase option price stated in the lease is, in each case, equal to the
fair market value of the facility at the inception date of such lease.
(2) Indicates an owned facility the acquisition of which has been accounted
for as a capital lease.
(3) Includes 115 and 6 beds licensed for assisted living for the Laurelwood
and New Lebanon facilities, respectively.
(4) Does not include a 60 bed addition at this facility, which opened in
September 1998.
(5) Owned by Bowie L.P., in which the Company owns a 75% interest. The
Company's interest in Bowie L.P. is pledged to the facility's mortgage
lender. The Company has guaranteed the indebtedness of Bowie L.P.
86
The Company's corporate offices in Boston are subleased from an affiliate of
one of its current principal stockholders. The Company has entered into a
lease for new office space with an unaffiliated third party and expects to
relocate its offices during the third or fourth quarter of 1998. In connection
with such relocation, the Company is considering subleasing excess space at
its new headquarters to an existing affiliate on a short-term basis. The
Company also leases regional offices in Clearwater, Florida, Topsfield,
Massachusetts, and Indianapolis, Indiana, and owns a regional office in
Peterborough, New Hampshire. The Company's regional office in West Hartford,
Connecticut is located in The Reservoir, a skilled nursing facility listed in
the table above. Theracor leases offices in Palm Harbor, Florida and
Framingham, Massachusetts. The Company considers its properties to be in good
operating condition.
SOURCES OF REVENUES
The Company derives its net patient service revenues primarily from private
pay sources, the federal Medicare program for certain elderly and disabled
patients and state Medicaid programs for indigent patients. The Company's
revenues are influenced by a number of factors, including: (i) the licensed
bed capacity of its facilities; (ii) the occupancy rates of its facilities;
(iii) the payor mix of its facilities and the rates of reimbursement among
payor categories (private and other, Medicare and Medicaid); and (iv) the
extent to which subacute and other specialty medical and ancillary services
are utilized by patients and paid for by the respective payment sources. The
Company employs specialists to monitor reimbursement rules, policies and
related developments in order to comply with all reporting requirements and to
assist the Company in receiving reimbursements.
The table set forth below identifies the percentage of the Company's total
net revenues attributable to each of its payor sources for each of the periods
indicated. The increase in Medicaid revenues as a percentage of total net
revenues during the periods indicated has resulted primarily from the
acquisition of new facilities with a higher percentage of their net revenues
derived from the Medicaid program. An integral part of the Company's
acquisition strategy has been to acquire high-quality facilities from smaller,
less sophisticated operators whose facilities tend to offer lower acuity
services than those offered by the Company, thereby initially diluting the
Company's quality mix. The Company subsequently implements an expanded range
of specialty medical services at these facilities which typically leads to an
improved quality mix. The Company believes that, over time, its facilities
have generally experienced stable to increasing percentages of revenues
derived from payor sources other than Medicaid following their acquisition by
the Company.
TOTAL NET REVENUES (1)
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------- ------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
Private and other............................ 35.1% 35.5% 34.1% 33.5% 31.8%
Medicare..................................... 31.7 26.3 25.9 28.7 26.2
Medicaid..................................... 33.2 38.2 40.0 37.8 42.0
----- ----- ----- ----- -----
Total...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
- --------
(1) Total net revenues exclude net revenues of the Larkin Chase Center which
is owned by Bowie L.P. The Company owns a 75% partnership interest in
Bowie L.P. but records its investment in Bowie L.P. using the equity
method. See Note D to the Company's consolidated financial statements
included elsewhere in this Prospectus.
Private and Other. Private and other net revenues include payments from
individuals who pay directly for services without governmental assistance and
payments from commercial insurers, HMOs,
87
PPOs, Blue Cross organizations, workers' compensation programs, hospice
programs and other similar payment sources. The Company's rates for private
pay patients are typically higher than rates for patients eligible for
assistance under state Medicaid programs. The Company's private pay rates vary
from facility to facility and are influenced primarily by the rates charged by
other providers in the local market and by the Company's ability to
distinguish its services from those provided by its competitors. Although
private pay rates are generally established on a facility-specific fee
schedule, rates charged for individual cases may vary widely because, in the
case of managed care, they are either negotiated on a case-by-case basis with
the payor or are fixed by contract. Rates charged to private pay patients are
not subject to regulatory control in any of the states in which the Company
operates.
Medicare. All but two of the Company's facilities are certified Medicare
providers. The Company does not expect to seek Medicare certification for
these two uncertified facilities because all of the patients currently at
these facilities are private pay patients. Medicare is a federally funded and
administered health insurance program primarily designed for individuals who
are age 65 or over and are entitled to receive Social Security benefits. The
Medicare program consists of two parts. The first part, Part A, covers
inpatient hospital services and certain services furnished by other
institutional healthcare providers, such as long-term care facilities. The
second part, Part B, covers the services of doctors, suppliers of medical
items and services and various types of outpatient services. Part B services
include physical, speech and occupational therapy and durable medical
equipment and other ancillary services of the type provided by long-term care
or acute care facilities. Part A coverage, as applied to services delivered in
a long-term care facility, is limited to skilled nursing and rehabilitative
care related to a recent hospitalization and is limited to a specified term
(generally 100 days per calendar year), requires beneficiaries to share some
of the cost of covered services through the payment of a deductible and a co-
insurance payment and requires beneficiaries to meet certain qualifying
criteria. There are no limits on duration of coverage for Part B services, but
there is a co-insurance requirement for most services covered by Part B.
The method used in determining Medicare reimbursement for rehabilitation
therapy services furnished in the Company's facilities currently depends on
the type of therapy provided. The Medicare program currently applies salary
equivalency guidelines to determine the reasonable cost of physical therapy
services and respiratory therapy services provided on a contract basis, which
is the cost that would be incurred if the therapist were employed at the
facility, plus an amount designed to compensate the provider for certain
general and administrative overhead costs. With respect to occupational
therapy and speech language pathology, Medicare currently provides
reimbursement for services on a reasonable cost basis, subject to the so-
called "prudent buyer" rule for evaluating the reasonableness of the costs.
During the first quarter of 1997, the Health Care Financing Administration
("HCFA") proposed rules which would establish new guidelines for reimbursement
for rehabilitation therapy services provided at skilled nursing facilities.
These new guidelines would revise the existing salary equivalency rules for
physical and respiratory therapies and extend the salary equivalency
methodology to speech and occupational therapy services as well. The Company
does not believe that the proposed rules will have a material adverse effect
on its operations. Further, the salary equivalency guidelines will not apply
to skilled nursing facilities when the provisions of the BBA become effective.
See "--Governmental Regulation."
Under the Medicare Part A program, the Company is reimbursed under the
existing cost-based reimbursement system for its allowable direct costs (which
consist of routine, ancillary and capital expenses) plus an allocation of
allowable indirect costs. The total of routine costs and the respective
allocated overhead is subject to a regional routine cost limit. As the Company
expands its subacute care and other specialty medical services, the costs of
care for these patients have exceeded and are expected to continue to exceed
the regional reimbursement routine cost limits. In order to recover these
costs, the Company is required to submit routine cost limit exception requests
to recover the excess costs from the Medicare program. There can be no
assurance that the Company will be able
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to recover such excess costs under any pending or future requests. The failure
to recover these excess costs in the future could materially adversely affect
the Company. Under current regulations, new long-term care facilities are, in
certain limited circumstances, able to apply for a three year exemption from
routine cost limits. The Company has applied for, been denied and is now
appealing such exemptions for two of its facilities. Unless and until such
exemptions are granted, these facilities can only recover excess costs through
routine cost limit exception requests. The BBA substantially amends the
current Medicare reimbursement methodology and eliminates the process of
applying for and receiving routine cost limit exceptions and exemptions.
The BBA was enacted in August 1997 and significantly amends the
reimbursement methodology of the Medicare program. In addition to offering new
Medicare health plan options and increasing the penalties related to
healthcare fraud and abuse, the BBA provides for a prospective payment system
for skilled nursing facilities to be implemented for cost report periods
beginning on or after July 1, 1998. The BBA also mandates a 10% reduction in
Part B therapy costs for the period January 1, 1998 through July 1, 1998.
Subsequent to July 1, 1998, skilled nursing facilities will be reimbursed for
Part B therapy services which will be determined through fee schedules
established by HCFA. The BBA further limits reimbursement for Part B therapy
services by establishing annual limitations on Part B therapy charges per
beneficiary.
Since the Medicare prospective payment system will be all inclusive, the BBA
requires skilled nursing facilities to institute "consolidated billing" for a
variety of services and supplies. Under consolidated billing, the skilled
nursing facility must submit all Medicare claims for virtually all the
services and supplies that its residents receive (both Part A and Part B),
with the exception of mainly physicians' services. Payments for these services
and supplies billed on a consolidated basis will be made directly to the
skilled nursing facility, whether or not the services are provided directly by
the skilled nursing facility or by others under a contractual arrangement.
Among the services and goods which the skilled nursing facility will be
responsible for billing are: physical therapy, occupational therapy, speech
therapy, laboratory services, diagnostic x-rays, medical supplies, surgical
dressings, prosthetic devices/ostomy, colostomy, enteral/parenteral nutrition,
orthotics, limbs, etc., EKGs, vaccines, certain ambulance services and
psychological services by a social worker. Examples of Part B services and
goods which will not be billed by skilled nursing facilities are physicians'
services, physician assistants under physician supervision, nurse
practitioners, certified nurse-midwives, qualified psychologists, certified
registered nurses, anesthetists, home dialysis supplies and equipment, self-
care home dialysis support services and institutional dialysis services and
supplies, erythropoietin for certain dialysis patients, hospice care related
to a beneficiary's terminal illness, an ambulance trip to the skilled nursing
facility from the initial admission or from the skilled nursing facility
following a final discharge and transportation costs of electrocardiogram
equipment (for 1998 only).
In mid-April, 1998, HCFA issued a Program Memorandum to Medicare
Intermediaries and Carriers with detailed instructions concerning consolidated
billing. Under the Program Memorandum, skilled nursing facilities have the
option of utilizing a transition period from July 1, 1998 through December 31,
1998 in cases where the skilled nursing facility will not have the systems and
billing capability to submit claims to the intermediary for services and
supplies rendered on or after July 1, 1998. Intermediaries are to use this
transition period to educate providers regarding these new requirements
through December 31, 1998. For those skilled nursing facilities utilizing the
transition period, all claims for all services and supplies rendered on or
after January 1, 1999 must be billed to the intermediary. There will be no
extension of the transition period beyond January 1, 1999. Subsequent to the
Program Memorandum of mid-April, 1998, HCFA has issued additional Program
Memoranda concerning the implementation of PPS, affecting mainly the
"consolidated billing" provisions. In July, 1998, HCFA instructed Medicare
program intermediaries and carriers that, due to systems modification delays
in implementing skilled nursing facility consolidated billing, the
instructions in the mid-April 1998 Program Memorandum, as they apply to
services and supplies rendered to residents in a Part A stay in a skilled
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nursing facility not yet on PPS, and to the Part B stay (i.e., Part A benefits
exhausted, post-hospital or level of care requirements not met), are delayed
until further notice. On August 1, 1998, HCFA issued an additional Program
Memorandum asking carriers to refrain from implementing the professional
component/technical component indicator rules previously issued by HCFA. The
delay is effective until an indicator is developed so that carriers can
identify which skilled nursing facilities have converted to PPS.
Alternatively, the delay can be lifted whenever all skilled nursing facilities
have converted.
Regulations regarding Medicare PPS were published on May 12, 1998. The
regulations include (i) the unadjusted federal per diem rates to be applied to
days of covered skilled nursing facility services furnished during the fiscal
year, (ii) the case mix classification system to be applied with respect to
such services during the fiscal year and (iii) the factors to be applied in
making area wage adjustments with respect to such services. The regulations
also contain provisions for skilled nursing facility consolidated billing of
Medicare Part A and certain services and items furnished to residents of the
skilled nursing facility under Part B. (See the discussion below under
"Government Regulation" for more information about the prospective payment
system for skilled nursing facilities, including delays in implementing
consolidated billing for Part B services). As the regulations were published
recently and HCFA Program Memoranda continue to be issued regarding
implementation of PPS, the Company has not been able to fully assess and
quantify the potential impact of the regulations on the Company's consolidated
financial position, results of operations or liquidity. Based on a preliminary
assessment, the Company believes that the new regulations will result in a
reduction of the Company's average Medicare per diem reimbursement rate, which
the Company expects to be able to substantially offset primarily through
reductions in facility operating costs. However, no assurance can be given
that the Company will be able to reduce such costs. See "--Business Strategy."
Medicaid. The Medicaid program includes the various state-administered
reimbursement programs for indigent patients created by federal law. Although
Medicaid programs vary from state to state, they are partially subsidized by
federal funds, provided that the state has submitted an acceptable state plan
for medical assistance. Although reimbursement rates are determined by the
state, the federal government retains the right to approve or disapprove
individual state plans. For Medicaid recipients, providers must accept
reimbursement from Medicaid as payment in full for the services rendered,
because the provider may not bill the patient for more than the amount of the
allowable Medicaid payment. All but two of the Company's facilities
participate in the Medicaid program of the states in which they are located.
These two non-participating facilities are currently occupied solely by
private pay patients.
Under the Boren Amendment, a federal Medicaid statute, and related
regulations, state Medicaid programs were required to provide reimbursement
rates that were reasonable and adequate to cover the costs that would be
incurred by efficiently and economically operated facilities while providing
services in conformity with state and federal laws, regulations and quality
and safety standards. Furthermore, payments were required to be sufficient to
enlist enough providers so that services under a state's Medicaid plan were
available to recipients at least to the extent that those services are
available to the general population. In the past, several states' healthcare
provider organizations and providers have initiated litigation challenging the
Medicaid reimbursement methodologies employed in such states, asserting that
reimbursement payments are not adequate to reimburse an efficiently operated
facility for the costs of providing Medicaid covered services. The BBA
repealed the Boren Amendment effective October 1, 1997 and allows the states
to develop their own standards for determining Medicaid payment rates. The BBA
provides certain procedural restrictions on the states' ability to amend state
Medicaid programs by requiring that the states use a public process to
establish payment methodologies including a public comment and review process.
The repeal of the Boren Amendment provides states with greater flexibility to
amend individual state programs and potentially reduce state Medicaid payments
to skilled nursing facilities.
The Medicaid programs in the states in which the Company operates pay a per
diem rate for providing services to Medicaid patients based on the facility's
reasonable allowable costs incurred in
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providing services, subject to cost ceilings applicable to patient care, other
operating and capital costs. Some state Medicaid programs in states in which
the Company currently operates currently include incentive allowances for
providers whose costs are less than certain ceilings and who meet other
requirements.
There are generally two types of Medicaid reimbursement rates: retrospective
and prospective, although many states have adopted plans that have both
retrospective and prospective features. A retrospective rate is determined
after completion of a cost report by the service provider and is designed to
reimburse expenses. Typically, an interim rate, based upon historical cost
factors and inflation is paid by the state during the cost reporting period
and a cost settlement is made following an audit of the filed cost report.
Such adjustments may result in additional payments being made to the Company
or in recoupments from the Company, depending on actual performance and the
limitations within an individual state plan.
The more prevalent type of Medicaid reimbursement rate is the prospective
rate. Under a prospective plan, the state sets its rate of payment for the
period before services are rendered. Actual costs incurred by operators during
a period are used by the state to establish the prospective rate for
subsequent periods. The provider must accept the prospective rate as payment
in full for all services rendered. Although there is usually no settlement
based upon actual costs incurred subsequent to the cost report filing,
subsequent audits may provide a basis for the state program to retroactively
recoup monies.
To date, adjustments from Medicaid audits have not had a material adverse
effect on the Company. Although there can be no assurance that future
adjustments will not have a material adverse effect on the Company, the
Company believes that it has properly applied the various payment formulas and
that it is not likely that audit adjustments would have a material adverse
effect on the Company.
Therapy Services to Non-Affiliates. The Company generates revenues through
its rehabilitation therapy business by providing rehabilitation therapy
services to patients at non-affiliated long-term care facilities. In general,
payments for these services are received directly from the non-affiliated
long-term care facilities, which in turn are reimbursed by the Medicare
program or other payors. The revenues that the Company derives for these
services are typically subject to adjustment in the event the facility is
denied reimbursement by the Medicare program or any other applicable payor on
the basis that the services provided by the Company were not medically
necessary.
MANAGEMENT INFORMATION SYSTEMS
With the exception of the Connecticut Facilities, which were acquired by the
Company in December 1997, all of the Company's facilities are supported by a
centralized, integrated financial reporting system which processes financial
transactions and which enables Company personnel to monitor and respond on a
timely basis to key operating and financial data and budget variances. The
Company expects all newly acquired facilities to utilize the centralized
financial reporting system beginning with, or shortly after, their date of
acquisition. Additionally, the Company utilizes a payroll processing service
company to process payroll for all of its facilities with the exception of the
recently acquired Connecticut facilities. The Company intends to convert the
Connecticut Facilities to the Company's standard financial reporting and
payroll systems during 1998. The Company's financial reporting and payroll
systems are Year 2000 compliant.
The Company's facilities utilize various clinical information and patient
billing software packages, some of which are not Year 2000 compliant. The
Company is in the process of evaluating several clinical information software
products, including one which is being installed in 13 of its facilities, with
the expectation that it will identify a Year 2000 compliant standard clinical
information and patient billing system which will be implemented at each of
the Company's facilities. The Issuer currently estimates that it will complete
the selection of the standard clinical information and patient billing
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software during 1998 and finalize the conversion of its existing systems to
the new platform during 1999. Although the conversion of the clinical
information and patient billing systems is in some cases driven by the need
for all of its systems to be Year 2000 compliant, the Company believes that
the implementation of the Company-wide standard clinical information and
patient billing system will offer significant advantages by facilitating the
adherence to Company billing standards and by providing a consolidated
database from which it can extract valuable clinical information. There can be
no assurance that the Company will be able to complete this conversion in a
timely manner. See "Risk Factors--Impact of Year 2000 Issue."
GOVERNMENTAL REGULATION
The federal government and all states in which the Company operates regulate
various aspects of the Company's business. In addition to the regulation of
payment rates by governmental payor sources, the development and operation of
long-term care facilities and the provision of long-term care services are
subject to federal, state and local licensure and certification laws which
regulate with respect to a facility, among other matters, the number of beds,
the services provided, the distribution of pharmaceuticals, equipment,
staffing requirements, patients' rights, operating policies and procedures,
fire prevention measures, environmental matters and compliance with building
and safety codes. There can be no assurance that federal, state or local
governmental regulations will not change or be subjected to new
interpretations that impose additional restrictions which might adversely
affect the Company's business.
All of the facilities operated by the Company are licensed under applicable
state laws and possess the required CONs from responsible state authorities.
As previously noted, all but two of the Company's facilities are certified or
approved as providers under the Medicaid and Medicare programs. Both the
initial and continuing qualification of a long-term care facility to
participate in such programs depend upon many factors, including
accommodations, equipment, services, non-discrimination policies against
indigent patients, patient care, quality of life, patients' rights, safety,
personnel, physical environment and adequacy of policies, procedures and
controls. Licensing, certification and other applicable standards vary from
jurisdiction to jurisdiction and are revised periodically. State agencies
survey or inspect all long-term care facilities on a regular basis to
determine whether such facilities are in compliance with the requirements for
participation in government-sponsored third-party payor programs. In some
cases, or upon repeat violations, the reviewing agency has the authority to
take various adverse actions against a facility, including the imposition of
fines, temporary suspension of admission of new patients to the facility,
suspension or decertification from participation in the state Medicaid program
or the Medicare program, offset of amounts due against future billings to the
Medicare or Medicaid programs, denial of payments under the state Medicaid
program for new admissions, reduction of payments, restrictions on the ability
to acquire new facilities and, in extreme circumstances, revocation of a
facility's license or closure of a facility.
The Company believes that its facilities are in substantial compliance with
all statutes, regulations, standards and requirements applicable to its
business, including applicable Medicaid and Medicare regulatory requirements.
However, in the ordinary course of its business, the Company from time to time
receives notices of deficiencies for failure to comply with various regulatory
requirements. In most cases, the Company and the reviewing agency will agree
upon corrective measures to be taken to bring the facility into compliance.
Although the Company has been subject to some fines, statements of deficiency
and other corrective actions have not had a material adverse effect on the
Company. There can be no assurance that future agency inspections and the
actions taken by the reviewing agency based upon such inspections will not
have a material adverse effect on the Company.
Certificates of Need. All but one of the states in which the Company
operates have adopted CON or similar laws that generally require that a state
agency determine that a need exists prior to the construction of new
facilities, the addition or reduction of licensed beds or services, the
implementation of other changes, the incurrence of certain capital
expenditures, and, in certain states,
92
the approval of certain acquisitions and changes in ownership or the closure
of a facility. Indiana's CON program expired as of June 30, 1998. State CON
approval is generally issued for a specific project or number of beds,
specifies a maximum expenditure, is sometimes subject to an inflation
adjustment, and requires implementation of the proposal within a specified
period of time. Failure to obtain the necessary state approval can result in
the inability of the facility to provide the service, operate the facility or
complete the acquisition, addition or other change and can also result in
adverse reimbursement action or the imposition of sanctions or other adverse
action on the facility's license.
Medicare and Medicaid. The BBA was enacted in August 1997 and significantly
amends the reimbursement methodology of the Medicare program. In addition to
offering new Medicare health plan options and increasing the penalties related
to healthcare fraud and abuse, the BBA provides for a prospective payment
system for skilled nursing facilities to be implemented for cost report
periods beginning on or after July 1, 1998. The BBA also mandates a 10%
reduction in Part B therapy costs for the period January 1, 1998 through July
1, 1998. Subsequent to July 1, 1998, skilled nursing facilities will be
reimbursed for Part B therapy services through fee schedules established by
HCFA. The BBA also requires uniform coding specified by HCFA for skilled
nursing facility Part B bills. The BBA further limits reimbursement for Part B
therapy services by establishing annual limitations on Part B therapy charges
per beneficiary.
The BBA also requires skilled nursing facilities to institute "consolidated
billing" for a variety of services and supplies. Under consolidated billing,
the skilled nursing facility must submit all Medicare claims for all the
services and supplies that its residents receive (both Part A and Part B
services), with the exception of mainly physicians' services. Payments for
these services and supplies billed on a consolidated basis will be made
directly to the skilled nursing facility, whether or not the services were
provided directly by the skilled nursing facility or by others under a
contractual arrangement. The skilled nursing facility will be responsible for
paying the provider of the services or the supplier. The payment to the
skilled nursing facility for these services and supplies will be based upon
the amounts allowable to the skilled nursing facility based on the Medicare
PPS law and regulations. However, subsequent developments have delayed the
implementation of "consolidated billing" for Part B services.
Medicare PPS will be phased in over a period of four years, beginning with
skilled nursing facility cost reporting periods ending on or after July 1,
1998. "New facilities," which first received Medicare payment on or after
October 1, 1995, move to the federal per diem rate effective with the cost
report periods beginning on or before July 1, 1998 and do not have a
transitional period. All other facilities will be "phased-in" by a formula
effective with the cost report period beginning on or after July 1, 1998 and
through which Medicare PPS will blend together facility-specific rates and
federal industry per diems according to the following schedule: Year One --
75% facility-specific, 25% federal per diem; Year Two -- 50% each; Year
Three -- 25% facility-specific, 75% federal per diem; Year Four -- 100%
federal per diem. As a result of Medicare PPS being effective for cost reports
beginning on or after July 1, 1998, Medicare PPS will not directly impact the
Company's Medicare reimbursement until the fiscal year beginning January 1,
1999. When fully implemented, Medicare PPS will result in each skilled nursing
facility being reimbursed on a per diem rate basis with acuity-based per diem
rates being established as applicable to all Medicare Part A beneficiaries who
are residents of the skilled nursing facility. The per diem rates will be all-
inclusive rates through which the skilled nursing facility is reimbursed for
its routine, ancillary and capital costs. During the transition period, the
per diem rates for each facility will consist of a blending of facility-
specific costs and federal per diem rates. The unadjusted federal per diem
rates to be applied to days of covered skilled nursing facility services
furnished during the first year, the case mix classification system to be
applied with respect to such services, and the factors to be applied in making
area wage adjustments with respect to such services, are included in the
Medicare PPS regulations. The federal Medicare PPS rates were developed by
HCFA based on a blend of allowable costs from hospital-based and freestanding
skilled nursing facility cost reports for reporting periods beginning in
Federal Fiscal Year 1995 (i.e., October 1, 1994 --
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September 30, 1995). The data used in developing the federal rates incorporate
an estimate of the amounts payable under Part B for covered skilled nursing
facility services furnished during Federal Fiscal Year 1995 to individuals who
were residents of a facility and receiving Part A covered services. HCFA
updated costs to the first year of Medicare PPS using a skilled nursing
facility market basket index standardized for facility differences in case-mix
and for geographic variations in wages. Providers that received "new provider"
exemptions from the routine cost limits were excluded from the database used
to compute the federal payment rates. In addition, costs related to payments
for exceptions to the routine cost limits are excluded from the database used
to compute the federal payment rates. The facility-specific portion will be
based on each facility's Medicare cost report for cost reporting periods
beginning in Federal Fiscal Year 1995, including routine cost limit exception
and exemption payments up to 150% of the routine cost limit, the allowable
costs to be updated under Medicare PPS for the skilled nursing facility market
basket minus 1% through 1999 and the full skilled nursing facility market
basket after 1999. A variety of other adjustments will be made in developing
the Medicare PPS rates pursuant to the BBA and the regulations. As noted,
except in the case of "new facilities," in the first year of the transition to
Medicare PPS, the per diem rates will consist of a blend of 25% federal per
diem rates and 75% facility-specific costs. Thereafter, the facility-specific
cost portion will decrease by 25% per year until in the fourth year, the rate
will be 100% federal per diem rates. "New facilities" will be on 100% federal
per diem rates for cost reporting periods beginning on or after July 1, 1998.
Details of the Medicare PPS, including the unadjusted federal per diem
rates, were published in the Federal Register on May 12, 1998. As the
regulations were published recently and HCFA Program Memoranda continue to be
issued regarding implementation of PPS, the Company has not been able to fully
assess and quantify the potential impact of the regulations on the Company's
consolidated financial position, results of operations or liquidity. Based on
a preliminary assessment, the Company believes that the new regulations will
result in a reduction of the Company's average Medicare per diem reimbursement
rate, which the Company expects to be able to substantially offset primarily
through reductions in facility operating costs. However, no assurance can be
given that the Company will be able to reduce such costs.
Fee Splitting and Referrals. The Company is also subject to federal and
state laws that govern financial and other arrangements between healthcare
providers. Federal laws, as well as the laws of certain states, prohibit
direct or indirect payments or fee splitting arrangements between healthcare
providers that are designed to induce or encourage the referral of patients
to, or the recommendation of, a particular provider for medical products and
services. These laws include the federal "anti-kickback law" which prohibits,
among other things, the offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of Medicare and Medicaid patients. A
wide array of relationships and arrangements, including ownership interests in
a company by persons in a position to refer patients and personal service
agreements have, under certain circumstances, been alleged to violate these
provisions. Certain discount arrangements may also violate these laws. Because
of the broad reach of these laws, the federal government has published certain
"safe harbors," which set forth the requirements under which certain
relationships will not be considered to violate such laws. A violation of the
federal anti-kickback law could result in the loss of eligibility to
participate in Medicare or Medicaid, or in criminal penalties. Violation of
state anti-kickback laws could lead to loss of licensure, significant fines
and other penalties.
Various federal and state laws regulate the relationship between healthcare
providers and physicians, including employment or service contracts and
investment relationships. These laws include the broadly worded fraud and
abuse provisions of the Medicaid and Medicare statutes, which prohibit various
transactions involving Medicaid or Medicare covered patients or services. In
particular, the Omnibus Budget Reconciliation Act of 1993 ("OBRA 93") contains
provisions which greatly expand the federal prohibition on physician referrals
to entities with which they have a financial relationship. Effective January
1, 1995, OBRA 93 prohibits any physician with a financial relationship
(defined as a direct or indirect ownership or investment interest or
compensation arrangement) with an entity from
94
making a referral for "designated health services" to that entity and
prohibits that entity from billing for such services. "Designated health
services" do not include skilled nursing services but do include many services
which long-term care facilities provide to their patients, including physical
therapy, occupational therapy, infusion therapy and enteral and parenteral
nutrition. Various exceptions to the application of this law exist, including
one which protects the payment of fair market compensation for the provision
of personal services, so long as various requirements are met. Violations of
these provisions may result in civil or criminal penalties for individuals or
entities and/or exclusion from participation in the Medicaid and Medicare
programs. Various state laws contain analogous provisions, exceptions and
penalties. The Company believes that in the past it has been, and in the
future it will be, able to arrange its business relationships so as to comply
with these provisions.
Each of the Company's long-term care facilities has at least one medical
director that is a licensed physician. The medical directors may from time to
time refer their patients to the Company's facilities in their independent
professional judgment. The physician anti-referral restrictions and
prohibitions could, among other things, require the Company to modify its
contractual arrangements with its medical directors or prohibit its medical
directors from referring patients to the Company. From time to time, the
Company has sought guidance as to the interpretation of these laws. However,
there can be no assurance that such laws will ultimately be interpreted in a
manner consistent with the practices of the Company.
Potential Healthcare Reform. In addition to extensive existing governmental
healthcare regulation, there are numerous legislative and executive
initiatives at the federal and state levels for comprehensive reforms
affecting the payment for and availability of healthcare services. It is not
clear at this time what proposals, if any, will be adopted or, if adopted,
what effect such proposals would have on the Company's business. Aspects of
certain of these proposals, such as reductions in funding of the Medicare and
Medicaid programs, interim measures to contain healthcare costs such as a
short-term freeze on prices charged by healthcare providers or changes in the
administration of Medicaid at the state level, could materially adversely
affect the Company. Additionally, the BBA repealed the Boren Amendment
effective October 1, 1997 and allows the states to develop their own standards
for determining Medicaid payment rates. The BBA provides certain procedural
restrictions on the states' ability to amend state Medicaid programs by
requiring that the states use a public process to establish payment
methodologies including a public comment and review process. The repeal of the
Boren Amendment provides states with greater flexibility to amend individual
state programs and potentially reduce state Medicaid payments to skilled
nursing facilities. There can be no assurance that currently proposed or
future healthcare legislation or other changes in the administration or
interpretation of governmental healthcare programs will not have an adverse
effect on the Company.
COMPETITION
The long-term care industry is highly competitive. The Company competes with
other providers of long-term care on the basis of the scope and quality of
services offered, the rate of positive medical outcomes, cost-effectiveness
and the reputation and appearance of its long-term care facilities. The
Company also competes in recruiting qualified healthcare personnel, in
acquiring and developing additional facilities and in obtaining CONs. The
Company's current and potential competitors include national, regional and
local long-term care providers, some of whom have substantially greater
financial and other resources and may be more established in their communities
than the Company. The Company also faces competition from assisted living
facility operators as well as providers of home healthcare. In addition,
certain competitors are operated by not-for-profit organizations and similar
businesses which can finance capital expenditures and acquisitions on a tax-
exempt basis or receive charitable contributions unavailable to the Company.
In general, consolidation in the long-term care industry has resulted in the
Company being faced with larger competitors, many of whom have significant
financial and other resources. The Company expects that this continuing
consolidation may increase the competition for the acquisition of long-term
care facilities.
95
The Company believes that state regulations which require a CON before a new
long-term care facility can be constructed or additional licensed beds can be
added to existing facilities reduce the possibility of overbuilding and
promote higher utilization of existing facilities. CON legislation is
currently in place in all states in which the Company operates or expects to
operate with the exception of Indiana where the CON program expired as of June
30, 1998. Several of the states in which the Company operates have imposed
moratoriums on the issuance of CONs for new skilled nursing facility beds.
Connecticut has imposed a moratorium on the addition of any new skilled
nursing facility beds, including chronic and convalescent nursing facility
beds and rest home beds with nursing supervision, until the year 2002.
Massachusetts has imposed a moratorium on the addition of any new skilled
nursing facility beds until the year 2000, except that an existing facility
can add up to 12 beds without being subject to CON review. New Hampshire has
imposed a moratorium on the addition of any new beds to skilled nursing
facilities, intermediate care homes and rehabilitation homes until December
31, 1998. Legislation has been introduced in New Hampshire to extend this
moratorium until the year 2001, or in the alternative until the year 2003.
Ohio has imposed a moratorium until June 30, 1999 on the addition of any new
skilled nursing facility beds. Rhode Island has imposed a moratorium on the
issuance of any new initial licenses for skilled nursing facilities and on the
increase in the licensed bed capacity of any existing licensed skilled nursing
facility until July 1, 1999, except that an existing facility may increase its
licensed bed capacity to the greater of 10 beds or 10% of the facility's
licensed bed capacity. The other states in which the Company conducts business
do not currently have a moratorium on new skilled nursing facility beds in
effect. Although New Jersey does not have a "moratorium" on new skilled
nursing facility beds, with the exception of the Add-a-bed program (in which a
facility may request approval from the state licensure agency to increase
total licensed skilled nursing beds, including hospital based subacute care
beds, by no more than 10 beds or 10% of its licensed bed capacity, whichever
is less, without obtaining CON approval), New Jersey only accepts applications
for a CON for additional skilled nursing facility beds when the state CON
agency issues a call for beds. There is presently no call for additional beds,
and no call is expected to be made until the beginning of 1999 at the
earliest. A relaxation of CON requirements could lead to an increase in
competition. In addition, as cost containment measures have reduced occupancy
rates at acute care hospitals, a number of these hospitals have converted
portions of their facilities into subacute units. In the states in which the
Company currently operates, these conversions are subject to state CON
regulations. The Company believes that the application of the new Medicare PPS
rules will make such conversions less desirable. New Jersey recently enacted
legislation permitting acute care hospitals to offer subacute care services
under their existing hospital licenses, subject to first obtaining CON
approval pursuant to an expedited CON review process. Ohio has imposed a
moratorium on the conversion of acute care hospital beds into long-term care
beds through June 30, 1999. See "-- Governmental Regulation."
EMPLOYEES
As of June 30, 1998, the Company employed approximately 9,000 facility-based
personnel on a full and part-time basis. The Company's corporate and regional
staff consisted of approximately 100 persons as of such date. Approximately
450 employees at five of the Company's facilities are covered by collective
bargaining agreements. The Company believes that it maintains good
relationships with its employees and the unions that represent certain of its
employees.
The Company believes that the attraction and retention of dedicated, skilled
and experienced nursing and other professional staff has been and will
continue to be a critical factor in the successful growth of the Company. The
Company believes that its wage rates and benefit packages for nursing and
other professional staff are commensurate with market rates and practices.
The Company competes with other healthcare providers in attracting and
retaining qualified or skilled personnel. The long-term care industry in
general, and the Company in particular, have, at times, experienced shortages
of qualified personnel. In addition, the long-term care industry typically
experiences high turnover of less skilled employees. A shortage of nurses or
other trained personnel
96
or general economic inflationary pressures may require the Company to enhance
its wage and benefits package in order to compete with other employers. There
can be no assurance that the Company's labor costs will not increase or, if
they do, that they can be matched by corresponding increases in reimbursement.
Failure by the Company to attract and retain qualified employees, to control
its labor costs or to match increases in its labor expenses with corresponding
increases in revenues could have a material adverse effect on the Company. See
"Risk Factors -- Staffing and Labor Costs."
LEGAL PROCEEDINGS
The Company is a party to claims and legal actions arising in the ordinary
course of business. The Company does not believe that unfavorable outcomes in
any such matters, individually or in the aggregate, would have a material
adverse effect on the Company.
97
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE ISSUER
The following table sets forth certain information regarding the current
directors and executive officers of the Issuer:
NAME AGE POSITION
- ---- --- --------
Stephen L. Guillard..... 49 Chairman, President, Chief Executive Officer and Director
Damian N. Dell'Anno..... 39 Executive Vice President of Operations and Director
William H. Stephan...... 42 Senior Vice President and Chief Financial Officer and Director
Bruce J. Beardsley...... 35 Senior Vice President of Acquisitions
Michael E. Gomez,
R.P.T. ................ 36 Senior Vice President of Rehabilitation Services
Steven V. Raso.......... 33 Senior Vice President of Operations
Savio W. Tung........... 46 Director
Christopher J. O'Brien.. 40 Director
Charles J. Philippin.... 47 Director
Christopher J. Stadler.. 33 Director
Stephen L. Guillard has served as President and Chief Executive Officer of
Harborside since May 1988 and as a Director and Chairman of the Board of
Harborside since March 1996. Mr. Guillard previously served as Chairman,
President and Chief Executive Officer of Diversified Health Services ("DHS"),
a long-term care company which Mr. Guillard co-founded in 1982. DHS operated
approximately 7,500 long-term care and assisted living beds in five states.
Mr. Guillard has a total of 26 years of experience in the long-term care
industry and is a licensed Nursing Home Administrator.
Damian N. Dell'Anno has served as Executive Vice President of Operations of
Harborside since 1994. From 1993 to 1994, he served as the head of the
specialty services group for Harborside and was instrumental in developing
Harborside's rehabilitation therapy business. From 1989 to 1993, Mr. Dell'Anno
was Vice President of Reimbursement for Harborside. From 1988 to 1989, Mr.
Dell'Anno served as Director of Budget, Reimbursement and Cash Management for
Mediplex, an operator of skilled nursing facilities. Mr. Dell'Anno has a total
of 16 years of experience in the long-term care industry.
William H. Stephan has served as Senior Vice President and Chief Financial
Officer of Harborside since 1994. From 1986 to 1994, Mr. Stephan was a Manager
in the health care practice of Coopers & Lybrand L.L.P. In such position, his
clients included operators of long-term care facilities, continuing care
retirement centers, physician practices and acute care hospitals. Mr. Stephan
is a Certified Public Accountant and a member of the Healthcare Financial
Management Association.
Bruce J. Beardsley has served as Senior Vice President of Acquisitions of
Harborside since 1994. From 1992 to 1994, he was Vice President of Planning
and Development of Harborside with responsibility for the development of
specialized services, planning and engineering. From 1990 to 1992, he was an
Assistant Vice President of Harborside responsible for risk management and
administrative services. From 1988 to 1990, Mr. Beardsley served as Special
Projects Manager of Harborside. Prior to joining Harborside in 1988, Mr.
Beardsley was a commercial and residential real estate appraiser.
98
Michael E. Gomez, R.P.T. has served as Senior Vice President of
Rehabilitation Services of Harborside since 1994. From 1993 to 1994, Mr. Gomez
served as Director of Therapy Services of Harborside with responsibility for
overseeing the coordination and direction of physical, occupational and speech
therapy services. From 1991 to 1993, Mr. Gomez was Director of Rehabilitation
Services at Mary Washington Hospital in Fredericksburg, Virginia. From 1988 to
1990, he was Physical Therapy State Manager for Pro-Rehab, a contract therapy
company based in Boone, North Carolina. Mr. Gomez is a licensed physical
therapist.
Steven V. Raso has served as Senior Vice President of Operations since
September 1, 1998. He served as Senior Vice President of Reimbursement for
Harborside from 1997 to 1998, Vice President of Reimbursement from 1994 to
1997 and Director of Reimbursement and Budgets from 1989 to 1994. In these
capacities, Mr. Raso has been responsible for the Medicare and Medicaid
reimbursement cost reporting functions, including audits, appeals, licensing
and rate determinations. Mr. Raso also oversees the budgeting, accounts
receivable and compliance departments within Harborside.
Savio W. Tung has been an executive of Investcorp, its predecessor or one of
its wholly-owned subsidiaries since September 1984. He is a director of Werner
Holding Co. (DE), Inc., CSK Auto Corporation, Saks Holdings, Inc., Simmons
Holdings, Inc. and Star Markets Holdings, Inc.
Christopher J. O'Brien has been an executive of Investcorp, its predecessor
or one or more of its wholly-owned subsidiaries since December 1993. Prior to
joining Investcorp, he was a Managing Director of Mancuso & Company, a private
New York-based merchant bank. He is a director of Falcon Building Products,
Inc., Simmons Holdings, Inc., Star Markets Holdings, Inc., CSK Auto
Corporation and The William Carter Company.
Charles J. Philippin has been an executive of Investcorp, its predecessor or
one or more of its wholly-owned subsidiaries since July 1994. Prior to joining
Investcorp, he was a partner of Coopers & Lybrand L.L.P., an accounting firm.
He is a director of Falcon Building Products, Inc., Werner Holding Co. (DE),
Inc., Saks Holdings, Inc., CSK Auto Corporation, Simmons Holdings, Inc., Star
Markets Holdings, Inc. and The William Carter Company.
Christopher J. Stadler has been an executive of Investcorp, its predecessor
or one or more of its wholly-owned subsidiaries since April 1996. Prior to
joining Investcorp, he was employed by BT Securities Corporation, an
investment banking firm, in various capacities, including Managing Director;
the Davis Companies, a merchant bank, as a Managing Director; and CS First
Boston Corporation, an investment banking firm, as a Director. He is a
director of Falcon Building Products, Inc., Werner Holding Co. (DE), Inc., CSK
Auto Corporation and The William Carter Company.
99
EXECUTIVE COMPENSATION
The following tables set forth information for the year ended December 31,
1997 about the compensation of the chief executive officer and the four
executive officers of the Issuer who received the highest compensation for
such year:
EXECUTIVE COMPENSATION SUMMARY TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------------- -------------------------------
AWARDS PAYOUTS
----------------------- -------
OTHER SECURITIES ALL
ANNUAL RESTRICTED UNDERLYING OTHER
NAME AND SALARY BONUS COMPEN- STOCK AWARDS OPTIONS/ LTIP COMPEN-
PRINCIPAL POSITION YEAR ($) ($) (/1/) SATION ($) ($) SARS (#) PAYOUTS SATION($)(/2/)
------------------ ---- ------- --------- ---------- ------------ ---------- ------- --------------
Stephen L. Guillard,.... 1997 300,300 232,500 -- -- 55,000 -- 16,250
Chairman, President 1996 310,802 548,000 -- -- 80,000 -- 15,927
and Chief Executive Of- 1995 267,800 80,000 -- -- -- -- 4,063
ficer
Damian N. Dell'Anno,.... 1997 192,115 117,000 -- -- 27,000 -- 7,578
Executive Vice Presi- 1996 176,371 266,000 -- -- 50,000 -- 5,152
dent of Operations 1995 159,326 32,000 -- -- -- -- 1,573
Bruce J. Beardsley,..... 1997 151,153 70,000 -- -- 17,000 -- 8,178
Senior Vice 1996 131,905 237,333 -- -- 40,000 -- 7,385
President of Acquisi- 1995 117,192 37,306 -- -- -- -- 3,191
tions
William H. Stephan, .... 1997 146,154 60,000 -- -- 16,000 -- 7,346
Senior Vice President 1996 127,605 180,250 -- -- 40,000 -- 6,423
and Chief Financial Of- 1995 120,000 24,000 -- -- -- -- 5,954
ficer
Steven V. Raso,......... 1997 111,153 35,000 -- -- 18,000 -- 5,923
Senior Vice President 1996 93,187 95,000 -- -- 20,000 -- 5,648
of Operations 1995 77,980 12,000 -- -- -- -- 750
- --------
(1) 1996 amounts include special bonuses related to the IPO and other payments
paid to Messrs. Guillard, Dell'Anno, Beardsley, Stephan and Raso of
$438,000, $212,000, $185,250, $150,250 and $75,000, respectively.
(2) Includes matching contributions made by Harborside under its Supplemental
Executive Retirement Plan and 401(k) Plan.
100
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
----------------------------------------
NUMBER OF PERCENT OF TOTAL GRANT
SECURITIES OPTIONS/SARS DATE
UNDERLYING GRANTED TO EXERCISE OR PRESENT
OPTION/SARS EMPLOYEES IN BASE PRICE EXPIRATION VALUE
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE ($)(3)
---- ----------- ---------------- ----------- ----------------- --------
Stephen L.
Guillard(1)............. 55,000 25.8 12.00 February 12, 2007 294,250
Damian N.
Dell'Anno(1)............ 27,000 12.7 12.00 February 12, 2007 144,450
Bruce J. Beardsley(1).... 17,000 8.0 12.00 February 12, 2007 90,950
William H. Stephan(1).... 16,000 7.5 12.00 February 12, 2007 85,600
Steven V. Raso(1)(2)..... 14,000 6.6 12.00 February 12, 2007 74,900
4,000 1.9 18.69 November 14, 2007 32,840
- --------
(1) Messrs. Guillard, Dell'Anno, Beardsley, Stephan and Raso received options
to purchase shares of Harborside Common Stock on February 12, 1997. One
third of these options become exercisable on the first, second and third
anniversary of their date of grant. The options terminate (with certain
exceptions) on the tenth anniversary of their date of grant.
(2) Mr. Raso received additional options to purchase shares of Harborside
Common Stock on November 14, 1997. These options become exercisable and
terminate on the same terms as the options granted on February 12, 1997.
(3) The fair value of each stock option is estimated on the date of grant
using the Black-Scholes pricing model with the following weighted-average
assumptions: an expected life of five years, expected volatility of 40%,
no dividend yield and a risk-free interest rate of 6.2%, except that the
assumed risk-free interest rate for Mr. Raso's options granted on November
14, 1997 is 5.8%.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR END FISCAL YEAR END ($)
--------------- -------------------
SHARES
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
---- ------------ ------------ --------------- -------------------
Stephen L. Guillard..... -- -- 26,667/108,333 213,336/852,914
Damian N. Dell'Anno..... -- -- 16,667/60,333 133,336/475,914
Bruce J. Beardsley...... -- -- 13,333/43,667 154,663/441,087
William H. Stephan...... -- -- 13,333/42,667 154,663/433,337
Steven V. Raso.......... -- -- 6,667/31,333 53,336/219,404
COMPOSITION OF THE BOARD OF DIRECTORS
The Board of Directors of the Issuer consists of seven members, including
four directors from III. Directors of the Issuer are elected annually by the
stockholders to serve during the ensuing year or until their respective
successors are duly elected and qualified.
COMMITTEES OF THE BOARD OF DIRECTORS
The Issuer has an Audit Committee and a Compensation Committee. The duties
of the Audit Committee include recommending to the Board of Directors the
selection of independent accountants, reviewing the activities and reports of
the Issuer's independent accountants and reviewing the internal accounting
controls of the Issuer. The duties of the Compensation Committee include
establishing salaries, incentives and other forms of compensation for the
Issuer's directors and officers and recommending policies relating to the
Issuer's benefit plans.
101
COMPENSATION OF DIRECTORS
The Issuer does not pay any compensation to its directors for their service
to the Issuer in such capacity.
LIMITATION ON DIRECTORS' LIABILITY
The Issuer has included in its Certificate of Incorporation provisions to
eliminate the rights of the Issuer and its stockholders (through stockholders'
derivative suits on behalf of the Issuer) to recover monetary damages from a
director resulting from breaches of fiduciary duty (including breaches
resulting from grossly negligent behavior). However, this provision does not
eliminate liability for breaches of the duty of loyalty, acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law, violations under Section 174 of the Delaware General Corporation Law
(the "DGCL") concerning the unlawful payment of dividends or stock redemptions
or repurchases or for any transaction from which the director derived an
improper personal benefit. These provisions will also not limit the liability
of the Issuer's directors under federal securities laws. The Issuer believes
that these provisions are necessary to attract and retain qualified persons as
directors and officers.
EMPLOYMENT AGREEMENTS
The Issuer has entered into employment agreements with Messrs. Guillard,
Dell'Anno, Stephan, Beardsley and Raso (collectively, the "Employment
Agreements"). Under the terms of the Employment Agreements, Mr. Guillard
serves as President and Chief Executive Officer of the Issuer and receives a
minimum base salary payable at an annual rate of $345,000, Mr. Dell'Anno
serves as Executive Vice President and Chief Operating Officer of the Issuer
and receives a minimum base salary payable at an annual rate of $225,000, Mr.
Stephan serves as Senior Vice President and Chief Financial Officer of the
Issuer and receives a minimum base salary payable at an annual rate of
$190,000, Mr. Beardsley serves as Senior Vice President of Acquisitions of the
Issuer and receives a minimum base salary payable at an annual rate of
$200,000 and Mr. Raso serves as Senior Vice President of Operations of the
Issuer and receives a minimum base salary payable at an annual rate of
$140,000. The salaries of Messrs. Guillard, Dell'Anno, Stephan, Beardsley and
Raso will be increased to $375,000, $240,000, $200,000, $215,000 and $150,000,
respectively, effective April 1, 1999. Under the terms of these Employment
Agreements, the salaries of each officer will be subject to further adjustment
at the discretion of the Compensation Committee of the Board of Directors of
the Issuer.
The Employment Agreements also provide (i) for an annual bonus to be paid to
Messrs. Guillard, Dell'Anno, Stephan, Beardsley and Raso, part of which will
be based upon achievement of specific performance targets and part of which
will be discretionary, in maximum amounts of 120% of base salary in the case
of Mr. Guillard, 96% of base salary in the case of Mr. Dell'Anno and 78% of
base salary in the cases of Messrs. Stephan, Beardsley and Raso, and (ii) that
upon termination of employment prior to an initial public offering, the Issuer
will have certain rights to call from such officers shares of Harborside
Common Stock owned by such officers (including shares underlying then-
exercisable stock options), and such officers will have certain rights to put
such shares to an affiliate of Investcorp (subject to a right of first refusal
in favor of the Issuer).
Each officer has the right to terminate his Employment Agreement on 30 days
notice. The Issuer has the right to terminate an Employment Agreement without
obligation for severance only for Good Cause (as defined in the Employment
Agreements). The Employment Agreements provide for severance benefits to be
paid in the event an officer's employment is terminated if such termination
is, in the case of termination by the Issuer, without Good Cause, or, in the
case of termination by an officer, for Good Reason (as defined in the
Employment Agreements). If the Issuer terminates the employment of an officer
without Good Cause or the officer terminates his employment for Good
102
Reason, the officer will be entitled to receive severance benefits which will
include (i) the vesting of the pro rata portion of stock options subject to
vesting in the then current year attributable to the part of the year that the
officer was employed, if the applicable performance targets are met, (ii) the
ability to exercise vested stock options for the period ending on the earlier
of the date that is 180 days from the date his employment is terminated or the
specific expiration date stated in the options, and (iii) in the case of Mr.
Guillard, for the period ending 24 months after termination, and in the cases
of Messrs. Dell'Anno, Stephan, Beardsley and Raso, for the period ending 12
months after termination, payment of the officer's compensation at the rate
most recently in effect; subject to such officer's compliance with
noncompetition and nonsolicitation covenants for such 12 or 24 month period,
as applicable.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective September 15, 1995, Harborside established a Supplemental
Executive Retirement Plan ("SERP") to provide benefits for key employees of
Harborside. Participants may defer up to 25% of their salary and bonus
compensation by making contributions to the SERP. Amounts deferred by the
participant are credited to his or her account and are always fully vested.
Harborside matches 50% of amounts contributed until 10% of base salary has
been contributed. Matching contributions made by Harborside become vested as
of January 1 of the second year following the end of the plan year for which
contributions were credited, provided the employee is still employed with
Harborside on that date. In addition, participants will be fully vested in
such matching contribution amounts in the case of death or permanent
disability or at the discretion of Harborside. Participants are eligible to
receive benefits distributions upon retirement or in certain pre-designated
years. Participants may not receive distributions prior to a pre-designated
year, except in the case of termination, death or disability or demonstrated
financial hardship. Only amounts contributed by the employee may be
distributed because of financial hardship. Although amounts deferred and
Company matching contributions are deposited in a "rabbi trust," they are
subject to risk of loss. If Harborside becomes insolvent, the rights of
participants in the SERP would be those of an unsecured general creditor of
Harborside.
STOCK INCENTIVE PLAN
Immediately following the effective time of the Merger (the "Effective
Time"), the Issuer adopted the Harborside Healthcare Corporation Stock
Incentive Plan (the "Stock Option Plan"). 806,815 shares were initially made
available to be awarded under the Stock Option Plan, representing
approximately 10% of the shares of common stock of Harborside outstanding
immediately after the Effective Time, determined after giving effect to the
exercise of the options issued or issuable under the Stock Option Plan.
Options to purchase approximately 7.7% of such shares (determined on such
basis) were granted to members of the Issuer's management upon consummation of
the Merger. Options for the remaining approximately 2.3% of the shares of
capital stock of the Issuer (determined on such basis) have been reserved for
grant to current or future officers and employees of the Issuer. Messrs.
Guillard, Dell'Anno, Stephan, Beardsley and Raso received seven-year options
to purchase 2.06%, 1.34%, .93%, .93% and .65%, respectively, of the shares of
common stock of the Issuer outstanding immediately after the Effective Time,
determined after giving effect to the exercise of the options issued or
issuable under the Stock Option Plan, at a price of $25.00 per share.
The Stock Option Plan is administered by the Issuer's Board of Directors.
The Board designates which employees of the Issuer are eligible to receive
awards under the Stock Option Plan, and the amount, timing and other terms and
conditions applicable to such awards. Future options will be exercisable in
accordance with the terms established by the Board and will expire on the date
determined by the Board, which will not be later than 30 days after the
seventh anniversary of the grant date. An optionee will have certain rights to
put to the Issuer, and the Issuer will have certain rights to call from the
optionee, vested stock options issued to the optionee under the Stock Option
Plan upon termination of the optionee's employment with the Issuer prior to an
initial public offering.
103
PRINCIPAL SHAREHOLDERS
The Issuer is authorized to issue shares of five classes of common stock,
each with a par value of $0.01 (these five classes are sometimes referred to
collectively as the "Harborside Stock"), consisting of Class A Common Stock
("Harborside Class A Common Stock"), Class B Common Stock ("Harborside Class B
Common Stock"), Class C Common Stock ("Harborside Class C Common Stock"),
Class D Common Stock ("Harborside Class D Common Stock") and Common Stock
("Common Stock"). Harborside Class A Common Stock, Harborside Class D Common
Stock and Common Stock are the only classes of the Issuer's common stock that
have the power to vote. Holders of Harborside Class B Common Stock and
Harborside Class C Common Stock do not have any voting rights, except that the
holders of Harborside Class B Common Stock and Harborside Class C Common Stock
have the right to vote as a class to the extent required under the laws of the
State of Delaware.
As of September 1, 1998, there were 661,332 shares of Harborside Class A
Common Stock, 20,000 shares of Harborside Class D Common Stock and no shares
of "Common Stock" outstanding. Holders of shares of Harborside Class A Common
Stock and Common Stock of the Issuer are entitled to one vote per share on all
matters as to which stockholders may be entitled to vote pursuant to the DGCL.
Holders of Harborside Class D Common Stock as of the Effective Time are
entitled to 330 votes per share on all matters as to which stockholders may be
entitled to vote pursuant to the DGCL.
As a result of the consummation of the Merger, the New Investors
beneficially own all of the outstanding Harborside Class D Common Stock,
constituting approximately 91% of the outstanding voting stock of the Issuer,
and pre-Merger stockholders, including certain members of management,
beneficially own all of the outstanding Harborside Class A Common Stock,
constituting approximately 9% of the outstanding voting stock of the Issuer.
In addition, the New Investors own 5,940,000 shares of Harborside Class B
Common Stock and 640,000 shares of Harborside Class C Common Stock. See
"Description of Capital Stock."
104
The following table sets forth certain information regarding the beneficial
ownership of the voting stock of the Issuer as of September 1, 1998. The table
sets forth, as of that date, (i) each person known by the Issuer to be the
beneficial owner of more than 5% of any class of voting stock of the Issuer,
(ii) each person who was a director of the Issuer or a named executive officer
of the Issuer who beneficially owned shares of voting stock of the Issuer and
(iii) all directors of the Issuer and executive officers of the Issuer as a
group. None of the Issuer's directors or officers own shares of Harborside
Class D Common Stock. Unless otherwise indicated, each of the stockholders
shown in the table below has sole voting and investment power with respect to
the shares beneficially owned.
HARBORSIDE CLASS A COMMON STOCK
(9% OF VOTING POWER)
NUMBER OF NUMBER OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES(2) OPTIONS(3) TOTAL CLASS(4)
- --------------------------------------- --------- ---------- ------- ----------
George Krupp (5)....................... 194,162 -- 194,162 29.4
Douglas Krupp (5)...................... 194,163 -- 194,163 29.4
Stephen L. Guillard.................... 177,688 -- 177,688 26.9
Damian N. Dell'Anno.................... 47,563 10,560 58,123 8.7
Bruce J. Beardsley..................... -- 39,162 39,162 5.6
William H. Stephan..................... 400 38,332 38,732 5.5
Steven V. Raso......................... -- 21,940 21,940 3.2
All directors and executive officers as
a group, including certain of the
persons named above (10 persons)...... 225,561 109,994 335,555 43.5
HARBORSIDE CLASS D COMMON STOCK
(91% OF VOTING POWER)
NUMBER OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES (2) CLASS
- ------------------------------------ ---------- ----------
INVESTCORP S.A. (6)(7).................................... 20,000 100.0
SIPCO Limited (8)......................................... 20,000 100.0
CIP Limited (9)(10)....................................... 18,400 92.0
Ballet Limited (9)(10).................................... 1,840 9.2
Denary Limited (9)(10).................................... 1,840 9.2
Gleam Limited (9)(10)..................................... 1,840 9.2
Highlands Limited (9)(10)................................. 1,840 9.2
Nobel Limited (9)(10)..................................... 1,840 9.2
Outrigger Limited (9)(10)................................. 1,840 9.2
Quill Limited (9)(10)..................................... 1,840 9.2
Radial Limited (9)(10).................................... 1,840 9.2
Shoreline Limited (9)(10)................................. 1,840 9.2
Zinnia Limited (9)(10).................................... 1,840 9.2
INVESTCORP Investment Equity Limited (7).................. 1,600 8.0
- --------
(1) The address of each person listed in the table as a holder of Harborside
Class A Common Stock is c/o Harborside Healthcare Corporation, 470
Atlantic Avenue, Boston, Massachusetts 02210.
(2) As used in the table above, a beneficial owner of a security includes any
person who, directly or indirectly, through contract, arrangement,
understanding, relationship, or otherwise has or shares (i) the power to
vote, or direct the voting of, such security or (ii) investment power
which includes the power to dispose, or to direct the disposition of,
such security.
105
(3) Includes shares of stock that are subject to options exercisable within
60 days of September 1, 1998. The options granted upon consummation of
the Merger pursuant to the Issuer's new Stock Option Plan are not
included in this table because they are not exercisable within 60 days of
September 1, 1998.
(4) Reflects the percentage such shares and options represent of the number
of outstanding shares of such class of the Issuer's common stock after
giving effect to the exercise of options owned by such person or persons.
(5) The shares beneficially owned by George Krupp are owned of record by The
George Krupp 1994 Family Trust ("GKFT"). The shares beneficially owned by
Douglas Krupp are owned of record by The Douglas Krupp 1994 Family Trust
("DKFT"). The trustees of both GKFT and DKFT are Lawrence I. Silverstein,
Paul Krupp and M. Gordon Ehrlich (the "Trustees"). The Trustees share
control over the power to dispose of the assets of GKFT and DKFT and thus
each may be deemed to beneficially own the shares held by GKFT and DKFT;
however, each of the Trustees disclaims beneficial ownership of all of
such shares.
(6) Investcorp does not directly own any stock in the Issuer. The number of
shares shown as owned by Investcorp includes all of the shares owned by
INVESTCORP Investment Equity Limited (see note (7) below). Investcorp
owns no stock in Ballet Limited, Denary Limited, Gleam Limited, Highlands
Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial Limited,
Shoreline Limited, Zinnia Limited, or in the beneficial owners of these
entities (see note (10) below). Investcorp may be deemed to share
beneficial ownership of the shares of voting stock held by these entities
because the entities have entered into revocable management services or
similar agreements with an affiliate of Investcorp, pursuant to which
each such entities has granted such affiliate the authority to direct the
voting and disposition of the Issuer voting stock owned by such entity
for so long as such agreement is in effect. Investcorp is a Luxembourg
corporation with its address at 37 rue Notre-Dame, Luxembourg.
(7) INVESTCORP Investment Equity Limited is a Cayman Islands corporation, and
a wholly-owned subsidiary of Investcorp, with its address at P.O. Box
1111, West Wind Building, George Town, Grand Cayman, Cayman Islands.
(8) SIPCO Limited may be deemed to control Investcorp through its ownership
of a majority of a company's stock that indirectly owns a majority of
Investcorp's shares. SIPCO Limited's address is P.O. Box 1111, West Wind
Building, George Town, Grand Cayman, Cayman Islands.
(9) CIP Limited ("CIP") owns no stock in the Issuer. CIP indirectly owns less
than 0.1% of the stock in each of Ballet Limited, Denary Limited, Gleam
Limited, Highlands Limited, Noble Limited, Outrigger Limited, Quill
Limited, Radial Limited, Shoreline Limited and Zinnia Limited (see note
(10) below). CIP may be deemed to share beneficial ownership of the
shares of voting stock of the Issuer held by such entities because CIP
acts as a director of such entities and the ultimate beneficial
stockholders of each of those entities have granted to CIP revocable
proxies in companies that own those entities' stock. None of the ultimate
beneficial owners of such entities beneficially owns individually more
than 5% of the Issuer's voting stock.
(10) Each of CIP Limited, Ballet Limited, Denary Limited, Gleam Limited,
Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited,
Radial Limited, Shoreline Limited and Zinnia Limited is a Cayman Islands
corporation with its address at P.O. Box 2197, West Wind Building, George
Town, Grand Cayman, Cayman Islands.
106
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At the Effective Time, the Issuer received $165.0 million of common equity
capital provided by the New Investors. An affiliate of Investcorp was paid by
the Issuer a fee of $6.5 million for services rendered outside of the United
States in connection with the raising of the equity capital from the
international investors. In connection with the Merger, the Issuer paid III,
an affiliate of the Issuer and of Investcorp, a loan finance advisory fee of
$4.0 million and Invifin S.A., an affiliate of Investcorp, a fee of $1.5
million for providing a standby commitment to fund the $99.5 million of Old
Notes. In connection with the closing of the Merger, the Issuer entered into
an agreement for management advisory and consulting services for a five-year
term with III, pursuant to which the Issuer prepaid III $6.0 million upon such
closing.
Pursuant to the Merger Agreement, at the Effective Time the Issuer entered
into a master rights agreement for the benefit of The Berkshire Companies
Limited Partnership, a Massachusetts limited partnership that was affiliated
with Harborside prior to the Effective Time ("BCLP"), certain of its
affiliates (BCLP and such affiliates collectively, the "Berkshire
Stockholders") and the New Investors, which agreement provides, among other
things, for the following: (i) the New Investors have demand and "piggyback"
registration rights; (ii) the Berkshire Stockholders have "piggyback"
registration rights entitling them (subject to certain limitations) to
participate pro rata in Company registration statements filed with the
Commission; (iii) unless otherwise agreed by the New Investors holding voting
common stock and the Berkshire Stockholders, if any new equity securities
(subject to certain exceptions) are to be issued by the Issuer prior to an
initial public offering by the Issuer at a price below fair market value, as
determined in good faith by the Board of Directors of the Issuer, the Issuer
will give all holders of the then outstanding common stock (not including
stock options) the right to participate pro rata in such equity financing; and
(iv) the Berkshire Stockholders are entitled to receive periodic information
concerning the Issuer (subject to certain limitations). The terms of the
master rights agreement may be modified or terminated by agreement of the
Issuer, the New Investors and the Berkshire Stockholders.
Pursuant to the Merger Agreement, the Issuer has agreed that for six years
after the Effective Time, it will indemnify all current and former directors,
officers, employees and agents of the Issuer and its subsidiaries and will,
subject to certain limitations, maintain for six years a directors' and
officers' insurance and indemnification policy containing terms and conditions
which are not less advantageous than the policy in effect as of the date of
the Merger Agreement.
Harborside entered into a Non-Compete Agreement, dated as of April 15, 1998,
with each of Douglas Krupp, a director of Harborside prior to the Merger and a
beneficial stockholder of the Issuer, and George Krupp, a beneficial
stockholder of the Issuer, pursuant to which each such individual has agreed
for a one-year period commencing at the Effective Time not to engage in
certain business activities or to own certain equity interests in any person
or entity that engages in such business activities. Pursuant to such
agreements, Harborside paid $250,000 to each of such individuals at the
Effective Time.
In 1995, Mr. Guillard subscribed for equity interests in certain of
Harborside's predecessors. The aggregate subscription price of $438,000, equal
to the fair market value of such equity interests as of December 31, 1995, was
paid by Mr. Guillard in 1996 with the proceeds of a special bonus equal to
such purchase price. To pay taxes due with respect to the purchase of equity
interests and this bonus, Mr. Guillard received a loan from Harborside,
evidenced by a note maturing April 15, 2001, and bearing interest at 7.0% per
annum. In connection with the IPO Reorganization, such equity interests and
Messrs. Guillard's and Dell'Anno's interests in Harborside Healthcare Limited
Partnership were exchanged for an aggregate of 307,724 shares of Harborside
Common Stock. Under his prior employment agreement, Mr. Dell'Anno also
received an additional 18,037 shares of Harborside
107
Common Stock pursuant to a bonus payment in connection with the IPO (with a
value of $212,000). Mr. Dell'Anno also received a loan from Harborside at an
interest rate of prime plus 1% to pay income tax liabilities that resulted
from such bonus payment.
In connection with the IPO, Harborside entered into a Reorganization
Agreement (the "Reorganization Agreement") with certain individuals, including
but not limited to Messrs. Guillard and Dell'Anno (the "Contributors"),
pursuant to which the Contributors received 4,400,000 shares of Harborside
Common Stock in exchange for their ownership interests in Harborside's
predecessors. The reorganization contemplated by the Reorganization Agreement
was completed immediately prior to completion of the IPO.
Harborside adopted an Executive Long-Term Incentive Plan (the "Executive
Plan") effective July 1, 1995. Eligible participants, consisting of
Harborside's department heads and regional directors, were entitled to receive
payment upon an initial public offering or sale of Harborside above a baseline
valuation of $23,000,000 within two years of the effective date of the plan.
The Executive Plan terminated upon completion of the IPO. The payments to
Messrs. Beardsley, Stephan and Raso totaled $185,250, $150,250 and $75,000,
respectively.
Pursuant to certain Change In Control Agreements dated as of January 15,
1998 between Harborside and each of Messrs. Guillard, Dell'Anno, Stephan,
Beardsley and Raso, which were entered into prior to the execution of the
Merger Agreement, at the Effective Time, each of such officers received a
payment equal to his annual salary, except for Mr. Guillard who received a
payment equal to 1.5 times his annual salary. The amounts of such payments
were as follows: Mr. Guillard, $517,500; Mr. Dell'Anno, $225,000; Mr. Stephan,
$190,000; Mr. Beardsley, $200,000; and Mr. Raso, $140,000. In addition,
pursuant to these agreements, all outstanding loans made by Harborside to such
officers for the purchase of stock were forgiven as of the Effective Time. The
forgiven loans were to Messrs. Guillard and Dell'Anno and had a remaining
balance of $229,350 and $112,520, respectively, as of the Effective Time. The
purpose of the Change In Control Agreements was to induce such officers to
remain in the employ of Harborside and to assure them of fair severance should
their employment terminate in specified circumstances following a change in
control of Harborside. Such officers were entitled to the payments and loan
forgiveness described above because the Merger constituted a "change in
control" under the terms of the Change In Control Agreements. The Change In
Control Agreements also provided for certain payments if the employment with
Harborside of any of such officers is terminated by Harborside for any reason
other than cause within 12 months following a change in control. The Change In
Control Agreements were terminated by mutual agreement of the parties as of
the Effective Time, except that Harborside complied with its obligations under
the provisions described in the first sentence of this paragraph.
108
THE TRANSACTIONS
OVERVIEW
On April 15, 1998, Harborside entered into the Merger Agreement with
MergerCo, an entity organized for the sole purpose of effecting the Merger on
behalf of Investcorp and the New Investors. On August 11, 1998, pursuant to
the Merger Agreement, MergerCo was merged with and into Harborside, with
Harborside as the surviving corporation. As a result of the Merger:
. The New Investors became the owners of approximately 91% of the post-
Merger common stock of Harborside.
. Certain Harborside stockholders, including certain members of senior
management, retained shares representing approximately 9% of the post-
Merger common stock of Harborside.
. Each other share of Harborside common stock was converted into $25.00 in
cash, representing an aggregate of approximately $183.9 million in cash
payments to Harborside stockholders.
. In general, holders of outstanding Harborside stock options had the
right to retain their options or to have their options converted into
cash at $25.00 per underlying share less the applicable option exercise
price and withholding taxes. Certain members of Harborside senior
management retained a portion of their stock options, representing
options to purchase 109,994 shares in the aggregate. All other options
were converted into cash, resulting in an aggregate of approximately
$7.9 million in cash payments to holders of outstanding Harborside stock
options.
THE MERGER
On August 11, 1998, pursuant to the terms of the Merger Agreement, each
outstanding share of Harborside's common stock, par value $.01 per share (the
"Harborside Common Stock"), was converted, at the election of the holder
thereof, into either (a) the right to receive $25.00 in cash or (b) the right
to retain one share (a "Non-cash Election Share") of Harborside Common Stock
which, upon consummation of the Merger, was denominated as Harborside Class A
Common Stock and has rights, powers, privileges and restrictions which differ
in some respects from those of the pre-Merger Harborside Common Stock, except
that (i) as described in greater detail below, all stockholders who elected to
retain Harborside Common Stock experienced proration of such shares, resulting
in their retaining only a portion of the shares of Harborside Common Stock
they elected to retain and receiving $25.00 per share in cash for each of
their other shares of Harborside Common Stock, (ii) 177,688, 47,563 and 400
shares of Harborside Common Stock held by Messrs. Stephen L. Guillard, Damian
Dell'Anno and William H. Stephan (collectively, the "Senior Management
Stockholders"), respectively, were not subject to the election described above
and instead were converted into the right to retain the same number of shares
of Harborside Common Stock (the "Management Rollover Shares") which, upon
consummation of the Merger, was denominated as Harborside Class A Common
Stock, (iii) each other share of Harborside Common Stock held by the Senior
Management Stockholders, constituting an aggregate of 106,663 shares of
Harborside Common Stock, and each share of Harborside Common Stock held by
certain other specified officers of Harborside, constituting an aggregate of
3,846 shares of Harborside Common Stock, was not subject to the election
described above and instead was converted into the right to receive $25.00 in
cash (which was equal to $2.1 million for Mr. Guillard, $.5 million for Mr.
Dell'Anno, $.1 million for Mr. Stephan and $.1 million for such other
specified officers in the aggregate), and (iv) shares of Harborside Common
Stock held by Harborside, its subsidiaries, MergerCo or any of its affiliates
were canceled and retired. No holders of shares of Harborside Common Stock
perfected appraisal rights in accordance with Delaware law in connection with
the Merger.
109
In addition, pursuant to the terms of the Merger Agreement, as of the
Effective Time, the shares of MergerCo's Class B Stock, Class C Stock and
Class D Stock issued and outstanding immediately prior to the Effective Time,
all of which were owned by the New Investors, were converted into an equal
number of shares of Harborside Class B Common Stock, Harborside Class C Common
Stock and Harborside Class D Common Stock, respectively.
Pursuant to the terms of the Merger Agreement, the number of shares of
Harborside Common Stock (other than Management Rollover Shares) retained by
pre-Merger stockholders of Harborside was required to be 435,681 (the "Non-
cash Election Number"), which represented 6% of the total number of shares of
all classes of the Issuer's common stock issued and outstanding immediately
after giving effect to the Merger. Because the Berkshire Stockholders
committed prior to the Merger to elect to retain a number of shares of
Harborside Common Stock equal to the Non-cash Election Number, all other
stockholders who did not elect to retain Harborside Common Stock received
$25.00 in cash for each share held by such stockholders, and all stockholders
who elected to retain Harborside Common Stock experienced proration of such
shares, resulting in their retaining only a portion of the shares of
Harborside Common Stock they elected to retain and receiving $25.00 per share
in cash for each of their other shares of Harborside Common Stock. The shares
of Harborside Common Stock retained by pre-Merger Harborside stockholders
(including the Management Rollover Shares) constituted approximately 9% of the
outstanding common stock and approximately 9% of the voting power of the
Issuer immediately following the Merger. The shares of Harborside Stock owned
by the New Investors immediately following the Merger constituted the
remaining approximately 91% of the outstanding common stock and approximately
91% of the voting power of the Issuer immediately following the Merger.
In addition, pursuant to the Merger Agreement, each option to purchase
shares of Harborside Common Stock (each such option, a "Company Stock Option"
and, collectively, the "Company Stock Options") issued and outstanding
immediately prior to the Effective Time (whether or not then vested or
exercisable) was converted, at the election of the holder thereof and subject
to the terms and conditions described in the Merger Agreement, into (i) the
right to retain a fully vested and immediately exercisable option for all or
any portion (the "Elected Portion") of the number of shares of Harborside
Common Stock subject to such Company Stock Option immediately prior to the
Effective Time at an exercise price per share equal to the exercise price of
such Company Stock Option immediately prior to the Effective Time and/or (ii)
the right to receive an amount in cash equal to (a) the excess, if any, of
$25.00 over the per share exercise price of such Company Stock Option,
multiplied by (b) the number of shares of Harborside Common Stock which were
subject to such Company Stock Option immediately prior to the Effective Time
but which were not part of the Elected Portion thereof (if any), reduced by
(c) any applicable withholding taxes. The cash amounts that Messrs. Guillard,
Dell'Anno, Beardsley, Stephan and Raso elected to receive in respect of their
Company Stock Options, after retaining certain numbers of Company Stock
Options upon which the grant to them of new options under the Stock Option
Plan was contingent, were $1.9 million, $.9 million, $.4 million, $.4 million
and $.3 million, respectively.
RECAPITALIZATION FINANCINGS
Prior to the Effective Time, MergerCo received common equity contributions
of $165.0 million from the New Investors at a price of $25.00 per share, and
issued $99.5 million in gross proceeds of Old Notes and $40.0 million in gross
proceeds of Old Preferred Stock. At the Effective Time, the Issuer succeeded
to the obligations of MergerCo with respect to the Old Notes and the Old
Preferred Stock and entered into the $250.0 million New Credit Facility. These
financing arrangements are in addition to Harborside's capital lease
obligations and mortgage loans which existed prior to the Merger. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." The proceeds of the offering of
Old Notes and Old Preferred Stock and of
110
the new common stock issuances were used to finance the conversion into cash,
in the Merger, of approximately 91% of the Harborside Common Stock outstanding
prior to the Merger, to refinance certain existing indebtedness of Harborside
and to pay the fees and expenses associated with the Recapitalization. Funds
available under the New Credit Facility, together with cash flow from
operations, are being used to finance working capital, meet debt service and
capital expenditure requirements and for general corporate purposes. It is
anticipated that these funds will also be used to finance acquisitions and
lease real estate. In connection with the Merger, Harborside received an
opinion of a reputable expert firm confirming the solvency of Harborside
(after giving effect to the Recapitalization).
111
DESCRIPTION OF CAPITAL STOCK
The Issuer is authorized to issue 500,000 shares of preferred stock with a
par value of $.01 per share (the "Preferred Stock") and 19,000,000 shares
comprised of five classes of common stock, each with a par value of $.01 per
share (these five classes of common stock are sometimes referred to
collectively as the "Harborside Stock"). The Harborside Stock consists of
Harborside Class A Common Stock, Harborside Class B Common Stock, Harborside
Class C Common Stock, Harborside Class D Common Stock and Common Stock.
The shares of Old Preferred Stock issued in the Old Securities Offering are
the only shares of Preferred Stock that are outstanding. The Board of
Directors of the Issuer is authorized, without further action by the
stockholders, but subject to the limitations set forth in the Certificate of
Designation, to provide for the issue of additional shares of Preferred Stock,
in one or more series, and to fix for each such series such voting powers,
full or limited, and such designations, preferences and relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof as shall be stated and expressed in the
resolution or resolutions adopted by the Board of Directors of the Issuer
providing for the issue of such series and as may be permitted by the DGCL.
The numbers of authorized and outstanding shares for each of the five
classes of Harborside Stock are as follows:
AUTHORIZED OUTSTANDING
TITLE SHARES SHARES
----- ---------- -----------
Harborside Class A Common Stock.......................... 1,200,000 661,332
Harborside Class B Common Stock.......................... 6,700,000 5,940,000
Harborside Class C Common Stock.......................... 1,580,000 640,000
Harborside Class D Common Stock.......................... 20,000 20,000
Common Stock............................................. 9,500,000 --
---------- ---------
Total.................................................. 19,000,000 7,261,332
========== =========
Holders of shares of Harborside Class A Common Stock and Common Stock are
entitled to one vote per share on all matters as to which stockholders may be
entitled to vote pursuant to the DGCL. Holders of shares of Harborside Class D
Common Stock are entitled to 330 votes per share on all matters as to which
stockholders may be entitled to vote pursuant to the DGCL. This number of
votes per share results in holders of Harborside Class D Common Stock being
entitled in the aggregate to a number of votes equal to the total number of
outstanding shares of Harborside Class B Common Stock, Harborside Class C
Common Stock and Harborside Class D Common Stock. Holders of Harborside Class
B Common Stock or Harborside Class C Common Stock do not have any voting
rights, except that the holders of the Harborside Class B Common Stock and
Harborside Class C Common Stock have the right to vote as a class to the
extent required under the laws of the State of Delaware.
Upon the occurrence at any future date of a sale of 100% of the outstanding
equity securities or substantially all of the assets of the Issuer, a merger
as a result of which the ownership of the Harborside Stock is changed to the
extent of 100% or a public offering of any equity securities of the Issuer,
each share of Harborside Class A Common Stock, Harborside Class B Common
Stock, Harborside Class C Common Stock and Harborside Class D Common Stock
will convert into one share of Common Stock of the Issuer.
112
DESCRIPTION OF THE NEW CREDIT FACILITY
GENERAL
As part of the Recapitalization, immediately following the Effective Time,
the Issuer and certain of its subsidiaries, including all of the Guarantors
and certain of the Subsidiary Non-Guarantors (collectively the "Borrowers"),
entered into the New Credit Facility. The New Credit Facility is in an
aggregate principal amount of $250.0 million, available as follows: (i)
approximately $75.0 million available for the term of the facility on a
revolving basis; and (ii) approximately $175.0 million available initially on
a revolving basis, but under which loans outstanding on each anniversary of
the closing are converted to term loans. In addition, during the first four
years of the New Credit Facility, any or all of the full $250.0 million of
availability under the New Credit Facility may be used for synthetic lease
financings ("Synthetic Lease Financings"). The following is a summary
description of the principal terms of the New Credit Facility and is qualified
in its entirety by reference to the definitive agreements.
The obligations of the Borrowers under the New Credit Facility are joint and
several. Indebtedness under the New Credit Facility is collateralized by first
or second priority security interests in all of the capital stock of certain
of the Issuer's subsidiaries and a substantial portion of the personal and
real property of the Issuer and certain of its subsidiaries, in each case with
certain exceptions. One exception is that subsidiaries of the Issuer were not
required to grant such security interests if they were prohibited from doing
so by other financial arrangements. Such subsidiaries, together with any
subsidiaries that are not Borrowers, are restricted in certain respects,
including restrictions on the amount of intercompany loans to and investments
in such subsidiaries.
USE OF PROCEEDS
Provided that the Issuer and its subsidiaries meet certain financial tests
and comply with certain collateral requirements, proceeds of loans under the
New Credit Facility (the "Loans") may be used for acquisitions, for working
capital purposes, for capital expenditures and for general corporate purposes.
SYNTHETIC LEASE FINANCINGS
The New Credit Facility permits certain real property subject to a Synthetic
Lease Financing (including property acquired and constructed within four years
of the Closing Date, each a "Property") to be owned by HHC 1998-1 Trust, a
Delaware business trust (the "Lessor") established for the benefit of BTD
Harborside Inc., Morgan Stanley Senior Funding, Inc. and CSL Leasing, Inc.
(the "Investors"). Currently, there are no Properties subject to Synthetic
Lease Financing.
Pursuant to a master lease (the "Lease"), the Lessor will lease the
Properties to Harborside of Dayton Limited Partnership, a subsidiary of the
Issuer (the "Lessee"). The Lease is a triple net lease, and rent includes
basic rent payments sufficient to pay interest on the Loans outstanding to the
Lessor under the Synthetic Lease Financing (the "Synthetic Lease Loans") plus
an investor yield. The Lease terminates on the sixth anniversary of the
Closing Date (the "Maturity Date"). On the Maturity Date, the Lessee must pay,
as supplemental rent, for any Property consisting of improvements, an amount
equal to the maximum amount under SFAS No. 13 which permits the Lessee to
account for the Lease as an operating lease and, for any Property consisting
of land, 97% of the Property Cost (as defined below) for such Property (such
aggregate payment, the "Maximum Residual Guarantee Amount"). Prior to the
Maturity Date and provided no default exists, the Lessee will be able to
purchase any Property for the amount of Synthetic Lease Loans and other
amounts due under the operative agreements allocable to such Property (such
amount, the "Termination Value"). By written notice 12 months prior to the
Maturity Date, the Lessee will have the option (and, if the Termination Value
of all Properties at such time is less than 75% of the highest Termination
Value of all Properties at any prior time, will have the obligation) to
purchase all (but not less than all) of the Properties on the Maturity
113
Date. If the Lessee does not exercise the option to purchase the Properties,
it will be required to use its best efforts to market the Properties and to
consummate a sale of all Properties on or prior to the Maturity Date.
The Lessor is able to incur Synthetic Lease Loans consisting of loans from
the lenders under the New Credit Facility, in the amount of 95.25% of the
Property Cost. The remaining 4.75% of Property Costs are funded by
contributions from the Investors ("Investor Contributions"). Proceeds of the
Synthetic Lease Loans (other than Investor Contributions) are to be used to
finance a maximum of 95.25% of the Property Cost of each Property. These
Synthetic Lease Loans (excluding the Investor Contribution) will consist of
Tranche A Loans equal to the Maximum Residual Guarantee Amount (not to be less
than 87.66% of the aggregate Synthetic Lease Loan amount), with the remaining
loan amount consisting of Tranche B Loans. At the time the Synthetic Lease
Loans are incurred, the Investors are required to advance the Investor
Contribution equal to 4.75% of the Property Cost. Property Cost means the
costs and expenses (including ordinary and reasonable "hard" and "soft" costs)
incurred to acquire a Property and construct improvements on it. The Issuer
and certain of its subsidiaries guarantee all amounts owed by the Lessor with
respect to Tranche A Loans. If a default exists, this guaranty will also apply
to the amount of Tranche B Loans and Investor Contributions.
CONVERSION OF REVOLVING LOANS
The New Credit Facility consists of commitments of up to an aggregate of
$250.0 million, any of which may be used for Synthetic Lease Financings. On
each anniversary of the closing date of the New Credit Facility, all
outstanding Loans (other than those that have already been converted as
described in this paragraph on a previous anniversary) in excess of $75.0
million will be converted into term loans. This conversion to term loans will
be made first to any Synthetic Lease Loans, and then to any Loans otherwise
made under the New Credit Facility. All Loans so converted will mature on the
sixth anniversary of the closing date of the New Credit Facility.
INTEREST RATES
Interest accrues quarterly on the Loans with reference to the base rate (the
"Base Rate") plus the applicable interest margin. The Issuer may elect that
all or a portion of the Loans other than swing line loans (loans available on
same day notice) bear interest at the eurodollar rate (the "Eurodollar Rate")
plus the applicable interest margin. The Base Rate is defined as the higher of
(i) the federal funds rate, as published by the Federal Reserve Bank of New
York, plus .5%, (ii) the secondary market rate for three-month certificates of
deposit of money center banks, and (iii) the prime commercial lending rate of
The Chase Manhattan Bank ("Chase"). The Eurodollar Rate is defined as the rate
at which eurodollar deposits for one, two, three or six months or (if and when
available to all of the relevant lenders) nine or 12 months are offered to
Chase in the interbank eurodollar market. The applicable interest margin for
Base Rate Loans is initially 1.25% per quarter, and the applicable interest
margin for Eurodollar Loans is initially 2.25% per quarter. Overdue principal,
interest, fees and other amounts owing under the New Credit Facility bear
interest at a rate 2% over the rate otherwise applicable thereto. The interest
margins for the Loans will be subject to reduction from and after the date on
which financial statements are delivered in respect of the first four full
fiscal quarters after the Closing Date based on the leverage ratio of the
Issuer and its Consolidated Subsidiaries, provided that no default or event of
default exists.
MANDATORY AND OPTIONAL PREPAYMENT
Loans outstanding under the New Credit Facility are required to be prepaid,
subject to certain conditions and exceptions, with (i) 100% of the net
proceeds of any incurrence of indebtedness, subject to certain exceptions, by
the Issuer or its subsidiaries, (ii) 100% of the net proceeds of certain asset
dispositions, subject to certain re-investment rights, (iii) 50% of the net
proceeds from certain
114
equity issuances by the Issuer and its subsidiaries, subject to certain
exceptions and redemption rights, and (iv) commencing with the year ending
December 31, 1999, 50% of the excess cash flow (as such term is defined in the
New Credit Facility) of the Issuer and its subsidiaries on a consolidated
basis. The foregoing mandatory prepayments will be applied to the permanent
reduction of the commitments and outstanding amounts under the New Credit
Facility and/or, at the Issuer's option, to cash collateralize obligations
relating to Synthetic Lease Financings and/or repurchase Properties.
The New Credit Facility provides that the Issuer may optionally prepay Loans
in whole or in part without penalty, subject to minimum prepayments and
reimbursement of the lenders' breakage and redeployment costs in the case of
prepayment of Eurodollar Rate Loans.
FEES
The Issuer is required to pay the lenders, on a quarterly basis, a
commitment fee of .5% per annum on the average daily unused portion of the New
Credit Facility, payable quarterly in arrears. This commitment fee is subject
to reduction from and after the date on which financial statements are
delivered in respect of the first four fiscal quarters after the Closing Date
based on the leverage ratio of the Issuer and its Consolidated Subsidiaries,
provided that no default or event of default exists. The Issuer is also
required to pay a letter of credit fee in a percentage per annum equal to the
interest margin for Eurodollar Loans on the daily average amount available to
be drawn under each standby letter of credit and on the maximum face amount of
each commercial letter of credit.
COVENANTS
The New Credit Facility contains certain covenants and other requirements of
the Issuer and its subsidiaries. The affirmative covenants provide for, among
other things, mandatory reporting by the Issuer of financial and other
information to the agent and notice by the Issuer to the agent upon the
occurrence of certain events. The affirmative covenants also include standard
covenants requiring the Issuer to operate its business in an orderly manner
and consistent with past practice.
The New Credit Facility also contains certain negative covenants and
restrictions on actions by the Issuer including, without limitation,
restrictions on indebtedness, liens, guarantee obligations, mergers, asset
dispositions not in the ordinary course of business, investments, loans,
advances and acquisitions, dividends and other restricted junior payments,
transactions with affiliates, change in business conducted and prepayment and
amendments of subordinated indebtedness. The New Credit Facility requires the
Issuer to meet certain financial covenants including cash interest and
facility rent coverage ratios and maximum leverage ratios.
EVENTS OF DEFAULT
The New Credit Facility specifies certain customary events of default
including, without limitation, non-payment of principal, interest or fees,
violation of covenants, inaccuracy of representations and warranties in any
material respect, cross default to certain other indebtedness and agreements,
bankruptcy and insolvency events, material judgments and liabilities, ERISA
violations and change of control transactions.
The description of the New Credit Facility set forth above does not purport
to be complete and is qualified in its entirety by reference to the complete
text of the documents entered into in connection therewith.
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DESCRIPTION OF THE NEW NOTES
GENERAL
The New Notes will be issued pursuant to an indenture (the "Indenture") by
and among the Issuer, the Guarantors and United States Trust Company of New
York, as trustee (the "Trustee"). The terms of the New Notes include those
stated in the Indenture and those made part of the Indenture by reference to
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
New Notes are subject to all such terms, and Holders of New Notes are referred
to the Indenture and the Trust Indenture Act for a statement thereof. The
following summary of the material provisions of the Indenture does not purport
to be complete and is qualified in its entirety by reference to the Indenture,
including the definitions therein of certain terms used below. Copies of the
Indenture and Registration Rights Agreement are available as set forth below
under "--Additional Information." The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions." All
references in this Description of the New Notes to the "Issuer" are limited to
Harborside Healthcare Corporation and do not include any of the Issuer's
Subsidiaries.
The Indenture provides for the issuance of additional Notes having identical
terms and conditions to the New Notes offered hereby (the "Additional Notes"),
subject to compliance with the covenants contained in the Indenture. Any
Additional Notes will be part of the same issue as the New Notes offered
hereby and will vote on all matters with the New Notes offered hereby. For
purposes of this "Description of the New Notes," reference to the Notes
(including the New Notes) does not include Additional Notes.
All of the Issuer's Subsidiaries are Restricted Subsidiaries. However, under
certain circumstances, the Issuer will be able to designate current or future
Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not
be subject to the restrictive covenants set forth in the Indenture.
PRINCIPAL AND MATURITY OF AND INTEREST ON THE NEW NOTES
The New Notes will be general unsecured senior subordinated obligations of
the Issuer and will mature on August 1, 2008. The Old Notes were offered at a
substantial discount from their principal amount at maturity and the Accreted
Value of the Old Notes accretes from the Issue Date. See "Risk Factors--
Original Issue Discount Consequences" and "U.S. Federal Income Tax
Consequences." No interest will accrue on the New Notes until August 1, 2003
(the "Full Accretion Date"), but the Accreted Value will accrete (representing
the amortization of original issue discount), between the date of original
issuance and such date, on a semi-annual bond equivalent basis using a 360-day
year comprised of twelve 30-day months such that the Accreted Value shall be
equal to the full principal amount of the New Notes on the Full Accretion
Date. The initial Accreted Value per $1,000 principal amount of Old Notes was
$585.25 (representing the original purchase price for the Old Notes) and on
the date of issuance of the New Notes, the Accreted Value of the New Notes
will equal the Accreted Value of the Old Notes on such date. Beginning on
August 1, 2003, interest on the New Notes will accrue at the rate of 11% per
annum and will be payable in cash semi-annually, in arrears, on February 1 and
August 1, commencing on February 1, 2004, to holders of record on the
immediately preceding January 15 and July 15. Interest on the New Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the Full Accretion Date. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest on the New Notes will be payable at
the office or agency of the Issuer maintained for such purpose within the City
and State of New York or, at the option of the Issuer, payment of interest may
be made by check mailed to the Holders of the New Notes at their respective
addresses set forth in the register of Holders of Notes; provided that all
payments of principal, premium, if any, and interest with respect to any New
Notes, the Holders of which have given wire transfer instructions to the
Issuer, will be required to be made by wire transfer of immediately available
funds to the
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accounts specified by the Holders thereof. Until otherwise designated by the
Issuer, the Issuer's office or agency in New York will be the office of the
Trustee maintained for such purpose. The New Notes will be issued in
denominations of $1,000 of principal amount and integral multiples thereof.
SUBORDINATION
The Debt evidenced by the New Notes will be unsecured, will be subordinated
in right of payment, as set forth in the Indenture, to all existing and future
Senior Debt of the Issuer, will rank pari passu in right of payment with all
existing and future Pari Passu Debt of the Issuer and will be senior in right
of payment to all existing and future Subordinated Debt of the Issuer. The New
Notes will also be effectively subordinated to any Secured Debt of the Issuer
to the extent of the value of the assets securing such Debt. However, payment
from the money or the proceeds of Government Notes held in any defeasance
trust described under "--Legal Defeasance and Covenant Defeasance" below is
not subordinated to any Senior Debt or subject to the restrictions described
herein, so long as the payments into the defeasance trust were not prohibited
pursuant to the subordination provisions hereinafter described at the time
when so paid.
The indebtedness evidenced by a Note Guarantee will be unsecured, will be
subordinate in right of payment, as set forth in the Indenture, to all
existing and future Senior Debt of the applicable Guarantor, will rank pari
passu in right of payment with all existing and future Pari Passu Debt of such
Guarantor and will be senior in right of payment to all existing and future
Subordinated Debt of such Guarantor. Each Note Guarantee will also be
effectively subordinated to any Secured Debt of the applicable Guarantor to
the extent of the value of the assets securing such Debt.
At June 30, 1998, after giving pro forma effect to the Recapitalization (i)
the outstanding Senior Debt of the Issuer and the Guarantors would have been
$61.5 million, all of which would have been Secured Debt, (ii) the Issuer and
the Guarantors would have had no Pari Passu Debt or Subordinated Debt
outstanding, (iii) the total liabilities of the Subsidiaries of the Issuer
that are not Guarantors (collectively, the "Subsidiary Non-Guarantors")
(including trade payables and deferred taxes but excluding amounts owed to the
Issuer or any Guarantor) would have been $29.5 million and (iv) the Issuer and
its Subsidiaries would have had $177.4 million of consolidated Debt.
The Issuer conducts substantially all of its operations through its
Subsidiaries and consequently derives substantially all of its income through
its Subsidiaries. Claims of creditors of the Subsidiary Non-Guarantors,
including trade creditors, generally will have priority with respect to the
assets and earnings of such Subsidiary Non-Guarantors over the claims of
creditors of the Issuer, including the holders of the New Notes. The New
Notes, therefore, will be effectively subordinated to creditors (including
trade creditors) of the Subsidiary Non-Guarantors.
Upon any payment or distribution to creditors of the Issuer in a liquidation
or dissolution of the Issuer or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Issuer or its property, an
assignment for the benefit of creditors or any marshaling of the Issuer's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full, in cash or Cash Equivalents, of all Obligations due in
respect of such Senior Debt (including interest after the commencement of any
such proceeding at the rate specified in the applicable Senior Debt, whether
or not allowed or allowable in such proceeding) before the Holders of New
Notes will be entitled to receive any payment with respect to the New Notes,
and until all Obligations with respect to Senior Debt are paid in full, in
cash or Cash Equivalents, any payment or distribution to which the Holders of
New Notes would be entitled shall be made to the holders of Senior Debt
(except that Holders of New Notes may receive and retain (i) Permitted Junior
Securities and (ii) payments made from the trust described under "--Legal
Defeasance and Covenant Defeasance" so long as, on the date or dates the
respective amounts were paid into the trust, such payments were made with
respect to the New Notes without violating the subordination provisions
described herein). The term "payment" means,
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with respect to the New Notes, any payment, whether in cash or other assets or
property, of interest, principal (including redemption price and purchase
price), premium, Liquidated Damages or any other amount on, of or in respect
of the New Notes, any other acquisition of New Notes and any deposit into the
trust described under "--Legal Defeasance and Covenant Defeasance" below. The
verb "pay" has a correlative meaning.
The Issuer also may not make any payment or distribution upon or in respect
of the New Notes (except from the trust described under "--Legal Defeasance
and Covenant Defeasance") if (i) a default in the payment of any Obligations
with respect to Designated Senior Debt occurs and is continuing (a "payment
default"), or any other default on Designated Senior Debt occurs and the
maturity of such Designated Senior Debt is accelerated in accordance with its
terms or (ii) a default, other than a payment default, occurs and is
continuing with respect to Designated Senior Debt that permits holders of the
Designated Senior Debt as to which such default relates to accelerate its
maturity (a "non-payment default"), and, in the case of this clause (ii) only,
the Trustee receives a notice of such default (a "Payment Blockage Notice")
from the Issuer, a Representative for, or the holders of a majority of the
outstanding principal amount of, any issue of Designated Senior Debt. Payments
on the New Notes may and shall be resumed (a) in the case of a payment
default, upon the date on which such default is cured or waived and, in the
case of Designated Senior Debt that has been accelerated, such acceleration
has been rescinded, and (b) in case of a non-payment default, the earlier of
the date on which such non-payment default is cured or waived or 179 days
after the date on which the applicable Payment Blockage Notice is received,
unless the maturity of any Designated Senior Debt has been accelerated. No new
period of payment blockage may be commenced on account of any non-payment
default unless and until 360 days have elapsed since the initial effectiveness
of the immediately prior Payment Blockage Notice. No non-payment default that
existed or was continuing on the date of delivery of any Payment Blockage
Notice to the Trustee, shall be, or be made, the basis for a subsequent
Payment Blockage Notice unless such default shall have been cured or waived
for a period of not less than 90 days. Notwithstanding any other provision
hereof, during any 365 day period, there must be at least 180 days where there
is no Payment Blockage Notice in effect.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of New Notes may recover less ratably
than other creditors of the Issuer including holders of Senior Debt and trade
creditors. The Indenture limits, subject to certain financial tests and
exceptions, the amount of additional Debt, including Senior Debt, that the
Issuer and its Subsidiaries can incur. See "--Certain Covenants--Incurrence of
Debt and Issuance of Preferred Stock."
The Note Guarantees are subordinated on a similar basis. See "--Note
Guarantees."
NOTE GUARANTEES
The Issuer's payment obligations under each of the New Notes will be jointly
and severally guaranteed by the Guarantors. See Note G to Condensed
Consolidated Financial Statements for the six months ended June 30, 1998 for
certain financial information relating to the Guarantors. The Note Guarantee
of each Guarantor will be subordinated to the prior payment in full of all
Senior Debt of such Guarantor on substantially the same terms as the New Notes
are subordinated to Senior Debt of the Issuer. Each Note Guarantee will be
limited to an amount not to exceed the maximum amount that can be Guaranteed
by that Subsidiary without rendering the Note Guarantee, as it relates to such
Subsidiary, voidable under applicable law relating to fraudulent conveyance or
fraudulent transfer or similar laws affecting the rights of creditors
generally. In addition, the Indenture provides that the Note Guarantee by HRI
will be limited to an amount not to exceed, together with any Debt outstanding
under the New Credit Facility, 80% of the aggregate purchase price paid by HRI
(which purchase price was approximately $17 million) for the Harborside
Healthcare-Pawtuxet Village Nursing and Rehabilitation Center and the
Harborside Healthcare-Greenwood Nursing and Rehabilitation Center.
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The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person) another Person
(other than the Issuer or another Guarantor) unless (i) subject to the
provisions of the following paragraph, the Person formed by or surviving any
such consolidation or merger (if other than such Guarantor), assumes all the
obligations of such Guarantor under the Notes and the Indenture pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee; and (ii) immediately after giving effect to such transaction, no
Default or Event of Default exists. Notwithstanding the foregoing clause (ii),
(a) any Restricted Subsidiary may consolidate with, merge into or transfer all
or part of its properties and assets to any Guarantor and (b) any Guarantor
may merge with an Affiliate incorporated solely for the purpose of
reincorporating such Guarantor in another jurisdiction.
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the Capital Stock of any
Guarantor then held by the Issuer and its Restricted Subsidiaries, then such
Guarantor will be released and relieved of any obligations under its Note
Guarantee; provided that the Net Proceeds of such sale or other disposition
are applied in accordance with the applicable provisions of the Indenture, to
the extent required thereby. See "--Asset Sales." In addition, the Indenture
provides that any Guarantor that is designated as an Unrestricted Subsidiary
in accordance with the provisions of the Indenture will be released from its
Note Guarantee upon effectiveness of such designation.
OPTIONAL REDEMPTION
Except as described in the following paragraphs, the New Notes will not be
redeemable at the Issuer's option prior to August 1, 2003. Thereafter, the New
Notes will be subject to redemption at any time at the option of the Issuer,
in whole or in part, upon not less than 30 nor more than 60 days' notice, at
the redemption prices (expressed as percentages of principal amount) set forth
below plus accrued and unpaid interest thereon, if any, to the applicable
redemption date (subject to the right of Holders on the relevant record date
to receive interest due on the relevant interest payment date), if redeemed
during the twelve-month period beginning on August 1 of the years indicated
below:
YEAR PERCENTAGE
---- ----------
2003............................................. 105.500%
2004............................................. 103.667
2005............................................. 101.833
2006 and thereafter.............................. 100.000
In addition, at any time and from time to time, prior to August 1, 2001, the
Issuer may redeem up to 35% of the sum of (i) the aggregate principal amount
at maturity of Notes and (ii) the aggregate principal amount at maturity of
any Additional Notes at a redemption price of 111% of the Accreted Value
thereof (determined at the redemption date) to the redemption date, with the
net cash proceeds received by the Issuer of a public offering of common stock
of the Issuer, provided that at least 65% of the sum of (i) the aggregate
principal amount at maturity of Notes and (ii) the aggregate principal amount
at maturity of any Additional Notes remains outstanding immediately after the
occurrence of such redemption; and provided, further, that such redemption
shall occur within 60 days of the date of the closing of such public offering.
At any time on or prior to August 1, 2003, the New Notes may be redeemed as
a whole but not in part at the option of the Issuer upon the occurrence of a
Change of Control, upon not less than 30 nor more than 60 days' prior notice
(but in no event may any such redemption occur more than 90 days after the
occurrence of such Change of Control) mailed by first-class mail to each
Holder's registered address, at a redemption price equal to 100% of the
Accreted Value thereof (determined at the
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redemption date) plus the Applicable Premium and Liquidated Damages thereon,
if any, to the redemption date (subject to the right of Holders on the
relevant record date to receive interest due on the relevant interest payment
date).
"Applicable Premium" means, with respect to a New Note at any redemption
date prior to August 1, 2003, the greater of (i) 1.0% of the Accreted Value of
such New Note or (ii) the excess of (A) the present value at such time of the
redemption price of such New Note at August 1, 2003 (such redemption price
being set forth in the table above), computed using a discount rate equal to
the Treasury Rate plus 50 basis points, over (B) the Accreted Value of such
New Note on the redemption date.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H. 15(519)
which has become publicly available at least two Business Days prior to the
redemption date (or, if such Statistical Release is no longer published, any
publicly available source or similar market data)) most nearly equal to the
period from the redemption date to August 1, 2003, provided, however, that if
the period from the redemption date to August 1, 2003 is not equal to the
constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the
weekly average yields of United States Treasury securities for which such
yields are given, except that if the period from the redemption date to August
1, 2003 is less than one year, the weekly average yield on actually traded
United States Treasury securities adjusted to a constant maturity of one year
shall be used.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata basis
(among the Notes and any Additional Notes as one class), by lot or by such
method as the Trustee shall deem fair and appropriate; provided that no Notes
in a principal amount at maturity of $1,000 or less shall be redeemed in part.
Notices of redemption shall be mailed by first class mail at least 30 days,
but not more than 60 days before the redemption date to each Holder of Notes
to be redeemed at its registered address. Notices of redemption may not be
conditional. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in a principal amount at maturity
equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original Note. Notes called for
redemption become due on the date fixed for redemption. On and after the
redemption date, interest and Liquidated Damages, if any, cease to accrue on
Notes or portions of them called for redemption (or, if such redemption date
is prior to the Full Accretion Date, Accreted Value of the Notes will cease to
accrete).
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, unless all Notes have been
called for redemption pursuant to the provisions described above under the
caption "--Optional Redemption," each Holder of Notes will have the right to
require the Issuer to repurchase all or any part (equal to a principal amount
at maturity of $1,000 or an integral multiple thereof) of such Holder's Notes
pursuant to an offer described more fully in the Indenture (the "Change of
Control Offer") at an offer price in cash equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid interest and Liquidated
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Damages thereon, if any, to the date of purchase (or, if such Change of
Control Offer occurs prior to the Full Accretion Date, 101% of the Accreted
Value thereof on the date of repurchase plus Liquidated Damages thereon, if
any).
The Indenture provides that, prior to complying with the provisions of this
covenant, but in any event within 90 days following a Change of Control, the
Issuer will either repay all outstanding Senior Debt or obtain the requisite
consents, if any, under all agreements governing outstanding Senior Debt to
permit the repurchase of Notes required by this covenant, unless notice of
redemption of all Notes has then been given pursuant to the provisions
described under the caption "--Optional Redemption" above, and such redemption
is permitted by the terms of outstanding Senior Debt. The Issuer will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the date that payment is made pursuant to the Change of
Control Offer (the "Change of Control Payment Date").
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Issuer repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar
transaction. The Change of Control purchase feature is a result of
negotiations between the Issuer and the Placement Agents. Management has no
present intention to engage in a transaction involving a Change of Control,
although it is possible that the Issuer would decide to do so in the future.
Subject to the limitations discussed below, the Issuer could, in the future,
enter into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of Debt outstanding at such time
or otherwise affect the Issuer's capital structure or credit ratings.
The New Credit Facility prohibits the Issuer from purchasing any Notes, and
also provides that certain change of control events with respect to the Issuer
will constitute a default thereunder. Any future credit agreements or other
agreements relating to Senior Debt to which the Issuer becomes a party or that
may be entered into by Subsidiaries of the Issuer may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Issuer is prohibited from purchasing Notes, the Issuer could seek the
consent of its lenders to the purchase of Notes or could attempt to refinance
the borrowings that contain such prohibition. If the Issuer does not obtain
such a consent or repay such borrowings, the Issuer will remain prohibited
from purchasing Notes. In such case, the Issuer's failure to purchase tendered
Notes would constitute an Event of Default under the Indenture which would, in
turn, constitute a default under the New Credit Facility or any such future
credit or other agreement. In such circumstances, the subordination provisions
in the Indenture would restrict payments to the Holders of Notes.
The Issuer will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes and consummates a Change of Control
Offer.
"Change of Control" means the occurrence of any of the following events:
(i) prior to the first public offering of Voting Stock of the Issuer, the
Initial Control Group ceases to be the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of
more than 50% of the total voting power of the Voting Stock of the Issuer,
whether as a result of the issuance of securities of the Issuer, any
merger, consolidation, liquidation or dissolution of the Issuer, any direct
or indirect transfer of securities by the Initial Control Group or
otherwise (for purposes of this clause (i), the Initial Control Group shall
be deemed to beneficially own all Voting Stock of an entity (the "specified
entity") held by any other entity (the "parent entity") so long as the
Initial Control Group beneficially owns (as so defined),
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directly or indirectly, in the aggregate a majority of the voting power of
the Voting Stock of the parent entity);
(ii) following the first public offering of Voting Stock of the Issuer
(A) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more members of the Initial Control Group,
is or becomes the beneficial owner (as defined in clause (i) above),
directly or indirectly, of more than 40% of the total voting power of the
Voting Stock of the Issuer and (B) the Initial Control Group "beneficially
owns" (as defined in clause (i) above), directly or indirectly, in the
aggregate a lesser percentage of the total voting power of the Voting Stock
of the Issuer, than such other person and does not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the Board of Directors of the Issuer (for purposes
of this clause (ii), such other person shall be deemed to beneficially own
all Voting Stock of a specified entity held by a parent entity, if such
other person "beneficially owns" (as defined in clause (i) above), directly
or indirectly, in the aggregate more than 40% of the voting power of the
Voting Stock of such parent entity and the Initial Control Group
"beneficially owns" (as defined in clause (i) above), directly or
indirectly, in the aggregate a lesser percentage of the voting power of the
Voting Stock of such parent entity and does not have the right or ability
by voting power, contract or otherwise to elect or designate for election a
majority of the board of directors of such parent entity); or
(iii) at any time after the first public offering of common stock of the
Issuer, any person other than the Initial Control Group (or their
designated board members), (A)(I) nominates one or more individuals for
election to the Board of Directors of the Issuer and (II) solicits proxies,
authorizations or consents in connection therewith and (B) such number of
nominees elected to serve on the Board of Directors in such election and
all previous elections after the Closing Date represents a majority of the
Board of Directors of the Issuer following such election.
"Initial Control Group" means Investcorp, its Affiliates, any Person acting
in the capacity of an underwriter or initial purchaser in connection with a
public or private offering of the Issuer's Capital Stock, any employee benefit
plan of the Issuer or any of its Subsidiaries or any participant therein, a
trustee or other fiduciary holding securities under any such employee benefit
plan or any Permitted Transferee of any of the foregoing Persons.
"Permitted Transferee" means, with respect to any Person, (i) any other
Person, directly or indirectly, controlling or controlled by or under direct
or indirect common control with such specified Person, (ii) the spouse, former
spouse, lineal descendants, heirs, executors, administrators, testamentary
trustees, legatees or beneficiaries of any such Person, (iii) a trust, the
beneficiaries of which, or a corporation or partnership or limited liability
company, the stockholders, general or limited partners or members of which,
include only such Person or his or her spouse, lineal descendants or heirs, in
each case to whom such Person has transferred, or through which it holds, the
beneficial ownership of any securities of the Issuer and (iv) any investment
fund or investment entity that is a subsidiary of such Person or a Permitted
Transferee of such Person.
ASSET SALES
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Issuer
(or the Restricted Subsidiary, as the case may be) receives consideration at
the time of such Asset Sale at least equal to the fair market value of the
assets or Equity Interests issued or sold or otherwise disposed of and (ii) at
least 75% of the consideration therefor received by the Issuer or such
Restricted Subsidiary is in the form of cash or Cash Equivalents; provided
that the amount of (x) any liabilities (as shown on the Issuer's or such
Restricted Subsidiary's most recent balance sheet), of the Issuer or any
Restricted Subsidiary (other than liabilities that are by their terms
subordinated to the Notes or, in the case of liabilities of a
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Guarantor, the Note Guarantee of such Guarantor) that are assumed by the
transferee of any such assets, or from which the Issuer and its Restricted
Subsidiaries are released in writing by the creditor with respect thereto, and
(y) any securities, notes or other obligations received by the Issuer or any
such Restricted Subsidiary from such transferee that are converted by the
Issuer or such Restricted Subsidiary into cash (to the extent of the cash
received) within 180 days after receipt shall be deemed, in each case, to be
cash for purposes of this provision; provided, further, however, that this
clause (ii) shall not apply to any sale of Equity Interests of or other
Investments in Unrestricted Subsidiaries.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Issuer may apply such Net Proceeds, at its option, (a) to repay Senior
Debt, Debt of any Restricted Subsidiary or Pari Passu Debt (other than Debt
owed to the Issuer or a Subsidiary of the Issuer, and provided that if the
Issuer shall so reduce Pari Passu Debt, it will equally and ratably make an
Asset Sale Offer (in accordance with the procedures set forth below for an
Asset Sale Offer) to all Holders), (b) to invest in properties and assets that
will be used or useful in the business of the Issuer or any of its
Subsidiaries, or (c) to the acquisition of a controlling interest in another
business, the making of a capital expenditure or the acquisition of other
assets, in each case, that will be used or useful in the business of the
Issuer or any of its Restricted Subsidiaries; provided that if during such 360
day period the Issuer or a Restricted Subsidiary enters into a definitive
agreement committing it to apply such Net Proceeds in accordance with the
requirements of clause (b) or (c), such 360 day period will be extended for a
period not to exceed 180 days with respect to the amount of Net Proceeds so
committed until required to be paid in accordance with such agreement (or, if
earlier, until termination of such agreement). Any Net Proceeds from Asset
Sales that are not applied or invested as provided in the first sentence of
this paragraph will be deemed to constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $10 million, the Indenture
provides that the Issuer will (i) make an offer to all Holders of Notes, and
(ii) prepay, purchase or redeem (or make an offer to do so) any other Pari
Passu Debt of the Issuer in accordance with provisions requiring the Issuer to
prepay, purchase or redeem such Debt with the proceeds from any Asset Sales
(or offer to do so), pro rata in proportion to the respective principal
amounts (or accreted value, as applicable) of the Notes and such other Debt
required to be prepaid, purchased or redeemed or tendered for, in the case of
the Notes pursuant to such offer (an "Asset Sale Offer"), to purchase the
maximum principal amount of Notes that may be purchased out of such pro rata
portion of the Excess Proceeds, at an offer price in cash in an amount equal
to 100% of their principal amount plus accrued and unpaid interest and
Liquidated Damages (or, if prior to Full Accretion Date, 100% of the Accreted
Value thereof on the date of purchase, plus Liquidated Damages (if any) to the
date of purchase subject to the right of Holders of record on a record date to
receive interest on the relevant interest payment date, in accordance with the
procedures set forth in the Indenture). To the extent that the aggregate
principal amount (or, if prior to the Full Accretion Date, the aggregate
Accreted Value) of Notes and Pari Passu Debt tendered pursuant to an Asset
Sale Offer or other offer is less than the Excess Proceeds, the Issuer may use
any remaining Excess Proceeds for general corporate purposes. If the aggregate
principal amount (or Accreted Value, as the case may be) of Notes surrendered
by Holders thereof exceeds the pro rata portion of such Excess Proceeds to be
used to purchase Notes, the Trustee shall select the Notes to be purchased on
a pro rata basis. Upon completion of such offer to purchase, the amount of
Excess Proceeds shall be reset at zero.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws or regulations are applicable in connection with the
repurchase of the Notes pursuant to an Asset Sale Offer. To the extent that
the provisions of any applicable securities laws or regulations conflict with
the provisions of the Indenture, the Issuer will comply with such securities
laws and regulations and shall not be deemed to have breached its obligations
described in the Indenture by virtue thereof.
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CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly:
(i) declare or pay any dividend or make any other distribution (including
any payment in connection with any merger or consolidation) on account of
the Issuer's or any of its Restricted Subsidiaries' Equity Interests (other
than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) and dividends payable to the Issuer or any Restricted
Subsidiary);
(ii) purchase, redeem or otherwise acquire or retire for value (including
in connection with any merger or consolidation) any Equity Interests of the
Issuer (or any Restricted Subsidiary held by Persons other than the Issuer
or any Restricted Subsidiary);
(iii) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value, any Subordinated Debt of
the Issuer, except (A) a payment of interest, principal or other related
Obligations at Stated Maturity and (B) the purchase, repurchase or other
acquisition or retirement of Subordinated Debt of the Issuer in
anticipation of satisfying a sinking fund obligation, principal installment
or final maturity, in each case due within one year of the date of
purchase, repurchase or other acquisition or retirement; or
(iv) make any Restricted Investment
(all such payments and other actions set forth in clauses (i) through (iv)
above being collectively referred to as "Restricted Payments"), unless, at
the time of, and after giving effect to, such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Issuer would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Debt pursuant to the
Consolidated Coverage Ratio test set forth in the first paragraph of the
covenant described below under the caption "--Incurrence of Debt and
Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with (without duplication) the
aggregate amount of all other Restricted Payments made by the Issuer and
its Restricted Subsidiaries after the Issue Date (excluding Restricted
Payments permitted by clauses (ii), (iii)(A), (iv), (v), (vi)(A) and
(vii) of the next succeeding paragraph, but including all other
Restricted Payments permitted by the next succeeding paragraph), is less
than the sum (without duplication) of
(i) 50% of the Consolidated Net Income of the Issuer for the period
(taken as one accounting period) from the beginning of the fiscal
quarter during which the Issue Date occurs to the end of the Issuer's
most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit, less 100% of
such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Issuer
from the issue or sale (other than to a Subsidiary) of, or from capital
contributions with respect to, Equity Interests of the Issuer (other
than Disqualified Stock), in either case after the Issue Date, plus
(iii) the aggregate principal amount (or accreted value, if less) of
Debt or Disqualified Stock of the Issuer or any Restricted Subsidiary
issued since the Issue Date (other than to a Restricted Subsidiary)
that has been converted into Equity Interests (other than Disqualified
Stock) of the Issuer, plus
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(iv) 100% of the aggregate net cash received by the Issuer or a
Restricted Subsidiary of the Issuer since the Issue Date from (A)
Restricted Investments, whether through interest payments, principal
payments, dividends or other distributions or payments, or the sale or
other disposition (other than to the Issuer or a Restricted Subsidiary)
thereof made by the Issuer and its Restricted Subsidiaries and (B) a
cash dividend from, or the sale (other than to the Issuer or a
Restricted Subsidiary) of the stock of, an Unrestricted Subsidiary,
plus
(v) upon the redesignation of an Unrestricted Subsidiary as a
Restricted Subsidiary, the fair market value of the Investments of the
Issuer and its Restricted Subsidiaries (other than such Subsidiary) in
such Subsidiary.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would have
complied with the provisions of the Indenture;
(ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Equity Interests or Subordinated Debt in exchange for,
or out of the net cash proceeds of the substantially concurrent sale (other
than to a Restricted Subsidiary of the Issuer) of, other Equity Interests
(other than any Disqualified Stock) of, or a capital contribution to, the
Issuer; provided that the amount of any such net cash proceeds that are
utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition shall be excluded from clause (c) (ii) of the preceding
paragraph;
(iii) the redemption, repurchase, retirement, defeasance or other
acquisition of (A) Subordinated Debt made by an exchange for, or with the
net cash proceeds from an incurrence of, Permitted Refinancing Debt or (B)
Subordinated Debt (including Exchange Debentures) or Preferred Equity
Interests (other than Subordinated Debt or Preferred Equity Interests held
by Affiliates of the Issuer) upon a Change of Control or Asset Sale to the
extent required by the agreement governing such Subordinated Debt or the
certificate of designation governing such Preferred Equity Interests, as
the case may be, but only (x) if the Issuer shall have complied with the
covenant described under the caption "--Repurchase at the Option of
Holders--Change of Control" or "--Asset Sales", as the case may be, and
repurchased all Notes tendered pursuant to the offer required by such
covenants prior to purchasing or repaying such Subordinated Debt or
Preferred Equity Interests, as the case may be, (y) in the case of an Asset
Sale, to the extent of the remaining Excess Proceeds offered to Holders
pursuant to the Asset Sale Offer and (z) within six months after the date
such offer is consummated;
(iv) the payment of any dividend by a Restricted Subsidiary of the Issuer
to the holders of its common Equity Interests on a pro rata basis;
(v) to the extent constituting Restricted Payments, the Specified
Affiliate Payments;
(vi) (A) the payment of any regular quarterly dividends in respect of the
Exchangeable Preferred Stock in the form of additional shares of
Exchangeable Preferred Stock having the terms and conditions set forth in
the Certificate of Designation for the Exchangeable Preferred Stock as in
effect on the Issue Date; and (B) commencing November 1, 2003, the payment
of regular quarterly cash dividends (in the amount no greater than that
provided for in the Certificate of Designation for the Exchangeable
Preferred Stock as in effect on the Issue Date), out of funds legally
available therefor, on any of the shares of Exchangeable Preferred Stock
issued on the Issue Date or subsequently issued in payment of dividends in
respect of such shares of Exchangeable Preferred Stock issued on the Issue
Date, provided that, at the time of and immediately after giving effect to
the payment of such cash dividend, no Default or Event of Default shall
have occurred and be continuing;
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(vii) the exchange of Exchangeable Preferred Stock for Exchange
Debentures in accordance with the terms of the Certificate of Designation
for such Exchangeable Preferred Stock as in effect on the Issue Date,
provided that such exchange is permitted by the "Incurrence of Debt and
Issuance of Preferred Stock" covenant; and
(viii) Restricted Payments in an aggregate amount not to exceed $10.0
million.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Issuer and its Restricted Subsidiaries (except to the extent repaid in cash)
in the Subsidiary so designated, to the extent they do not constitute
Permitted Investments at the time such Subsidiary became an Unrestricted
Subsidiary, will be deemed to be Restricted Payments made at the time of such
designation. The amount of such outstanding Investments will be equal to the
portion of the fair market value of the net assets of any Subsidiary of the
Issuer at the time that such Subsidiary is designated an Unrestricted
Subsidiary that is represented by the interest of the Issuer and its
Restricted Subsidiaries in such Subsidiary, in each case as determined in good
faith by the Board of Directors of the Issuer. Such designation will only be
permitted if such Restricted Payment would be permitted at such time and if
such Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Issuer or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any non-cash Restricted Payment shall be determined
in good faith by the Board of Directors of the Issuer.
In making the computations required by this covenant, (i) the Issuer or the
relevant Restricted Subsidiary may use audited financial statements for the
portions of the relevant period for which audited financial statements are
available on the date of determination and unaudited financial statements and
other current financial data based on the books and records of the Issuer for
the remaining portion of such period and (ii) the Issuer or the relevant
Restricted Subsidiary will be permitted to rely in good faith on the financial
statements and other financial data derived from the books and records of the
Issuer and the Restricted Subsidiary that are available on the date of
determination. If the Issuer makes a Restricted Payment that, at the time of
the making of such Restricted Payment, would in the good faith determination
of the Issuer or any Restricted Subsidiary be permitted under the requirements
of the Indenture, such Restricted Payment will be deemed to have been made in
compliance with the Indenture notwithstanding any subsequent adjustments made
in good faith to the Issuer's or any Restricted Subsidiary's financial
statements affecting Consolidated Net Income of the Issuer for any period.
For the avoidance of doubt, it is expressly agreed that no payment or other
transaction permitted by clauses (3), (4) and (5), of the covenant described
under "--Transactions with Affiliates" shall be considered a Restricted
Payment for purposes of, or otherwise restricted by, the Indenture.
Incurrence of Debt and Issuance of Preferred Stock
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any Debt
and that the Issuer and Guarantors will not issue any Disqualified Stock and
will not permit any of its Restricted Subsidiaries that are not Guarantors to
issue any shares of Preferred Stock; provided, however, that the Issuer and
its Restricted Subsidiaries may incur Debt or issue shares of Disqualified
Stock, if the Consolidated Coverage Ratio for the Issuer's most recently ended
four full fiscal quarters
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for which internal financial statements are available immediately preceding
the date on which such additional Debt is incurred or such Disqualified Stock
is issued would have been at least 1.75 to 1.00 if such four-quarter period
ends on or prior to the second anniversary of the Issue Date and 2.00 to 1.00
if it ends thereafter, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Debt had been
incurred, or the Disqualified Stock had been issued, as the case may be, at
the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Debt (collectively, "Permitted
Debt"):
(i) the incurrence of term and revolving Debt, letters of credit (with
letters of credit being deemed to have a principal amount equal to the
undrawn face amount thereof) and other Debt under Credit Facilities
(including Guarantees by the Issuer or any of its Subsidiaries of synthetic
lease drawings and other loans under the New Credit Facility or of other
Debt under Credit Facilities); provided that the aggregate principal amount
of such Debt outstanding pursuant to this clause (i) does not exceed an
amount equal to $250.0 million;
(ii) the incurrence by the Issuer and its Restricted Subsidiaries of
Existing Debt;
(iii) the incurrence by the Issuer of Debt represented by the Notes and
by the Guarantors of Debt represented by the Note Guarantees;
(iv) the incurrence by the Issuer or any of its Restricted Subsidiaries
of Acquired Debt;
(v) the incurrence by the Issuer or any of its Restricted Subsidiaries of
Permitted Refinancing Debt in exchange for, or the net proceeds of which
are used to refund, refinance or replace Debt (other than intercompany
Debt) that was permitted by the Indenture to be incurred;
(vi) the incurrence by the Issuer or any of its Restricted Subsidiaries
of intercompany Debt or Preferred Stock owed or issued to and held by the
Issuer and any of its Restricted Subsidiaries, provided, however, that (X)
any such Debt of the Issuer shall be subordinated and junior in right of
payment to the Notes and (Y)(A) any subsequent issuance or transfer of
Equity Interests or other action that results in any such Debt or Preferred
Stock being held by a Person other than the Issuer or a Restricted
Subsidiary and (B) any sale or other transfer of any such Debt or Preferred
Stock to a Person that is not either the Issuer or a Restricted Subsidiary
shall be deemed, in each case, to constitute an incurrence of such Debt or
issuance of such Preferred Stock by the Issuer or such Restricted
Subsidiary, as the case may be, that was not permitted by this clause (vi);
(vii) the incurrence by the Issuer or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred (A) principally for the purpose of
fixing or hedging interest rate risk with respect to any floating rate Debt
that is permitted by the terms of the Indenture to be outstanding or (B)
principally for the purpose of fixing or hedging currency exchange rate
risk or commodity price risk incurred in the ordinary course of business;
(viii) the guarantee by the Issuer or any Guarantor of Debt of the Issuer
or a Restricted Subsidiary of the Issuer that was permitted to be incurred
by another provision of this covenant;
(ix) Debt of the Issuer in respect of Exchange Debentures issued as
payment in kind interest on Exchange Debentures issued upon the exchange of
Exchangeable Preferred Stock, to the extent such interest payments are made
pursuant to the terms of the Exchange Debenture Indenture; provided the
issuance of the Exchange Debentures upon such exchange was permitted by
this covenant at the time of such exchange; and
(x) the incurrence by the Issuer or any of its Restricted Subsidiaries of
additional Debt (which may comprise Debt under the New Credit Facility) in
an aggregate principal amount (or accreted
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value, as applicable) at any time outstanding pursuant to this clause (x)
not to exceed an amount equal to $20.0 million.
For purposes of determining compliance with this covenant, in the event that
an item of Debt meets the criteria of more than one of the categories of
Permitted Debt described in clauses (i) through (x) above or is entitled to be
incurred pursuant to the first paragraph of this covenant, the Issuer shall,
in its sole discretion, classify such item of Debt in any manner that complies
with this covenant and such item of Debt will be treated as having been
incurred pursuant to only one of such clauses or pursuant to the first
paragraph hereof; provided that all outstanding Debt under the New Credit
Facility immediately following the Recapitalization shall be deemed to have
been incurred pursuant to clause (i) of the definition of Permitted Debt.
Accrual of interest and the accretion of accreted value will be deemed not to
be an incurrence of Debt for purposes of this covenant.
Liens
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, create, incur, assume or otherwise cause or
suffer to exist or become effective any Lien of any kind securing Debt or
trade payables (other than Permitted Liens) upon any of their property or
assets, now owned or hereafter acquired, unless all payments due under the
Indenture and the Notes are secured on an equal and ratable basis with the
obligations so secured until such time as such obligations are no longer
secured by a Lien; provided that (i) if such other Debt constitutes
Subordinated Debt or is otherwise subordinate or junior in right of payment to
the Obligations under the Indenture, the Notes or any Note Guarantee, as the
case may be, such Lien is expressly made prior and senior in priority to the
Lien securing such other Debt, or (ii) in any other case, such Lien ranks
equally and ratably with or prior to, the Lien securing the other Debt or
obligations so secured.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(a) pay
dividends or make any other distributions to the Issuer or any of its
Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits, or (b) pay
any indebtedness owed to the Issuer or any of its Restricted Subsidiaries,
(ii) make loans or advances to the Issuer or any of its Restricted
Subsidiaries or (iii) transfer any of its properties or assets to the Issuer
or any of its Restricted Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of:
(a) Existing Debt,
(b) the Indenture, the Notes, the Additional Notes, the Exchangeable
Preferred Stock and any Additional Exchangeable Preferred Stock, the
Exchange Debentures or the Exchange Debenture Indenture and any other
agreement entered into after the Issue Date, provided that the encumbrances
or restrictions in such agreements are not materially more restrictive than
those contained in the foregoing agreements,
(c) any agreement or other instrument of a Person acquired by the Issuer
or any of its Restricted Subsidiaries as in effect at the time of such
acquisition (but not created in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired,
(d) purchase money obligations (including Capital Lease Obligations) for
property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (iii) above on the property
so acquired,
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(e) in the case of clause (iii), any encumbrance or restriction (1) that
restricts in a customary manner the subletting, assignment, or transfer of
any property or asset that is subject to a lease, license or similar
contract, (2) by virtue of any transfer of, agreement to transfer, option
or right with respect to, or Lien on, any property or assets of the Issuer
or any Restricted Subsidiary not otherwise prohibited by the Indenture or
(3) contained in security agreements or mortgages securing Debt to the
extent such encumbrance or restriction restricts the transfer of the
property subject to such security agreements or mortgages,
(f) contracts for the sale of assets, including any restriction with
respect to a Restricted Subsidiary imposed pursuant to an agreement entered
into for the sale or disposition of all or substantially all of the Capital
Stock or assets of such Restricted Subsidiary pending the closing of such
sale or disposition,
(g) contractual encumbrances or restrictions in effect on the Closing
Date, including pursuant to the New Credit Facility and its related
documentation,
(h) restrictions on cash or other deposits or net worth imposed by
leases, credit agreements or other agreements entered into in the ordinary
course of business,
(i) customary provisions in joint venture agreements and other similar
agreements,
(j) any encumbrances or restrictions created with respect to (i) Debt of
Guarantors permitted to be incurred subsequent to the Issue Date pursuant
to the provisions of the covenant described under the caption "--Incurrence
of Debt and Issuance of Preferred Stock" and (ii) Debt of Subsidiary Non-
Guarantors permitted to be incurred subsequent to the Issue Date pursuant
to the provisions of the covenant described under the caption "--Incurrence
of Debt and Issuance of Preferred Stock" or operating leases, provided that
in the case of this clause (ii) the Board of Directors of the Issuer
determines (as evidenced by a resolution of the Board of Directors) in good
faith at the time such encumbrances or restrictions are created that such
encumbrances or restrictions would not reasonably be expected to impair the
ability of the Issuer to make payments of interest, Liquidated Damages (if
any) and scheduled payments of principal on the Notes, in each case as and
when due; and
(k) any encumbrances or restrictions of the type referred to in clauses
(i), (ii) and (iii) imposed by any amendments, modifications, restatements,
renewals, increases, supplements, refundings,
replacements or refinancings of the contracts, instruments or obligations
referred to in clauses (a) through (j), provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings, taken as a whole, are, in the good faith
judgment of the Issuer, not materially more restrictive with respect to
such encumbrances or restrictions than those contained in the contracts,
instruments or obligations prior to such amendment, modification,
restatement, renewal, increase, supplement, refunding, replacement or
refinancing.
Merger, Consolidation or Sale of all or Substantially all Assets
The Indenture provides that the Issuer may not consolidate or merge with or
into (whether or not the Issuer is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to
another Person unless:
(i) the Issuer is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than the Issuer) or to
which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia;
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(ii) the Person formed by or surviving any such consolidation or merger
(if other than the Issuer) or the Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made
assumes all the obligations of the Issuer under the Notes and the Indenture
pursuant to a supplemental indenture in a form reasonably satisfactory to
the Trustee;
(iii) immediately after such transaction no Default or Event of Default
exists; and
(iv) except in the case of a merger of the Issuer with or into a Wholly
Owned Restricted Subsidiary of the Issuer, the Issuer or the Person formed
by or surviving any such consolidation or merger (if other than the
Issuer), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made will, at the time of such
transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter
period, either (x) be permitted to incur at least $1.00 of additional Debt
pursuant to the Consolidated Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "--Incurrence
of Debt and Issuance of Preferred Stock" or (y) have a Consolidated
Coverage Ratio at least equal to the Consolidated Coverage Ratio of the
Issuer for such four-quarter reference period.
Notwithstanding the foregoing clauses (iii) and (iv), (a) any Restricted
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to the Issuer and (b) the Issuer may merge with an
Affiliate incorporated solely for the purpose of reincorporating the Issuer in
another jurisdiction.
Transactions with Affiliates
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for
the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless:
(i) such Affiliate Transaction is on terms that, taken as a whole, are no
less favorable to the Issuer or the relevant Restricted Subsidiary than
those that would have been obtained in a comparable transaction by the
Issuer or such Restricted Subsidiary with an unrelated Person; and
(ii) the Issuer delivers to the Trustee (a) with respect to any Affiliate
Transaction entered into after the Issue Date involving aggregate
consideration in excess of $3.0 million, a resolution of the Board of
Directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (i) above and that such
Affiliate Transaction has been approved by a majority of the members of the
Board of Directors and (b) with respect to any Affiliate Transaction
involving aggregate consideration in excess of $10.0 million, an opinion as
to the fairness to the Holders of such Affiliate Transaction from a
financial point of view issued by an investment banking, appraisal or
accounting firm of national standing.
Notwithstanding the foregoing, the following will not be deemed to be
Affiliate Transactions:
(1) transactions between or among the Issuer and/or its Restricted
Subsidiaries;
(2) Permitted Investments and Restricted Payments that are permitted by
the provisions of the Indenture described above under the caption "--
Restricted Payments;"
(3) employment agreements, employee benefit plans and related
arrangements entered into in the ordinary course of business and all
payments and other transactions contemplated thereby;
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(4) any payments to Investcorp and its Affiliates (whether or not such
Persons are Affiliates of the Issuer) (A) for any financial advisory,
financing, underwriting or placement services or in respect of other
investment banking activities, including in connection with acquisitions
or divestitures, which payments are approved by the Board of Directors of
the Issuer in good faith and (B) of annual management, consulting and
advisory fees and related expenses;
(5) any agreement in effect on the Closing Date (including the
Recapitalization Agreement, the Services Agreement (as amended on April
15, 1998) between the Berkshire Companies Limited Partnership and the
Issuer and the Brevard lease agreement) or any amendment thereto (so long
as any such amendment is not disadvantageous to the Holders in any
material respect) or any payment or other transaction contemplated by any
of the foregoing; and
(6) Debt permitted by paragraph (x) of the covenant described under the
caption "--Incurrence of Debt and Issuance of Preferred Stock" to the
extent such Debt is on terms that, taken as a whole, are no less
favorable to the Issuer or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction with an
unrelated Person.
Restriction on Senior Subordinated Debt
The Indenture provides that (i) the Issuer will not incur any Debt that is
expressly subordinate in right of payment to any Senior Debt and senior in any
respect in right of payment to the Notes and (ii) no Guarantor will incur any
Debt that is expressly subordinate in right of payment to any Senior Debt and
senior in any respect in right of payment to the Note Guarantee of such
Guarantor.
Additional Note Guarantees
The Indenture provides that all future Subsidiaries of the Issuer who
guarantee any Debt of the Issuer under the New Credit Facility, other than
Subsidiaries that have been properly designated as Unrestricted Subsidiaries
in accordance with the Indenture for so long as they continue to constitute
Unrestricted Subsidiaries, will be Guarantors in accordance with the terms of
the Indenture until released from such guarantee of the New Credit Facility.
Each future Note Guarantee will be limited to an amount not to exceed the
maximum amount that can be Guaranteed by that Subsidiary without rendering the
Note Guarantee, as it relates to such Subsidiary, voidable under applicable
law relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally. Each future Note Guarantee will
be subordinated
to Senior Debt of the respective Guarantor on the same basis and to the same
extent as the Notes are subordinated to Senior Debt of the Issuer. See "--
Subordination."
Reports
Notwithstanding that the Issuer may not be required to remain subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, to the
extent permitted by the Exchange Act, the Issuer will file with the Securities
and Exchange Commission (the "Commission"), and provide within 15 days after
the Issuer is required to file the same with the Commission, the Trustee and
the Holders with the annual reports and the information, documents and other
reports that are specified in Sections 13 and 15(d) of the Exchange Act. In
the event the Issuer is not permitted to file such reports, documents and
information with the Commission, the Issuer will provide substantially similar
information to the Trustee and the Holders, as if the Issuer were subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act.
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EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default with respect to the New Notes:
(i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes (whether or not prohibited by
the subordination provisions of the Indenture);
(ii) default in payment when due of the principal of or premium, if any,
on the Notes (whether or not prohibited by the subordination provisions of
the Indenture);
(iii) failure by the Issuer for 30 days after receipt of a notice
specifying such failure to comply with the provisions described under the
captions "--Repurchase at Option of Holders--Change of Control,"
"Repurchase at the Option of Holders--Asset Sales," "--Certain Covenants--
Restricted Payments," "--Certain Covenants--Incurrence of Debt and Issuance
of Preferred Stock" or "--Certain Covenants--Merger, Consolidation or Sale
of all or Substantially all Assets;"
(iv) failure by the Issuer for 60 days after receipt of a notice
specifying such failure to comply with any of its other agreements in the
Indenture or the Notes;
(v) the failure by the Issuer or any Restricted Subsidiary that is a
Significant Subsidiary to pay any Debt within any applicable grace period
after final maturity or acceleration by the holders thereof because of a
default if the total amount of such Debt unpaid or accelerated at the time
exceeds $15.0 million;
(vi) any judgment or decree for the payment of money in excess of $15.0
million (net of any insurance or indemnity payments actually received in
respect thereof prior to or within 90 days from the entry thereof, or to be
received in respect thereof in the event any appeal thereof shall be
unsuccessful) is entered against the Issuer or any Significant Subsidiary
that is a Restricted Subsidiary and is not discharged, waived or stayed and
either (A) an enforcement proceeding has been commenced by any creditor
upon such judgment or decree or (B) there is a period of 90 days following
the entry of such judgment or decree during which such judgment or decree
is not discharged, waived or the execution thereof stayed;
(vii) except as permitted by the Indenture, any Note Guarantee by a
Guarantor that is a Significant Subsidiary shall be held in any judicial
proceeding to be unenforceable or invalid or shall cease for any reason to
be in full force and effect or any Guarantor, or any Person acting on
behalf of any Guarantor, shall deny or disaffirm its obligations under its
Note Guarantee; and
(viii) certain events of bankruptcy or insolvency with respect to the
Issuer or any of its Restricted Subsidiaries that is a Significant
Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable. Upon such a declaration, such amounts
shall be due and payable immediately; provided, however, that if upon such
declaration there are any amounts outstanding under the New Credit Facility
and the amounts thereunder have not been accelerated, such amounts shall be
due and payable upon the earlier of the time such amounts are accelerated or
five Business Days after receipt by the Issuer and the Representative of the
lenders under the New Credit Facility of such declaration. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency with respect to the Issuer, all outstanding Notes
will become due and payable without further action or notice. Subject to
certain limitations, Holders of a majority in principal amount at maturity of
the then outstanding Notes may direct the Trustee in its exercise of any trust
or power.
The Holders of a majority in aggregate principal amount at maturity of the
Notes then outstanding by notice to the Trustee may on behalf of the Holders
of all of the Notes waive any existing Default or
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Event of Default and its consequences under the Indenture except a continuing
Default or Event of Default in the payment of interest on, or the principal
of, the Notes.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such
Holders have offered to the Trustee reasonable indemnity or security against
any loss, liability or expense. Except to enforce the right to receive payment
of principal, premium (if any), interest or Liquidated Damages when due, no
Holder may pursue any remedy with respect to the Indenture or the Notes unless
(i) such Holder has previously given the Trustee notice that an Event of
Default is continuing, (ii) Holders of at least 25% in principal amount at
maturity of the outstanding Notes have requested the Trustee to pursue the
remedy, (iii) such Holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense, (iv) the Trustee has not
complied with such request within 60 days after the receipt of the request and
the offer of security or indemnity, and (v) the Holders of a majority in
principal amount at maturity of the outstanding Notes have not given the
Trustee a direction inconsistent with such request within such 60-day period.
Subject to certain restrictions, the Holders of a majority in principal amount
at maturity of the outstanding Notes are given the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or of exercising any trust or power conferred on the Trustee.
The Trustee, however, may refuse to follow any direction that conflicts with
law or the Indenture or that the Trustee determines is unduly prejudicial to
the rights of any other Holder or that would involve the Trustee in personal
liability. Prior to taking any action under the Indenture, the Trustee will be
entitled to indemnification satisfactory to it in its sole discretion against
all losses and expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the
Default within the earlier of 90 days after it occurs or 30 days after it is
known to a trust officer or written notice of it is received by the Trustee.
Except in the case of a Default in the payment of principal of, premium (if
any), interest or Liquidated Damages on any Note, the Trustee may withhold
notice if and so long as a committee of its trust officers in good faith
determines that withholding notice is in the interests of Noteholders. In
addition, the Issuer is required to deliver to the Trustee, within 120 days
after the end of each fiscal year, a certificate indicating whether the
signers thereof actually know of any Default that occurred during the previous
year. The Issuer also is required to deliver to the Trustee, forthwith upon
any Senior Officer obtaining actual knowledge of any such Default, written
notice of any event which would constitute certain Defaults, their status and
what action the Issuer is taking or proposes to take in respect thereof.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder or Affiliate of
the Issuer, as such, shall have any liability for any obligations of the
Issuer under the Notes, the Indenture or for any claim based on, in respect
of, or by reason of, such obligations or their creation. No director, officer,
employee, incorporator or stockholder or Affiliate of any of the Guarantors,
as such, shall have any liability for any obligations of the Guarantors under
the Note Guarantees, the Indenture or for any claim based on, in respect of,
or by reason of, such obligations or their creation. Each holder of New Notes
and Note Guarantees by accepting a New Note and a Note Guarantee waives and
releases all such liabilities. The waiver and release are part of the
consideration for issuance of the New Notes and the New Note Guarantees. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the Commission that such a waiver is against public
policy.
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SATISFACTION AND DISCHARGE
Upon the request of the Issuer, the Indenture will cease to be of further
effect (except as to surviving rights of registration of transfer or exchange
of the Notes, as expressly provided for in the Indenture) and the Trustee, at
the expense of the Issuer, will execute proper instruments acknowledging
satisfaction and discharge of the Indenture, any security agreements relating
thereto, the Notes and the Note Guarantees when (a) either (i) all the Notes
theretofore authenticated and delivered (other than destroyed, lost or stolen
Notes that have been replaced or paid and Notes that have been subject to
defeasance under "--Legal Defeasance and Covenant Defeasance") have been
delivered to the Trustee for cancellation or (ii) all Notes not theretofore
delivered to the Trustee for cancellation (A) have become due and payable, (B)
will become due and payable at maturity within one year or (C) are to be
called for redemption within one year under arrangements satisfactory to the
Trustee for the giving of notice of redemption by the Trustee in the name, and
the expense, of the Issuer, and the Issuer has irrevocably deposited or caused
to be deposited with the Trustee funds in trust for the purpose in an amount
sufficient to pay and discharge the entire Debt on such Notes not theretofore
delivered to the Trustee for cancellation, for principal (and premium, if any,
on) and interest on the Notes to the date of such deposit (in case of Notes
that have become due and payable) or to the Stated Maturity or redemption
date, as the case may be; (b) the Issuer has paid or caused to be paid all
sums payable under the Indenture by the Issuer; or (c) the Issuer has
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel,
each stating that all conditions precedent provided in the Indenture relating
to the satisfaction and discharge of the Indenture, the security agreements
relating thereto, the Notes and the Note Guarantees have been complied with.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuer may, at its option and at any time, elect to have all of its and
any Guarantor's obligations discharged with respect to the outstanding Notes
and any Note Guarantees, as the case may be ("Legal Defeasance") and cure all
then existing Events of Default, except for (i) the rights of Holders of
outstanding Notes to receive payments in respect of the principal of, premium,
if any, and interest and Liquidated Damages on such Notes when such payments
are due from the trust referred to below, (ii) the Issuer's obligations with
respect to the Notes concerning issuing temporary Notes, registration of
Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an
office or agency for payment and money for Note payments held in trust, (iii)
the rights, powers, trusts, duties and immunities of the Trustee, and the
Issuer's obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Indenture. In addition, the Issuer may, at its option and at
any time, elect to have the obligations of the Issuer and the Guarantors
released with respect to certain covenants that are described in the Indenture
and the Note Guarantees ("Covenant Defeasance") and thereafter any omission to
comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes and the Note Guarantees. In the event
Covenant Defeasance occurs, certain events (not including non-payment, and,
solely with respect to the Issuer, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes and the
Note Guarantees.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Issuer or the Guarantors must irrevocably deposit with the Trustee, in trust,
for the benefit of the Holders of the Notes cash in U.S. dollars, non-callable
Government Notes, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest and
Liquidated Damages on the outstanding Notes on the stated maturity or on the
applicable redemption date, as the case may be, and the Issuer and the
Guarantors must specify whether the Notes are being defeased to maturity or to
a particular redemption date; (ii) in the case of Legal Defeasance, the Issuer
or the Guarantors shall have delivered to the Trustee an opinion of counsel in
the United States reasonably acceptable to the Trustee confirming that,
subject to customary assumptions and exclusions, (A) the Issuer and the
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Guarantors have received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the Issue Date, there has been a change
in the applicable federal income tax law, in either case to the effect that,
and based thereon such opinion of counsel shall confirm that, subject to
customary assumptions and exclusions, the Holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred; (iii) in the case of
Covenant Defeasance, the Issuer or the Guarantors shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that, subject to customary assumptions and exclusions,
the Holders of the outstanding Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant Defeasance
had not occurred; (iv) no Default or Event of Default shall have occurred and
be continuing on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such deposit
and the grant of any Lien securing such borrowing) or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance will not result in a breach or violation of,
or constitute a default under any material agreement or instrument (other than
the Indenture) to which the Issuer or any of its Subsidiaries is a party or by
which the Issuer or any of its Subsidiaries is bound; (vi) the Issuer or the
Guarantors must have delivered to the Trustee an opinion of counsel, subject
to customary assumptions and exclusions, to the effect that after the 91st day
following the deposit, the trust funds will not be part of any "estate" formed
by the bankruptcy or reorganization of the Issuer or subject to the "automatic
stay" under the Bankruptcy Code or, in the case of Covenant Defeasance, will
be subject to a first priority Lien in favor of the Trustee for the benefit of
the Holders; (vii) the Issuer or the Guarantors must deliver to the Trustee an
Officers' Certificate stating that the deposit was not made by the Issuer or
the Guarantors with the intent of preferring the Holders of Notes over the
other creditors of the Issuer or the Guarantors, as applicable, with the
intent of defeating, hindering, delaying or defrauding creditors of the Issuer
or the Guarantors, as applicable, or others; and (viii) the Issuer must
deliver to the Trustee an Officers' Certificate and an opinion of counsel
(which opinion of counsel may be subject to customary assumptions and
exclusions), each stating that all conditions precedent relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange New Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Issuer may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Issuer is not required to transfer or exchange
any Note selected for
redemption or repurchase. Also, the Issuer is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed or before any repurchase offer.
The New Notes will be issued in registered form and the registered Holder of
a Note will be treated as the owner of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture, the
Notes and the Note Guarantees may be amended or supplemented with the consent
of the Holders of at least a majority in principal amount at maturity of the
Notes then outstanding (including consents obtained in connection with a
purchase of, or tender offer or exchange offer for, Notes), and any existing
default or compliance with any provision of the Indenture or the Notes may be
waived with the consent of the
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Holders of a majority in principal amount at maturity of the then outstanding
Notes (including consents obtained in connection with a tender offer or
exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder):
(i) reduce the principal amount at maturity of Notes whose Holders must
consent to an amendment, supplement or waiver,
(ii) reduce the principal of, change the fixed maturity of any Note,
reduce any premium payable upon optional redemption of the Notes or
otherwise alter the provisions with respect to the redemption or repurchase
of the Notes (other than provisions relating to the covenants described
above under the caption "--Repurchase at the Option of Holders"),
(iii) reduce the rate of or change the time for payment of interest on
any Note, or reduce the rate of accretion on the Accreted Value or extend
the period during which no interest accrues on the Notes,
(iv) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the Holders of at least a majority in
aggregate principal amount of the Notes and a waiver of the payment default
that resulted from such acceleration),
(v) make any Note payable in money other than that stated in the Notes,
or
(vi) impair the rights of Holders of the Notes to receive payments of
principal of or premium, if any, on the Notes, or
(vii) make any change in the foregoing amendment and waiver provisions,
or
(viii) except as permitted by the Indenture, release any Note Guarantee.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Issuer and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes (provided that the
uncertificated Notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Notes are
described in Section 163(f)(2)(B) of the Code), to provide for the assumption
of the Issuer's obligations to Holders of Notes in the case of a merger,
consolidation or sale of assets, to release any Note Guarantee or collateral
in accordance with the provisions of the Indenture, to provide for additional
Guarantors, to make any change that would provide any additional rights or
benefits to the Holders of Notes or that, as determined by the Board of
Directors in good faith, does not have a material adverse effect on the legal
rights under the
Indenture of any such Holder, or to comply with requirements of the Commission
in order to effect or maintain the qualification of the Indenture under the
Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should the Trustee become a creditor of the Issuer, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Trustee will be permitted to
engage in other transactions; however, if the Trustee acquires any conflicting
interest the Trustee must eliminate such conflict within 90 days, apply to the
Commission for permission to continue or resign.
The Indenture provides that in case an Event of Default shall occur (which
shall not be cured), the Trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs.
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ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreements without charge by writing to the Issuer at the
following address: Harborside Healthcare Corporation, 470 Atlantic Avenue,
Boston, Massachusetts 02110.
BOOK-ENTRY; DELIVERY AND FORM
Global Note
Except as set forth below, the New Notes will initially be issued in the
form of one or more permanent global Notes in fully registered form without
interest coupons (each, a "Global Note"). Upon issuance, each Global Note will
be deposited with the Trustee as custodian for, and registered in the name of,
a nominee of The Depository Trust Company ("DTC").
If a holder tendering Old Notes so requests, such holder's New Notes will be
issued as described below under "--Certificated Securities" in registered form
without coupons (the "Certificated Securities").
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected
only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants).
So long as DTC, or its nominee, is the registered owner or Holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or Holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in a Global Note will be able to transfer that interest except in accordance
with DTC's applicable procedures, in addition to those provided for under the
Indenture.
Payments of the principal of, premium, if any, and interest, on a Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. Neither the Issuer, the Trustee nor any Paying Agent will have
any responsibility or liability for any aspects of the records relating to or
payments made on account of beneficial ownership interests in a Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Issuer expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, and interest in respect of a Global Note, will
credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the
principal amount of such Global Note as shown on the records of DTC or its
nominee. The Issuer also expects that payments by participants to owners of
beneficial interests in such Global Note held through such participants will
be governed by standing instructions and customary practices, as is now the
case with securities held for the accounts of customers registered in the
names of nominees for such customers. Such payments will be the responsibility
of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
The Issuer expects that DTC will take any action permitted to be taken by a
Holder of a Note only at the direction of one or more participants to whose
account the DTC interests in a Global Note is credited and only in respect of
such portion of the aggregate principal amount of a Note as to which such
participant or participants has or have given direction. However, if there is
an Event of Default
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under the Notes, DTC will exchange the Global Note for Certificated Notes
which it will distribute to its participants.
DTC has advised the Issuer that it is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its
participants and to facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical
movement of certificates. Indirect access to the DTC system is available to
others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in a Global Note among participants of DTC,
it is under no obligation to perform or continue to perform such procedures,
and such procedures may be discontinued at any time. Neither the Issuer nor
the Trustee will have any responsibility for the performance by DTC or its
respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
Certificated Securities
If (i) the Issuer notifies the Trustee in writing that DTC is no longer
willing or able to act as a depository and the Issuer is unable to locate a
qualified successor within 90 days or (ii) the Issuer, at its option, notifies
the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture, then, upon surrender by DTC of its Global
Note, Certificated Securities will be issued to each person that DTC
identifies as the beneficial owner of the New Notes represented by the Global
Note. In addition, any person having a beneficial interest in a Global Note or
any holder of Old Notes whose Old Notes have been accepted for exchange may,
upon request to the Trustee or the Exchange Agent, as the case may be,
exchange such beneficial interest or Old Notes for Certificated Securities.
Upon any such issuance, the Trustee is required to register such
Certificated Securities in the name of such person or persons (or the nominee
of any thereof), and cause the same to be delivered thereto.
Neither the Issuer nor the Trustee shall be liable for any delay by DTC or
any participant or indirect participant in identifying the beneficial owners
of the related New Notes and each such person may conclusively rely on, and
shall be protected in relying on, instructions from DTC for all purposes
(including with respect to the registration and delivery, and the respective
principal amounts, of the New Notes to be issued).
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Accreted Value" means, for any date, the amount calculated pursuant to
clauses (i), (ii), (iii) or (iv) for each $1,000 principal amount at maturity
of Notes:
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(i) if the date occurs on one of the following dates (each a "Semi-Annual
Accrual Date"), the Accreted Value will equal the amount set forth below
for such Semi-Annual Accrual Date:
ACCRETED
SEMI-ANNUAL ACCRUAL DATE VALUE
------------------------ ---------
February 1, 1999.................................. $ 617.62
August 1, 1999.................................... $ 651.59
February 1, 2000.................................. $ 687.43
August 1, 2000.................................... $ 725.24
February 1, 2001.................................. $ 765.13
August 1, 2001.................................... $ 807.21
February 1, 2002.................................. $ 851.61
August 1, 2002.................................... $ 898.45
February 1, 2003.................................. $ 947.86
August 1, 2003.................................... $1,000.00
(ii) if the date occurs before the first Semi-Annual Accrual Date, the
Accreted Value will equal the sum of (a) the original issue price of the
Old Notes per $1,000 principal amount and (b) an amount equal to the
product of (1) the Accreted Value for the Semi-Annual Accrual Date less the
original issue price multiplied by (2) a fraction, the numerator of which
is the number of days from the Issue Date to the date, using a 360-day year
of twelve 30-day months, and the denominator of which is the number of days
from the Issue Date to the first Semi-Annual Accrual Date, using a 360-day
year of twelve 30-day months;
(iii) if the date occurs between two Semi-Annual Accrual Dates, the
Accreted Value will equal the sum of (a) the Accreted Value for the Semi-
Annual Accrual Date immediately preceding such date and (b) an amount equal
to the product of (1) Accreted Value for the immediately following Semi-
Annual Accrual Date less the Accreted Value for the immediately preceding
Semi-Annual Accrual Date multiplied by (2) a fraction, the numerator of
which is the number of days from the immediately preceding Semi-Annual
Accrual Date to the date, using a 360-day year of twelve 30-day months, and
the denominator of which is 180; or
(iv) if the date occurs after the last Semi-Annual Accrual Date, the
Accreted Value will equal $1,000.
"Acquired Debt" means, with respect to any specified Person, (i) Debt of any
other Person existing at the time such other Person is merged with or into or
became a Restricted Subsidiary of such specified Person, (ii) Debt incurred by
such specified Person, its Restricted Subsidiaries or such other Person for
the purpose of financing the acquisition of such other Person or its assets
(provided that such other Person becomes or, in the case of an asset purchase,
the person acquiring such assets is, a Restricted Subsidiary and (iii) Debt
secured by a Lien encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means (i) any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person, (ii) any other Person that owns, directly
or indirectly, 5% or more of such specified Person's Voting Stock or (iii) any
Person who is a director or officer (a) of such Person, (b) of any Subsidiary
of such Person or (c) of any Person described in clause (i) or (ii) above. For
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlling," "controlled by" and "under common control with"), as
used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities,
by agreement or otherwise.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including by way of a sale and leaseback) (provided that
the sale, lease, conveyance or other
139
disposition of all or substantially all of the assets of the Issuer will be
governed by the provisions of the Indenture described above under the caption
"--Certain Covenants--Merger, Consolidation or Sale of all or Substantially
all Assets" and not by the provisions of the Asset Sale covenant), and (ii)
the issue or sale by the Issuer or any of its Restricted Subsidiaries of
Equity Interests of any of the Issuer's Subsidiaries (other than director's
qualifying shares), in the case of either clause (i) or (ii), whether in a
single transaction or a series of related transactions (a) that have a fair
market value in excess of 2.5% of Total Assets or (b) for net proceeds in
excess of 2.5% of Total Assets. Notwithstanding the foregoing, the following
will not be Asset Sales: (i) a transfer of assets by the Issuer to a
Restricted Subsidiary or by a Restricted Subsidiary to the Issuer or to
another Restricted Subsidiary, (ii) an issuance of Equity Interests by a
Restricted Subsidiary to the Issuer or to another Restricted Subsidiary, (iii)
a Restricted Payment or Permitted Investment that is permitted by the covenant
described above under the caption "--Certain Covenants--Restricted Payments"
(including any formation of or contribution of assets to a Subsidiary or joint
venture), (iv) leases or subleases, in the ordinary course of business, to
third parties of real property owned in fee or leased by the Issuer
or its Subsidiaries, (v) a disposition, in the ordinary course of business, of
a lease of real property, (vi) any disposition of property of the Issuer or
any of its Subsidiaries that, in the reasonable judgment of the Issuer, has
become uneconomic, obsolete or worn out, (vii) any disposition of property or
assets (including any disposition of inventory, accounts receivable and any
licensing agreements) in the ordinary course of business, (viii) the sale of
Cash Equivalents and Investment Grade Securities or any disposition of cash,
(ix) any exchange of property or assets by the Issuer or a Restricted
Subsidiary in exchange for cash or Cash Equivalents or property or assets that
will be used or useful in the business conducted by the Issuer or any of its
Restricted Subsidiaries, provided any such cash and Cash Equivalents are
applied as if they were Net Proceeds of an Asset Sale, and (x) the sale or
factoring of receivables on customary market terms pursuant to Credit
Facilities but only if the proceeds thereof received by the Issuer and its
Restricted Subsidiaries represent the fair market value of such receivables.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person, or any authorized committee of the Board of
Directors of such Person.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any similar participation in profits and losses or equity of a Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of one year or less from the date of
acquisition, bankers' acceptances with maturities not exceeding one year and
overnight bank deposits, in each case with any commercial bank or trust
company having capital and surplus in excess of $300.0 million, (iv)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (ii) and (iii) above entered into
with any financial institution meeting the qualifications specified in clause
(iii) above, (v) commercial paper having the highest rating obtainable from
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings
Services, a division of the McGraw-Hill Companies, Inc. ("S&P") and in each
case maturing within one year after the date of acquisition, (vi) investment
funds investing 95% of their assets in securities of the types described in
clauses (ii)-(v) above, (vii) readily marketable direct obligations issued by
any state of the United States
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of America or any political subdivision thereof having one of the two highest
rating categories obtainable from either Moody's or S&P and (viii) Debt with a
rating of "A" or higher from S&P or "A2" or higher from Moody's and having a
maturity of not more than one year from the date of acquisition.
"Closing Date" means August 11, 1998, the date on which HH Acquisition Corp.
was merged with and into the Issuer.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commodity Hedging Agreements" means any futures contract or other similar
agreement or arrangement designed to protect the Issuer or any Restricted
Subsidiary against fluctuations in commodities prices.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period (A) plus (without
duplication), to the extent deducted in
computing such Consolidated Net Income, (i) Consolidated Interest Expense and
the amortization of debt issuance costs, commissions, fees and expenses of
such Person and its Restricted Subsidiaries for such period, (ii) provision
for taxes based on income or profits (including franchise taxes) of such
Person and its Restricted Subsidiaries for such period, (iii) depreciation and
amortization expense, including amortization of inventory write-up under APB
16, amortization of intangibles (including goodwill and the non-cash costs of
Interest Rate Agreements, Commodity Hedging Agreements or Currency Agreements,
license agreements and non-competition agreements), non-cash amortization of
Capital Lease Obligations, and organization costs, (iv) non-cash expenses
related to the amortization of management fees paid on or prior to the Closing
Date, (v) expenses and charges related to any equity offering or incurrence of
Debt permitted to be incurred by the Indenture (including any such expenses or
charges relating to the Recapitalization), (vi) the amount of any
restructuring charge or reserve, (vii) unrealized gains and losses from
hedging, foreign currency or commodities translations and transactions, (viii)
expenses consisting of internal software development costs that are expensed
during the period but could have been capitalized in accordance with GAAP,
(ix) any write-downs, write-offs, and other non-cash charges, items and
expenses, (x) the amount of expense relating to any minority interest in a
Restricted Subsidiary, and (xi) costs of surety bonds in connection with
financing activities, and (B) minus any cash payment for which a reserve or
charge of the kind described in clauses (vi), (ix) or (x) of subclause (A)
above was taken previously during such period.
"Consolidated Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Consolidated Interest Expense
of such Person and its Restricted Subsidiaries for such period. In the event
that the Issuer or any of its Restricted Subsidiaries incurs, assumes,
Guarantees, redeems or repays any Debt (other than revolving credit
borrowings) or issues or redeems Preferred Stock subsequent to the
commencement of the period for which the Consolidated Coverage Ratio is being
calculated but prior to the date on which the event for which the calculation
of the Consolidated Coverage Ratio is made (the "Calculation Date"), then the
Consolidated Coverage Ratio shall be calculated giving pro forma effect to
such incurrence, assumption, Guarantee, redemption or repayment of Debt, or
such issuance or redemption of Preferred Stock, as if the same had occurred at
the beginning of the applicable four-quarter reference period. For purposes of
making the computation referred to above, Investments, acquisitions,
dispositions, mergers and consolidations that have been made by the Issuer or
any of its Restricted Subsidiaries during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date,
and discontinued operations determined in accordance with GAAP on or prior to
the Calculation Date, shall be given effect on a pro forma basis assuming that
all such Investments, acquisitions, dispositions, mergers and consolidations
or discontinued operations (and the reduction or increase of any associated
Consolidated Interest Expense, and the change in Consolidated Cash Flow,
resulting therefrom, including because of reasonably anticipated cost savings)
had occurred on the first day of the four-
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quarter reference period. If since the beginning of such period any Person
(that subsequently became a Restricted Subsidiary or was merged with or into
the Issuer or any Restricted Subsidiary since the beginning of such period)
shall have made any Investment, acquisition, disposition, merger or
consolidation or determined a discontinued operation, that would have required
adjustment pursuant to this definition, then the Consolidated Coverage Ratio
shall be calculated giving pro forma effect thereto for such period as if such
Investment, acquisition, disposition, merger or consolidation or discontinued
operations had occurred at the beginning of the applicable four-quarter
period. For purposes of this definition, whenever pro forma effect is to be
given to a transaction, the pro forma calculations shall be made in good faith
by a financial or accounting officer of the Issuer. If any Debt to which pro
forma effect is given bears interest at a floating rate, the interest expense
on such Debt shall be calculated as if the rate in effect on the Calculation
Date had been the applicable interest rate for the entire period (taking into
account any Interest Rate Agreement in effect on the Calculation Date).
Interest on a Capital Lease Obligation shall be deemed to accrue at an
interest rate reasonably determined by a responsible financial or accounting
officer of the Issuer to be the rate of interest
implicit in such Capital Lease Obligation in accordance with GAAP. Interest on
Debt that may optionally be determined at an interest rate based upon a factor
of a prime or similar rate, a eurocurrency interbank offered rate, or other
rate, shall be deemed to have been based upon the rate actually chosen, or, if
none, then based upon such optional rate chosen as the Issuer may designate.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum, without duplication, of (i) the consolidated net interest
expense of such Person and its Restricted Subsidiaries for such period,
whether paid or accrued (including amortization of original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred
in respect of letter of credit or bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations relating to Interest Rate
Agreements or Currency Agreements with respect to Debt, excluding, however,
(A) amortization of debt issuance costs, commissions, fees and expenses, (B)
customary commitment, administrative and transaction fees and charges and (C)
expenses attributable to letters of credit or similar arrangements supporting
insurance certificates issued to customers in the ordinary course of
business), (ii) any interest expense on Debt of another Person that is
Guaranteed by or secured by a Lien on assets of such Person or one of its
Restricted Subsidiaries (but only to the extent such Guarantee or Lien has
then been called upon), and (iii) cash dividends paid in respect of any
Preferred Stock of such Person or any Restricted Subsidiary of such Person
held by Persons other than the Issuer or a Subsidiary, in each case, on a
consolidated basis and in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall
be included only to the extent of the amount of dividends or distributions
paid in cash to the referent Person or a Restricted Subsidiary of such Person,
(ii) the Net Income of any Restricted Subsidiary shall be excluded to the
extent that the declaration or payment of dividends or similar distributions
by that Restricted Subsidiary of that Net Income is not at the date of
determination permitted without any prior governmental approval (that has not
been obtained) or, directly or indirectly, prohibited by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Restricted
Subsidiary or its stockholders unless such restriction with respect to the
payment of dividends has been permanently waived, (iii) except for purposes of
calculating "Consolidated Cash Flow," the Net Income of any Person acquired in
a pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (iv) the cumulative effect of a change in
accounting principles shall be excluded (effected either through cumulative
effect adjustment or a retroactive application, in each case, in accordance
with GAAP), (v)
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to the extent deducted in determining Net Income, the fees, expenses and other
costs incurred in connection with the Recapitalization, including payments to
management contemplated by the Recapitalization Agreement, shall be excluded,
and (vi) to the extent deducted in determining Net Income, any non-cash
charges resulting from any write-up, write-down or write-off of assets, of the
Issuer and its Restricted Subsidiaries in connection with the
Recapitalization, shall be excluded.
"Credit Facilities" means, with respect to the Issuer, one or more debt
facilities (including the New Credit Facility) or commercial paper facilities
with banks, insurance companies or other institutional lenders providing for
revolving credit loans, term loans, synthetic lease financing, notes,
receivables factoring or other financing (including through the sale of
receivables to such lenders or to special purpose entities formed to borrow
from or issue securities to such lenders against such receivables) or letters
of credit or other credit facilities, in each case, as amended, restated,
modified, renewed, refunded, replaced or refinanced in whole or in part from
time to time.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement to which the Issuer or any
Restricted Subsidiary is a party or of which it is a beneficiary.
"Debt" means, with respect to any Person (without duplication), (i) any
indebtedness of such Person, whether or not contingent, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof) or banker's
acceptances or representing Capital Lease Obligations or the balance deferred
and unpaid of the purchase price of any property, which purchase price is due
more than six months after the date of placing such property in final service
or taking final delivery thereof, or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, (ii) all indebtedness
under clause (i) of other Persons secured by a Lien on any asset of such
Person (whether or not such indebtedness is assumed by such Person) provided
that the amount of indebtedness of such Person shall be the lesser of (A) the
fair market value of such asset at such date of determination and (B) the
amount of such indebtedness of such other Persons, and (iii) to the extent not
otherwise included, the Guarantee by such Person of any Debt under clause (i)
of any other Person; provided, however, that Debt shall not include (a)
obligations of the Issuer or any of its Restricted Subsidiaries arising from
agreements of the Issuer or a Restricted Subsidiary providing for
indemnification, adjustment of purchase price or similar obligations, in each
case, incurred or assumed in connection with the disposition of any business,
assets or a Subsidiary, other than guarantees of Debt incurred by any Person
acquiring all or any portion of such business, assets or a Subsidiary for the
purpose of financing such acquisition; provided, however, that (x) such
obligations are not reflected on the balance sheet of the Issuer or any
Restricted Subsidiary (contingent obligations referred to in a footnote to
financial statements and not otherwise reflected on the balance sheet will not
be deemed to be reflected on such balance sheet for purposes of this clause
(x)) and (y) the maximum assumable liability in respect of all such
obligations shall at no time exceed the gross proceeds including noncash
proceeds (the fair market value of such noncash proceeds being measured at the
time received and without giving effect to any subsequent changes in value)
actually received by the Issuer and its Restricted Subsidiaries in connection
with such disposition, (b) (A) obligations under (or constituting
reimbursement obligations with respect to) letters of credit, performance
bonds, surety bonds, appeal bonds, completion guarantees or similar
instruments issued in connection with the ordinary course of business
conducted by the Issuer, including letters of credit in respect of workers'
compensation claims, security or lease deposits and self-insurance, provided,
however, that upon the drawing of such letters of credit or other instrument,
such obligations are reimbursed within 30 days following such drawing, and (B)
obligations arising from the honoring by a bank or other financial institution
of a check, draft or similar instrument inadvertently (except in the case of
day-light overdrafts) drawn
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against insufficient funds in the ordinary course of business; provided,
however, that such obligations are extinguished within three business days of
incurrence, or (c) retentions in connection with purchasing assets in the
ordinary course of business of the Issuer and its Restricted Subsidiaries. The
amount of any Debt outstanding as of any date shall be the lesser of (i) the
accreted value thereof, and (ii) the principal amount thereof, provided that
the amount of Permitted Debt under clause (i) or (x) of the definition
thereof, at the Issuer's election, but without duplication, may be reduced by
the principal amount (not to exceed $7.5 million) of the note receivable
issued to the Issuer before the Issue Date in connection with the leasing of
certain nursing home facilities in the State of Connecticut.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) any Debt outstanding under the New Credit
Facility and (ii) any other Senior Debt permitted under the Indenture the
principal amount of which is $25.0 million or more and that has been
designated by the Issuer as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event (other than as a result of a
Change of Control), matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the
Holder thereof, in whole or in part, on or prior to the date on which the
Notes mature; provided, however, that if such Capital Stock is issued to any
plan for the benefit of employees of the Issuer or its Subsidiaries or by any
such plan to such employees, such Capital Stock shall not constitute
Disqualified Stock solely because it may be required to be repurchased by the
Issuer in order to satisfy applicable statutory or regulatory obligations. For
the avoidance of doubt, Exchangeable Preferred Stock shall not be considered
"Disqualified Stock".
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Debentures" means the Exchange Debentures of the Issuer due 2010
issued in exchange for the Exchangeable Preferred Stock and any Exchange
Debentures issued as payments in kind interest thereon.
"Exchange Debenture Indenture" means the indenture pursuant to which the
Exchange Debentures are to be issued as it may from time to time be amended or
supplemented.
"Exchangeable Preferred Stock" means the Exchangeable Preferred Stock of the
Issuer Due 2010 issued on the Issue Date, any Exchangeable Preferred Stock
issued as payment of dividends thereon and any Preferred Stock containing
terms substantially identical to the Exchangeable Preferred stock that are
issued and exchanged for the Exchangeable Preferred Stock.
"Existing Debt" means Debt of the Issuer and its Restricted Subsidiaries
(other than Debt under the New Credit Facility) in existence on the Issue
Date, until such amounts are repaid.
"Foreign Subsidiary" means any Subsidiary of the Issuer formed under the
laws of any jurisdiction other than the United States or any political
subdivision thereof substantially all of the assets of which are located
outside of the United States or that conducts substantially all of its
business outside of the United States.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
144
other entity as have been approved by a significant segment of the accounting
profession. All ratios and computations based on GAAP contained in the
Indenture shall be computed in conformity with GAAP as in effect as of the
Issue Date.
"Government Notes" means non-callable direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including letters of credit and reimbursement
agreements in respect thereof), of all or any part of any Debt.
"Guarantors" means, at any time after the Closing Date, (i) each of the
Issuer's Subsidiaries on the Closing Date, other than the Subsidiary Non-
Guarantors on such date and (ii) each Restricted Subsidiary that executes and
delivers a Note Guarantee after the Closing Date, and their respective
successors and assigns, in each case until released from its Note Guarantee in
accordance with the terms of the Indenture.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under Interest Rate Agreements, Currency Agreements or Commodity
Hedging Agreements.
"Holder" means a Person in whose a name a Note is registered in the register
for the Notes.
"HRI" means Harborside of Rhode Island L.P., a Massachusetts limited
partnership.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement, repurchase agreement, futures contract or other financial
agreement or arrangement designed to protect the Issuer or any Restricted
Subsidiary against fluctuations in interest rates.
"Investcorp" means Investcorp S.A. and certain affiliates thereof.
"Investment Grade Securities" means (i) securities issued or directly and
fully guaranteed or insured by the United States government or any agency or
instrumentality thereof (other than Cash Equivalents) having maturities of not
more than one year from the date of acquisition, (ii) debt securities or debt
instruments with a rating of BBB- or higher by S&P or Baa3 or higher by
Moody's or the equivalent of such rating by such rating organization, or, if
no rating of S&P or Moody's then exists, the equivalent of such rating by any
other nationally recognized securities rating agency, but excluding any debt
securities or instruments constituting loans or advances among the Issuer and
its Subsidiaries having maturities of not more than one year from the date of
acquisition, and (iii) investments in any fund that invests exclusively in
investments of the type described in clauses (i) and (ii), which fund may also
hold immaterial amounts of cash pending investment and/or distribution.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Debt or other obligations, but
excluding advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person), advances
or capital contributions (excluding commission, travel, payroll,
entertainment, relocation and similar advances to officers and employees made
in the ordinary course of business), purchases or other acquisitions for
consideration of Debt, Equity Interests or other securities. If the Issuer or
any Restricted Subsidiary of the Issuer sells or otherwise disposes of any
Equity Interests of any direct or indirect Subsidiary of the Issuer such that,
after giving effect to any such sale or disposition, such Person is no longer
a Subsidiary of the Issuer, the Issuer shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair
market value of the Equity Interests of such Subsidiary not
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sold or disposed of in an amount determined as provided in the third to last
paragraph of the covenant described above under the caption "--Restricted
Payments."
"Issue Date" means the date on which the Old Notes were originally issued.
"Issuer" means Harborside Healthcare Corporation.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement or any lease in the
nature thereof); provided that in no event shall an operating lease be deemed
to constitute a Lien.
"Net Income" means, with respect to any Person and any period, the net
income (or loss) of such Person for such period, determined in accordance with
GAAP and before any reduction in respect of Preferred Stock dividends,
excluding, however, (i) any extraordinary or non-recurring gains or losses or
charges and gains or losses or charges from the sale of assets outside the
ordinary course of business, together with any related provision for taxes on
such gain or loss or charges and (ii) deferred financing costs written off in
connection with the early extinguishment of Debt; provided, however, that Net
Income shall be deemed to include any increases during such period to
shareholder's equity of such Person attributable to tax benefits from net
operating losses and the exercise of stock options that are not otherwise
included in Net Income for such period.
"Net Proceeds" means the aggregate cash proceeds received by the Issuer or
any of its Restricted Subsidiaries in respect of any Asset Sale (including any
cash received upon the sale or other disposition of any non-cash consideration
received in any Asset Sale), net of the direct costs relating to such Asset
Sale (including legal, accounting and investment banking fees, and brokerage
and sales commissions) and any relocation, redundancy and closing costs
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax
sharing arrangements), amounts applied to the repayment of principal, premium
(if any) and interest on Debt that is not subordinated to the Notes required
(other than required by clause (a) of the second paragraph of "--Repurchase at
the Option of Holders--Asset Sales") to be paid as a result of such
transaction, all distributions and other payments required to be made to
minority interest holders in Subsidiaries or joint ventures as a result of
such Asset Sale, and any deduction of appropriate amounts to be provided by
the Issuer as a reserve in accordance with GAAP against any liabilities
associated with the asset disposed of in such transaction and retained by the
Issuer after such sale or other disposition thereof, including pension and
other post-employment benefit liabilities and liabilities related to
environmental matters or against any indemnification obligations associated
with such transaction.
"New Credit Facility" means the collective reference to the Credit
Agreement, dated as of August 11, 1998, among the Issuer and certain
Subsidiaries of the Issuer named therein and the financial institutions named
therein, any Credit Documents (as defined therein) and any related notes,
collateral documents, letters of credit, participation agreements, guarantees,
and other documents part of or relating to the Synthetic Lease Facility (as
defined in the Credit Agreement), including any appendices, exhibits or
schedules to any of the foregoing (as the same may be in effect from time to
time), in each case, as such agreements may be amended, modified, supplemented
or restated from time to time, or refunded, refinanced, restructured,
replaced, renewed, repaid or extended from time to time (whether with the
original agents and lenders or other agents or lenders or otherwise, and
whether provided under the original credit agreement or other credit
agreements or otherwise).
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"Note Guarantee" means the Guarantee by each Guarantor of the Issuer's
Obligations under the Notes.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages, guarantees and other liabilities
payable under the documentation governing any Debt, in each case whether now
or hereafter existing, renewed or restructured, whether or not from time to
time decreased or extinguished and later increased, created or incurred,
whether or not arising on or after the commencement of a proceeding under
Title 11, U.S. Code or any similar federal or state law for the relief of
debtors (including post-petition interest) and whether or not allowed or
allowable as a claim in any such proceeding.
"Officers" means any of the following: Chairman, President, Chief Executive
Officer, Treasurer, Chief Financial Officer, Executive Vice President, Senior
Vice President, Vice President, Assistant Vice President, Secretary, Assistant
Secretary or any other officer reasonably acceptable to the Trustee.
"Officers' Certificate" means a certificate signed by two Officers.
"Pari Passu Debt" means any Debt of the Issuer or any Guarantor that ranks
pari passu with the Notes or the relevant Note Guarantee.
"Permitted Investments" means (a) any Investment in the Issuer or in a
Restricted Subsidiary (including in any Equity Interests of a Restricted
Subsidiary); (b) any Investment in cash, Cash Equivalents or Investment Grade
Securities; (c) any Investment by the Issuer or any Restricted Subsidiary of
the Issuer in a Person, if as a result of such Investment (i) such Person
becomes a Restricted Subsidiary or (ii) such Person, in one transaction or a
series of substantially concurrent related transactions, is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Issuer or a
Restricted Subsidiary; (d) any securities or other assets received or other
Investments made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with the covenant
described above under the caption "--Repurchase at the Option of Holders--
Asset Sales" or in connection with any other disposition of assets not
constituting an Asset Sale; (e) any acquisition of assets solely in exchange
for the issuance of Equity Interests (other than Disqualified Stock) of the
Issuer; (f) loans or advances to employees (or guarantees of third party loans
to employees) in the ordinary course of business; (g) stock, obligations or
securities received in satisfaction of judgments, foreclosure of liens or
settlement of debts (whether pursuant to a plan of reorganization or similar
arrangement); (h) receivables owing to the Issuer or any Restricted
Subsidiary, if created or acquired in the ordinary course of business and
payable or dischargeable in accordance with customary trade terms (including
such concessionary terms as the Issuer or such Restricted Subsidiary deems
reasonable); (i) any Investment existing on the Issue Date or made pursuant to
legally binding written commitments in existence on the Issue Date; (j)
Investments in Interest Rate Agreements, Currency Agreements and Commodity
Hedging Agreements otherwise permitted under the Indenture; and (k) additional
Investments having an aggregate fair market value, taken together with all
other Investments made pursuant to this clause (k) that are at that time
outstanding, not to exceed 15.0% of Total Assets at the time of such
Investment (with the fair market value of each Investment being measured at
the time made and without giving effect to subsequent changes in value).
"Permitted Junior Securities" shall mean debt or equity securities of the
Issuer or any successor corporation issued pursuant to a plan of
reorganization or readjustment of the Issuer that are subordinated to the
payment of all Senior Debt at least to the same extent that the Notes are
subordinated to the payment of all Senior Debt on the Issue Date, so long as
(i) the effect of the use of this defined term in the subordination provisions
described under the caption "--Subordination" is not to cause the Notes to be
treated as part of (a) the same class of claims as the Senior Debt or (b) any
class of claims pari passu with, or senior to, the Senior Debt for any payment
or distribution in any
147
case or proceeding or similar event relating to the liquidation, insolvency,
bankruptcy, dissolution, winding up or reorganization of the Issuer and (ii)
to the extent that any Senior Debt outstanding on the date of consummation of
any such plan of reorganization or readjustment is not paid in full in cash
on such date, either (a) the holders of any such Senior Debt not so paid in
full in cash have consented to the terms of such plan of reorganization or
readjustment or (b) such holders receive securities which constitute Senior
Debt and which have been determined by the relevant court to constitute
satisfaction in full in money or money's worth of any Senior Debt not paid in
full in cash.
"Permitted Liens" means (i) Liens securing Senior Debt of the Issuer and
Guarantors and unsubordinated Debt of a Subsidiary Non-Guarantor (in each case
including related Obligations) that was permitted by the terms of the
Indenture to be incurred; (ii) Liens in favor of the Issuer or any Restricted
Subsidiary; (iii) Liens on property of a Person existing at the time such
Person is merged into or consolidated with the Issuer or any Restricted
Subsidiary of the Issuer; provided that such Liens were in existence prior to
the contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Issuer or a Restricted Subsidiary, as the case may be; (iv) Liens on property
existing at the time of acquisition thereof by the Issuer or any Restricted
Subsidiary of the Issuer, provided that such Liens were in existence prior to
the contemplation of such acquisition and do not extend to any assets other
than those acquired; (v) banker's Liens, rights of setoff and Liens to secure
the performance of bids, tenders, trade or government contracts (other than
for borrowed money), leases, licenses, statutory obligations, surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in the
ordinary course of business; (vi) without limitation of clause (i), Liens to
secure Acquired Debt; (vii) Liens existing on the Closing Date; (viii) Liens
for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate
proceedings, provided that any reserve or other appropriate provision as shall
be required in conformity with GAAP shall have been made therefor; (ix) Liens
incurred in the ordinary course of business of the Issuer or any Restricted
Subsidiary of the Issuer with respect to obligations that do not exceed $5.0
million at any one time outstanding and that (a) are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit in the ordinary course of business) and (b) do not in
the aggregate materially detract from the value of the property or materially
impair the use thereof in the operation of business by the Issuer or such
Restricted Subsidiary; (x) carriers', warehousemen's, mechanics', landlords',
materialmen's, repairmen's or other like Liens arising in the ordinary course
of business in respect of obligations that are not yet due or that are bonded
or that are being contested in good faith and by appropriate proceedings if
adequate reserves with respect thereto are maintained on the books of the
Issuer or such Restricted Subsidiary, as the case may be, in accordance with
GAAP; (xi) pledges or deposits in connection with workmen's compensation,
unemployment insurance and other social security legislation; (xii) easements
(including reciprocal easement agreements), rights-of-way, building, zoning
and similar restrictions, utility agreements, covenants, reservations,
restrictions, encroachments, changes, and other similar encumbrances or title
defects incurred, or leases or subleases granted to others, in the ordinary
course of business, that do not in the aggregate materially detract from the
aggregate value of the properties of the Issuer and its Subsidiaries, taken as
a whole, or in the aggregate materially interfere with or adversely affect in
any material respect the ordinary conduct of the business of the Issuer and
its Subsidiaries on the properties subject thereto, taken as a whole; (xiii)
Liens on goods (and the proceeds thereof) and documents of title and the
property covered thereby securing Debt in respect of commercial letters of
credit; (xiv) (A) mortgages, Liens, security interests, restrictions,
encumbrances or any other matters of record that have been placed by any
developer, landlord or other third party on property over which the Issuer or
any Restricted Subsidiary of the Issuer has easement rights or on any real
property leased by the Issuer or any Restricted Subsidiary on the Issue Date
and subordination or similar agreements relating thereto and (B) any
condemnation or eminent domain proceedings affecting any real property; (xv)
leases or subleases to third parties; (xvi) Liens in connection with workmen's
compensation obligations and general liability exposure of the Issuer and its
Restricted Subsidiaries;
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(xvii) Liens arising by reason of a judgment, decree or court order, to the
extent not otherwise resulting in an Event of Default; (xviii) Liens securing
Hedging Obligations entered into in the ordinary course of business; (xix)
without limitation of clause (i), Liens securing Permitted Refinancing Debt
permitted to be incurred under the Indenture or amendments or renewals of Liens
that were permitted to be incurred, provided, in each case, that (A) such Liens
do not extend to an additional property or asset of the Issuer or a Restricted
Subsidiary and (B) such Liens do not secure Debt in excess of the amount of
Permitted Refinancing Debt permitted to be incurred under the Indenture or the
principal amount of (or accreted value, if applicable), plus accrued interest
on, the Debt (plus the amount of reasonable premium and fees and expenses
incurred in connection therewith) secured by the Lien being amended or renewed,
as the case may be; (xx) Liens that secure Debt of a Person existing at the time
such Person becomes a Restricted Subsidiary of the Issuer, provided that such
Liens do not extend to any assets other than those of the Person that became a
Restricted Subsidiary of the Issuer, and (xxi) any provision for the retention
of title to an asset by the vendor or transferor of such asset which asset is
acquired by the Issuer or any Restricted Subsidiary in a transaction entered
into in the ordinary course of business of the issuer or such Restricted
Subsidiary and for which kind of transaction it is normal market practice for
such retention of title provision to be included.
"Permitted Refinancing Debt" means any Debt of the Issuer or any of its
Restricted Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other Debt of
the Issuer or any of its Restricted Subsidiaries incurred in compliance with
the Indenture; provided that: (i) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Debt does not exceed the principal
amount of (or accreted value, if applicable), plus accrued interest on, the
Debt so extended, refinanced, renewed, replaced, defeased or refunded (plus
the amount of reasonable premium and fees and expenses incurred in connection
therewith); (ii) in the case of term Debt, (1) principal payments required
under such Permitted Refinancing Debt have a Stated Maturity no earlier than
the earlier of (A) the Stated Maturity of those under the Debt being
refinanced and (B) the maturity date of the Notes and (2) such Permitted
Refinancing Debt has a Weighted Average Life to Maturity equal to or greater
than the lesser of the Weighted Average Life to Maturity of the Debt being
extended, refinanced, renewed, replaced, defeased or refunded and the Weighted
Average Life to Maturity of the Notes; (iii) if the Debt being extended,
refinanced, renewed, replaced, defeased or refunded is subordinated in right
of payment to the Notes, such Permitted Refinancing Debt has a final maturity
date later than the final maturity date of, and is subordinated in right of
payment to, the Notes on terms at least as favorable to the Holders of Notes
as those contained in the documentation governing the Debt being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Debt is
incurred either by the Issuer or by its Restricted Subsidiary who is the
obligor on the Debt being extended, refinanced, renewed, replaced, defeased or
refunded. The Issuer may Incur Permitted Refinancing Debt not more than six
months prior to the application of the proceeds thereof to repay the Debt to
be refinanced; provided that upon the Incurrence of such Permitted Refinancing
Debt, the Issuer shall provide written notice thereof to the Trustee,
specifically identifying the Debt to be refinanced with Permitted Refinancing
Debt.
"Preferred Stock" means, with respect to any Person, any Capital Stock of
such Person (however designated) that is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over
shares of Capital Stock of any other class of such Person. With respect to the
Issuer, "Preferred Stock" includes the Exchangeable Preferred Stock.
"Preferred Equity Interests" means Preferred Stock and all warrants, options
or other rights to acquire Preferred Stock (but excluding any debt security
that is convertible into, or exchangeable for, Preferred Stock).
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"Recapitalization" means the recapitalization of Harborside Healthcare
Corporation pursuant to which HH Acquisition Corp. was merged with and into
the Issuer and the financing transactions related thereto.
"Recapitalization Agreement" means the Agreement and Plan of Merger dated as
of April 15, 1998 by and between HH Acquisition Corp. and Harborside
Healthcare Corporation, as amended through the Closing Date.
"Representative" means any agent or representative in respect of any
Designated Senior Debt; provided that if, and for so long as, any Designated
Senior Debt lacks such a representative, then the Representative for such
Designated Senior Debt shall at all times constitute the holders of a majority
in outstanding principal amount of such Designated Senior Debt.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Secured Debt" means any Debt of the Issuer or any Subsidiary secured by a
Lien.
"Senior Debt" means (i) all Debt of the Issuer or any Guarantor outstanding
under the New Credit Facility and all Hedging Obligations with respect
thereto, (ii) any other Debt (including Acquired Debt) permitted to be
incurred by the Issuer or any Guarantor under the terms of the Indenture,
unless the instrument under which such Debt is incurred expressly provides
that it is on a parity with or subordinated in right of payment to the Notes
or the relevant Note Guarantee and (iii) all Obligations with respect to the
foregoing. Notwithstanding anything to the contrary in the foregoing, Senior
Debt will not include (v) any liability for federal, state, local or other
taxes owed or owing by the Issuer, (w) any Debt of the Issuer or any Guarantor
to any of its Subsidiaries, officers, employees or other Affiliates (other
than Debt under any Credit Facility to any such Affiliate), (x) any trade
payables, (y) that portion of Debt incurred in violation of the covenant
described above under "Incurrence of Debt and Preferred Stock" (but as to any
such Debt under any Credit Facility, such violation shall be deemed not to
exist for purposes of this clause (y) if the lenders have obtained a
representation from a Senior Officer of the Issuer to the effect that the
issuance of such Debt does not violate such covenant) or (z) any Debt or
obligation of the Issuer or any Guarantor which is expressly subordinated in
right of payment to any other Debt or obligation of the Issuer or such
Guarantor, as applicable, including any Subordinated Debt of the Issuer.
"Senior Officer" means the Chief Executive Officer or the Chief Financial
Officer of the Issuer.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such regulation is in effect on the Issue
Date.
"Specified Affiliate Payments" means:
(i) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of the Issuer or any Restricted Subsidiary of
the Issuer held by any future, present or former employee, director,
officer or consultant of the Issuer (or any of its Restricted Subsidiaries)
pursuant to any management equity subscription agreement, stock option
agreement, put agreement, stockholder agreement or similar agreement that
may be in effect from time to time; provided that the aggregate price paid
for all such repurchased, redeemed, acquired or retired Equity Interests
shall not exceed $3.0 million in any calendar year (with unused amounts in
any calendar year being carried over to succeeding calendar years subject
to a maximum amount of repurchases, redemptions or other acquisitions
pursuant to this clause (i) (without giving effect to
150
the immediately following proviso) of $10.0 million in any calendar year)
and no payment default on Senior Debt or the Notes shall have occurred and
be continuing; provided further that such amount in any calendar year may
be increased by an amount not to exceed (A) the cash proceeds received by
the Issuer (including by way of capital contribution) since the Issue Date
from the sale of Equity Interests of the Issuer to employees, directors,
officers or consultants of the Issuer or its Subsidiaries that occurs in
such calendar year (it being understood that such cash proceeds shall be
excluded from clause (c)(ii) of the first paragraph under the covenant
described under the caption "--Certain Covenants--Restricted Payments")
plus (B) the cash proceeds from key man life insurance policies received by
the Issuer and its Restricted Subsidiaries in such calendar year (including
proceeds from the sale of such policies to the person insured thereby); and
provided, further, that cancellation of Debt owing to the Issuer from
employees, directors, officers or consultants of the Issuer or any of its
Subsidiaries in connection with a repurchase of Equity Interests of the
Issuer will not be deemed to constitute a Restricted Payment for purposes
of the Indenture;
(ii) repurchases of Equity Interests deemed to occur upon exercise of
stock options or warrants as a result of the payment of all or a portion of
the exercise price of such options or warrants with Equity Interests;
(iii) payments by the Issuer to shareholders or members of management of
the Issuer and its Subsidiaries in connection with the Recapitalization;
and
(iv) payments or transactions permitted under clause (5) of the second
paragraph of the covenant described under "--Certain Covenants--Transaction
with Affiliates;
"Stated Maturity" means, with respect to any installment of interest on or
principal of, or any other amount payable in respect of, any series of Debt,
the date on which such interest, principal or other amount was scheduled to be
paid in the documentation governing such Debt, and shall not include any
contingent obligations to repay, redeem or repurchase any such interest,
principal or other amount prior to the date scheduled for the payment thereof.
"Subordinated Debt" means any Debt of the Issuer or any Guarantor (whether
outstanding on the Issue Date or thereafter incurred) that is subordinate or
junior in right of payment to the Notes or the applicable Note Guarantee
pursuant to written agreement.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof). Unless the context otherwise requires, "Subsidiary" refers to a
Subsidiary of the Issuer.
"Subsidiary Non-Guarantors" means (i) each of the Subsidiaries of the Issuer
on the Closing Date that do not issue or are released from a Note Guarantee,
(ii) each Unrestricted Subsidiary, and (iii) each Restricted Subsidiary formed
or acquired after the Closing Date that does not execute and deliver or is
released from a Note Guarantee.
"Total Assets" means, at any time, the total consolidated assets of the
Issuer and its Restricted Subsidiaries at such time.
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, and (ii) any Subsidiary of an
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Unrestricted Subsidiary; but in the case of any Subsidiary referred to in
clause (i) (or any Subsidiary of any such Subsidiary) only to the extent that
such Subsidiary: (a) is not party to any agreement, contract, arrangement or
understanding with the Issuer or any Restricted Subsidiary of the Issuer
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to the Issuer or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of the
Issuer; and (b) except in the case of a Foreign Subsidiary, is a Person with
respect to which neither the Issuer nor any of its Restricted Subsidiaries has
any direct or indirect obligation (x) to subscribe for additional Equity
Interests or (y) to maintain or preserve such Person's financial condition or
to cause such Person to achieve any specified levels of operating results. Any
such designation by the Board of Directors shall be evidenced to the Trustee
by filing with the Trustee a certified copy of the Board Resolution giving
effect to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under the caption "--Certain Covenants--Restricted
Payments." If, at any time, any Unrestricted Subsidiary referred to in clause
(ii) of the first sentence of this definition (or any Subsidiary thereof)
would fail to meet the foregoing requirements as an Unrestricted Subsidiary,
it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the
Indenture and any Debt of such Subsidiary shall be deemed to be incurred by a
Restricted Subsidiary of the Issuer as of such date (and, if such Debt is not
permitted to be incurred as of such date under the covenant described under
the caption "--Certain Covenants--Incurrence of Debt and Issuance of Preferred
Stock," the Issuer shall be in default of such covenant). The Board of
Directors of the Issuer may at any time designate any Unrestricted Subsidiary
to be a Restricted Subsidiary; provided that such designation shall be deemed
to be an incurrence of Debt by a Restricted Subsidiary of the Issuer of any
outstanding Debt of such Unrestricted Subsidiary and such designation shall
only be permitted if (i) such Debt is permitted under the covenant described
under the caption "--Certain Covenants--Incurrence of Debt and Issuance of
Preferred Stock," calculated on a pro forma basis as if such designation had
occurred at the beginning of the four-quarter reference period, and (ii) no
Default or Event of Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person, excluding, however, Exchangeable Preferred Stock.
"Weighted Average Life to Maturity" means, when applied to any Debt at any
date, the number of years obtained by dividing (i) the sum of the products
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal,
including payment at final maturity, in respect thereof, by (b) the number of
years (calculated to the nearest one-twelfth) that will elapse between such
date and the making of such payment, by (ii) the then outstanding principal
amount of such Debt.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person.
152
DESCRIPTION OF THE NEW PREFERRED STOCK
GENERAL
The New Preferred Stock will be issued by the Issuer pursuant to a
Certificate of Designation (the "Certificate of Designation"). The summary
contained herein of certain provisions of the New Preferred Stock does not
purport to be complete and is qualified in its entirety by reference to the
provisions of the Certificate of Designation. Copies of the Certificate of
Designation may be obtained from the Secretary of State of Delaware or as set
forth in "Available Information" above. Definitions of certain capitalized
terms used in the Certificate of Designation and in the following summary are
set forth below under "Description of Exchange Debentures--Certain
Definitions."
The Issuer is authorized to issue 500,000 shares of Preferred Stock, of
which the Certificate of Designation designates as Exchangeable Preferred
Stock the 40,000 shares of Old Preferred Stock issued in the Old Securities
Offering, plus up to 40,000 additional shares of New Preferred Stock which may
be issued hereby in exchange for the shares of Old Preferred Stock initially
issued, plus additional shares of Exchangeable Preferred Stock which, among
other things, may be used to pay certain dividends on the Exchangeable
Preferred Stock issued in the Offering at the election of the Issuer.
In addition, the Certificate of Designation provides for the issuance
(subject to the 500,000 maximum referred to above of additional shares of
Preferred Stock having identical terms and conditions to the New Preferred
Stock offered hereby (the "Additional Exchangeable Preferred Stock"). Any
shares of Additional Exchangeable Preferred Stock will be part of the same
issue as the Exchangeable Preferred Stock offered hereby and will vote as one
class with such New Preferred Stock on all matters subject to a vote by the
Holders thereof. All references in this Description of the Exchangeable
Preferred Stock to "Exchangeable Preferred Stock" include any Additional
Exchangeable Preferred Stock and any references to "Exchange Debentures"
include any Exchange Debentures issued in exchange for Additional Exchangeable
Preferred Stock, unless the context otherwise requires.
Subject to certain conditions, the Exchangeable Preferred Stock will be
exchangeable for Exchange Debentures at the option of the Issuer on any
dividend payment date. The New Preferred Stock, when issued in exchange for
Old Preferred Stock, will be fully paid and non-assessable, and the Holders
thereof will not have any subscription or preemptive rights related thereto.
United States Trust Company of New York will be the transfer agent and
registrar for the New Preferred Stock.
RANKING
The New Preferred Stock will, with respect to dividends and as to
distributions upon the liquidation, winding-up and dissolution of the Issuer,
rank (i) senior to all other classes of Capital Stock of the Issuer
established after July 29, 1998 by the Board of Directors of the Issuer the
terms of which do not expressly provide that it ranks on a parity with the
Exchangeable Preferred Stock as to dividends and as to distributions upon the
liquidation, winding-up and dissolution of the Issuer (collectively referred
to with the common stock of the Issuer as "Junior Securities"); and (ii) on a
parity with each series of Preferred Stock established after July 29, 1998 by
the Board of Directors of the Issuer, the terms of which expressly provide
that such class will rank on a parity with the Exchangeable Preferred Stock as
to dividends and as to distributions upon the liquidation, winding-up and
dissolution of the Issuer (collectively referred to as "Parity Securities").
Creditors of the Issuer will have priority over the Holders of the New
Preferred Stock with respect to claims on the assets of the Issuer. In
addition, creditors and stockholders of the Issuer's Subsidiaries will have
priority over the New Preferred Stock with respect to claims on the assets of
such Subsidiaries.
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DIVIDENDS
New Preferred Stock Holders will be entitled to receive, when, as and if
declared by the Board of Directors of the Issuer, out of funds legally
available therefor, dividends on the New Preferred Stock at a rate per annum
equal to 13 1/2% of the liquidation preference per share of New Preferred
Stock. All dividends on the New Preferred Stock, as on the Old Preferred
Stock, will be cumulative, whether or not earned or declared, on a daily basis
from the date of issuance and will be payable quarterly in arrears on February
1, May 1, August 1, and November 1 of each year, commencing on the first such
date after issuance. On or before August 1, 2003, the Issuer may, at its
option, pay dividends in cash or in additional fully paid and non-assessable
shares of Exchangeable Preferred Stock ("Dividend Shares") having an aggregate
liquidation preference equal to the amount of such dividends. After August 1,
2003, dividends may be paid only in cash. It is not expected that the Issuer
will pay any dividends in cash for any period ending on or prior to August 1,
2003. The terms of certain debt instruments of the Issuer, including the New
Credit Facility and the Notes, contain restrictions on the Issuer's ability to
pay cash dividends and future agreements may contain similar restrictions. See
"Risk Factors--Substantial Leverage; Debt Service Obligations," "Risk
Factors--Restrictive Covenants," "Description of the New Notes," and "New
Credit Facility."
In the event that dividends with respect to the Exchangeable Preferred Stock
are paid in Dividend Shares, and U.S. federal withholding tax or backup
withholding is due with respect to such dividends, the Issuer or the
withholding agent, as the case may be, may retain all or a portion of the
Dividend Shares until such time as such shares have been reduced to cash
sufficient to satisfy the requisite withholding tax or backup withholding
obligations on such Dividend Shares. See "Certain U.S. Federal Income Tax
Consequences."
No dividends may be declared or paid (whether in cash, additional Parity
Securities or otherwise) or funds set apart for the payment of dividends on
any Parity Securities for any period unless full cumulative dividends shall
have been or contemporaneously are declared and paid in full or declared and,
if payable in cash, a sum in cash is set apart for such payment on the
Exchangeable Preferred Stock. If full dividends are not so declared, paid or
funds therefor set aside, as the case may be, the Exchangeable Preferred Stock
will share dividends pro rata with the Parity Securities. No dividends may be
paid or set apart for such payment on Junior Securities (except dividends on
Junior Securities in additional shares of Junior Securities) and no Junior
Securities or Parity Securities may be repurchased, redeemed or otherwise
retired nor may funds be set apart for payment with respect thereto, if full
cumulative dividends have not been paid on the Exchangeable Preferred Stock.
Preferred Stock Holders will not be entitled to any dividends, whether payable
in cash, in additional Exchangeable Preferred Stock, property or stock, in
excess of the full cumulative dividends as herein described.
OPTIONAL REDEMPTION
The New Preferred Stock may be redeemed for cash (subject to contractual and
other restrictions with respect thereto and to the legal availability of funds
therefor) at any time on or after August 1, 2003, in whole or in part, at the
option of the Issuer, at the following redemption prices (expressed as
percentages of the liquidation preference thereof) if redeemed during the 12-
month period beginning August 1 of each of the years set forth below, in each
case together with an amount in cash equal to all accumulated and unpaid
dividends, if any (including an amount in cash equal to a prorated dividend
for the period from the dividend payment date immediately prior to the
redemption date to the redemption date):
YEAR PERCENTAGE
---- ----------
2003............................................. 106.750%
2004............................................. 104.500
2005............................................. 102.250
2006 and thereafter.............................. 100.000
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In addition, at any time and from time to time prior to August 1, 2001, the
Issuer may redeem up to 35% of the Exchangeable Preferred Stock, at the option
of the Issuer, at a redemption price equal to 113.5% of the liquidation
preference thereof, plus an amount in cash equal to all accumulated and unpaid
dividends thereon, if any, to the redemption date (including an amount in cash
equal to a prorated dividend for the period from the dividend payment date
immediately prior to the redemption date to the redemption date), with the net
cash proceeds received by the Issuer of a public offering of common stock of
the Issuer, provided that such redemption shall occur within 60 days of the
date of the closing of such public offering.
At any time on or prior to August 1, 2003, the Exchangeable Preferred Stock
may be redeemed as a whole but not in part at the option of the Issuer upon
the occurrence of a Change of Control, upon not less than 30 nor more than 60
days' prior notice (but in no event may any such redemption occur more than 90
days after the occurrence of such Change of Control) mailed by first-class
mail to each Holder's registered address, at a redemption price equal to 100%
of the liquidation preference thereof, if any, to the redemption date, plus an
amount in cash equal to all accumulated and unpaid dividends thereon
(including an amount in cash equal to a prorated dividend for the period from
the dividend payment date immediately prior to the redemption date to the
redemption date) plus the Applicable Premium.
"Applicable Premium" means, with respect to a share of Exchangeable
Preferred Stock at any redemption date, the greater of (i) 1.0% of the
liquidation preference thereof or (ii) the excess of (A) the present value at
such time of the redemption price of such share of Exchangeable Preferred
Stock at August 1, 2003 (such redemption price being set forth in the table
above), computed using a discount rate equal to the Treasury Rate plus 50
basis points, over (B) the liquidation preference of such Exchangeable
Preferred Stock, if greater.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H. 15(519)
which has become publicly available at least two Business Days prior to the
redemption date (or, if such Statistical Release is no longer published, any
publicly available source or similar market data)) most nearly equal to the
period from the redemption date to August 1, 2003, provided, however, that if
the period from the redemption date to August 1, 2003 is not equal to the
constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the
weekly average yields of United States Treasury securities for which such
yields are given, except that if the period from the redemption date to August
1, 2003 is less than one year, the weekly average yield on actually traded
United States Treasury securities adjusted to a constant maturity of one year
shall be used.
No optional redemption may be authorized or made unless prior thereto or
contemporaneously therewith full unpaid cumulative dividends shall have been
paid or a sum shall have been set apart for such payment on the Exchangeable
Preferred Stock.
In the event of partial redemptions of Exchangeable Preferred Stock, the
shares to be redeemed will be determined pro rata or by lot, as determined by
the Issuer, except that the Issuer may redeem such shares held by any Holders
of fewer than 100 shares (or shares held by Holders who would hold less than
100 shares as a result of such redemption), without regard to any pro rata
redemption requirement. The terms of certain debt instruments of the Issuer,
including the New Credit Facility and the Notes, restrict, directly or
indirectly, the ability of the Issuer to redeem the Exchangeable Preferred
Stock, and future agreements to which the Issuer or its subsidiaries are
parties may contain similar restrictions. See "Description of the New Notes--
Certain Covenants" and "Description of New Credit Facility."
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MANDATORY REDEMPTION
On August 1, 2010, the Issuer will be required to redeem (subject to the
legal availability of funds therefor) all outstanding shares of Exchangeable
Preferred Stock at a price equal to the then effective liquidation preference
thereof, plus an amount in cash equal to all accumulated and unpaid dividends
thereon. The Issuer will not be required to make sinking fund payments with
respect to the Exchangeable Preferred Stock.
PROCEDURES FOR REDEMPTIONS
On and after a redemption date, unless the Issuer defaults in the payment of
the applicable redemption price, dividends will cease to accrue on shares of
Exchangeable Preferred Stock called for redemption and all rights of Holders
of such shares will terminate except for the right to receive the redemption
price plus accumulated and unpaid dividends thereon, but without interest. The
Issuer will send a written notice of redemption by first class mail to each
Holder of record of shares of Exchangeable Preferred Stock, not fewer than 30
days nor more than 60 days prior to the date fixed for such redemption.
Shares of Exchangeable Preferred Stock issued and reacquired will, upon
compliance with the applicable requirements of Delaware law, have the status
of authorized but unissued shares of Preferred Stock of the Issuer
undesignated as to series, and may with any and all other authorized but
unissued shares of Preferred Stock of the Issuer be designated or redesignated
and issued or reissued, as the case may be, as part of any series of Preferred
Stock of the Issuer, except that any issuance or reissuance of shares of
Exchangeable Preferred Stock must be in compliance with the Certificate of
Designation.
REPURCHASE AT THE OPTION OF EXCHANGEABLE PREFERRED STOCK HOLDERS UPON CHANGE
OF CONTROL
Upon the occurrence of a Change of Control, unless all Exchangeable
Preferred Stock has been called for redemption pursuant to the provisions
described above under the caption "--Optional Redemption," each Exchangeable
Preferred Stock Holder will have the right to require the Issuer to repurchase
all or any part of such Holder's Exchangeable Preferred Stock pursuant to the
offer described more fully in the Certificate of Designation (the
"Exchangeable Preferred Change of Control Offer") at an offer price in cash
(the "Exchangeable Preferred Change of Control Payment") equal to 101% of the
aggregate liquidation preference thereof plus an amount in cash equal to all
accumulated and unpaid dividends per share (including an amount in cash equal
to a prorated dividend for the period from the dividend payment date
immediately prior to the repurchase date to the repurchase date), if any, to
the date of repurchase.
The Certificate of Designation provides that, prior to complying with the
provisions of this covenant, but in any event within 90 days following a
Change of Control, the Issuer will either repay all outstanding Senior Debt or
obtain the requisite consents, if any, under all agreements governing
outstanding Senior Debt to permit the repurchase of Exchangeable Preferred
Stock required by this covenant, unless notice of redemption of all
Exchangeable Preferred Stock has then been given pursuant to the provisions
described under the caption "--Optional Redemption" above and such redemption
is permitted by the terms of outstanding Senior Debt. The Issuer will publicly
announce the results of the Exchangeable Preferred Change of Control Offer on
or as soon as practicable after the date that payment is made pursuant to the
Exchangeable Preferred Change of Control Offer (the "Exchangeable Preferred
Change of Control Payment Date").
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Certificate of Designation are applicable.
Except as described above with respect to a Change of Control, the Certificate
of Designation does not contain provisions that permit the
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Exchangeable Preferred Stock Holders to require that the Issuer repurchase or
redeem the Exchangeable Preferred Stock in the event of a takeover,
recapitalization or similar transaction. The Change of Control purchase
feature is a result of negotiations between the Issuer and the Placement
Agents. Management has no present intention to engage in a transaction
involving a Change of Control, although it is possible that the Issuer would
decide to do so in the future. Subject to the limitations discussed below, the
Issuer could, in the future, enter into certain transactions, including
acquisitions, refinancings or other recapitalizations, that would not
constitute a Change of Control under the Certificate of Designation, but that
could increase the amount of indebtedness or Junior Securities or Parity
Securities outstanding at such time or otherwise affect the Issuer's capital
structure or credit ratings.
The New Credit Facility prohibits the Issuer from purchasing any
Exchangeable Preferred Stock and will also provide that certain change of
control events with respect to the Issuer will constitute a default
thereunder. The indenture governing the Notes will require an offer to be made
to repurchase all outstanding Notes upon a Change of Control, unless all Notes
have then been called for redemption, and restricts the ability of the Issuer
to purchase Exchangeable Preferred Stock until such offer has been made or no
Notes remain outstanding. See "Description of the New Notes--Repurchase at the
Option of Holders--Change of Control" and "--Certain Covenants--Restricted
Payments." Any future credit agreements or other agreements relating to Senior
Debt to which the Issuer becomes a party or that may be entered into by
Subsidiaries of the Issuer may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when the Issuer is prohibited
from purchasing Exchangeable Preferred Stock, the Issuer could seek the
consent of its lenders and Holders of the Notes to the purchase of
Exchangeable Preferred Stock or could attempt to refinance the borrowings that
contain such prohibition. If the Issuer does not obtain such a consent or
repay such borrowings, the Issuer will remain prohibited from purchasing the
Exchangeable Preferred Stock. In such case, the Issuer's failure to purchase
tendered Exchangeable Preferred Stock would constitute a Voting Rights
Triggering Event under the Certificate of Designation which would, in turn,
constitute an default under the New Credit Facility or any such future credit
or other agreement. In any event, the ability of the Issuer to purchase all
Notes tendered upon a Change of Control or repay any such other borrowings
will be limited by the Issuer's financial resources. See "Risk Factors--
Potential Inability to Fund a Change of Control Offer."
The Issuer will not be required to make an Exchangeable Preferred Change of
Control Offer upon a Change of Control if a third party makes and consummates
an Exchangeable Preferred Change of Control Offer.
"Change of Control" means the occurrence of any of the following events:
(i) prior to the first public offering of Voting Stock of the Issuer, the
Initial Control Group ceases to be the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of
more than 50% of the total voting power of the Voting Stock of the Issuer,
whether as a result of the issuance of securities of the Issuer, any
merger, consolidation, liquidation or dissolution of the Issuer, any direct
or indirect transfer of securities by the Initial Control Group or
otherwise (for purposes of this clause (i), the Initial Control Group shall
be deemed to beneficially own all Voting Stock of an entity (the "specified
entity") held by any other entity (the "parent entity") so long as the
Initial Control Group beneficially owns (as so defined), directly or
indirectly, in the aggregate a majority of the voting power of the Voting
Stock of the parent entity);
(ii) following the first public offering of Voting Stock of the Issuer
(A) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more members of the Initial Control Group,
is or becomes the beneficial owner (as defined in clause (i) above),
directly or indirectly, of more than 40% of the total voting power of the
Voting Stock of the Issuer
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and (B) the Initial Control Group "beneficially owns" (as defined in clause
(i) above), directly or indirectly, in the aggregate a lesser percentage of
the total voting power of the Voting Stock of the Issuer, than such other
person and does not have the right or ability by voting power, contract or
otherwise to elect or designate for election a majority of the Board of
Directors of the Issuer (for purposes of this clause (ii), such other
person shall be deemed to beneficially own all Voting Stock of a specified
entity held by a parent entity, if such other person "beneficially owns"
(as defined in clause (i) above), directly or indirectly, in the aggregate
more than 40% of the voting power of the Voting Stock of such parent entity
and the Initial Control Group "beneficially owns" (as defined in clause (i)
above), directly or indirectly, in the aggregate a lesser percentage of the
voting power of the Voting Stock of such parent entity and does not have
the right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the board of directors of such parent
entity); or
(iii) at any time after the first public offering of common stock of the
Issuer, any person other than the Initial Control Group (or their
designated board members), (A)(I) nominates one or more individuals for
election to the Board of Directors of the Issuer and (II) solicits proxies,
authorizations or consents in connection therewith and (B) such number of
nominees elected to serve on the Board of Directors in such election and
all previous elections after the Closing Date represents a majority of the
Board of Directors of the Issuer following such election.
"Initial Control Group" means Investcorp, its Affiliates, any Person acting
in the capacity of an underwriter or initial purchaser in connection with a
public or private offering of the Issuer's Capital Stock, any employee benefit
plan of the Issuer or any of its Subsidiaries or any participant therein, a
trustee or other fiduciary holding securities under any such employee benefit
plan or any Permitted Transferee of any of the foregoing Persons.
"Permitted Transferee" means, with respect to any Person, (i) any other
Person, directly or indirectly, controlling or controlled by or under direct
or indirect common control with such specified Person, (ii) the spouse, former
spouse, lineal descendants, heirs, executors, administrators, testamentary
trustees, legatees or beneficiaries of any such Person, (iii) a trust, the
beneficiaries of which, or a corporation or partnership or limited liability
company, the stockholders, general or limited partners or members of which,
include only such Person or his or her spouse, lineal descendants or heirs, in
each case to whom such Person has transferred, or through which it holds, the
beneficial ownership of any securities of the Issuer and (iv) any investment
fund or investment entity that is a subsidiary of such Person or a Permitted
Transferee of such Person.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Issuer, Holders of Exchangeable Preferred Stock will be entitled to be
paid, out of the assets of the Issuer available for distribution, the
liquidation preference per share, plus an amount in cash equal to all
accumulated and unpaid dividends thereon to the date fixed for liquidation,
dissolution or winding-up (including an amount equal to a prorated dividend
for the period from the last dividend payment date to the date fixed for
liquidation, dissolution or winding-up), before any distribution is made on
any Junior Securities, including, without limitation, common stock of the
Issuer. If, upon any voluntary or involuntary liquidation, dissolution or
winding-up of the Issuer, the amounts payable with respect to the Exchangeable
Preferred Stock and all other Parity Securities are not paid in full, the
Holders of the Exchangeable Preferred Stock and the Parity Securities will
share equally and ratably in any distribution of assets of the Issuer in
proportion to the full liquidation preference and accumulated and unpaid
dividends to which each is entitled. After payment of the full amount of the
liquidation preferences and accumulated and unpaid dividends to which they are
entitled, the Holders of shares of Exchangeable Preferred Stock will not be
entitled to any further participation in any distribution of assets of the
Issuer. However, neither the sale, conveyance, exchange or transfer (for cash,
shares of
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stock, securities or other consideration) of all or substantially all of the
property or assets of the Issuer nor the consolidation or merger of the Issuer
with or into one or more corporations will be deemed to be a liquidation,
dissolution or winding-up of the Issuer.
The Certificate of Designation does not contain any provision requiring
funds to be set aside to protect the liquidation preference of the
Exchangeable Preferred Stock, although such liquidation preference will be
substantially in excess of the par value of such shares of Exchangeable
Preferred Stock. In addition, the Issuer is not aware of any provision of
Delaware law or any controlling decision of the courts of the State of
Delaware (the state of incorporation of the Issuer) that requires a
restriction upon any surplus of the Issuer solely because the liquidation
preference of the Exchangeable Preferred Stock will exceed its par value.
Consequently, there will be no restriction upon any surplus of the Issuer
solely because the liquidation preference of the Exchangeable Preferred Stock
will exceed the par value and there will be no remedies available to Holders
of the Exchangeable Preferred Stock before or after the payment of any
dividend, other than in connection with the liquidation of the Issuer, solely
by reason of the fact that such dividend would reduce the surplus of the
Issuer to an amount less than the difference between the liquidation
preference of the Exchangeable Preferred Stock and its par value.
VOTING RIGHTS
Exchangeable Preferred Stock Holders will have no voting rights with respect
to any matters except as provided by law or as set forth in the Certificate of
Designation. The Certificate of Designation provides that if (i) dividends on
the Exchangeable Preferred Stock are in arrears and unpaid (or, in the case of
dividends payable after August 1, 2003, are not paid in cash) for six
quarterly periods (whether or not consecutive), (ii) the Issuer fails to
discharge any redemption obligation with respect to the Exchangeable Preferred
Stock (whether or not such redemption is prohibited by the terms of the New
Credit Facility, the Notes or any other obligation of the Issuer), (iii) the
Issuer fails to redeem or make an offer to purchase all of the outstanding
shares of Exchangeable Preferred Stock following a Change of Control (whether
or not the Issuer is permitted to do so by the terms of the New Credit
Facility, the Notes or any other obligation of the Issuer) or fails to
purchase shares of Exchangeable Preferred Stock from Holders who elect to have
such shares purchased pursuant to the Exchangeable Preferred Change of Control
Offer, (iv) a breach or violation of the provisions described under the
caption "--Certain Covenants" occurs and the breach or violation continues for
a period of 90 days or more after the Issuer receives notice thereof
specifying the default from Holders of at least 25% of the Exchangeable
Preferred Stock then outstanding, or (v) the Issuer or any Significant
Subsidiary fails to pay any Debt within any applicable grace period after
final maturity (a "Payment Default"), or the acceleration of any such Debt by
the holders thereof because of a default, so long as the total amount of such
Debt unpaid or accelerated exceeds $15 million or its foreign currency
equivalent, then the number of directors constituting the Board of Directors
of the Issuer will be adjusted to permit the Holders of the majority of the
then outstanding Exchangeable Preferred Stock, voting separately as a class,
to elect two directors. Each such event described in clauses (i) through (v)
above is referred to herein as a "Voting Rights Triggering Event." Voting
rights arising as a result of a Voting Rights Triggering Event will continue
until (1) in the case of any Voting Rights Triggering Event under clause (i)
of the definition thereof, such time as all dividends in arrears on the
Exchangeable Preferred Stock are paid in full (and after August 1, 2003, are
paid in cash) and (2) in all other cases, any failure, breach or default
giving rise to such voting rights is remedied or waived by the Holders of at
least a majority of the shares of Exchangeable Preferred Stock then
outstanding (and, in the case of any acceleration referred to in clause (v) of
the definition of "Voting Rights Triggering Event," such acceleration has been
rescinded), at which time the term of the directors elected pursuant to the
provisions of this paragraph shall terminate automatically.
In addition, the Certificate of Designation provides that the Issuer may not
amend the Certificate of Designation so as to affect adversely the special
rights, powers, preferences, privileges or voting rights of Holders of the
Exchangeable Preferred Stock, without the affirmative vote or consent of the
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Holders of in excess of 50% of the then outstanding shares of Exchangeable
Preferred Stock, voting or consenting, as the case may be, as one class;
provided that (a) the creation, authorization or issuance of any shares of
Junior Securities or any Parity Securities, (b) the decrease in the amount of
authorized Capital Stock of any class, including any Exchangeable Preferred
Stock or (c) the increase in the amount of authorized Capital Stock of any
class of Junior Securities or Parity Securities (including Exchangeable
Preferred Stock) shall not require the consent of the Holders of Exchangeable
Preferred Stock and shall not be deemed to affect adversely the special
rights, powers, preferences, privileges or voting rights of Holders of shares
of Exchangeable Preferred Stock. The Holders of at least a majority of the
outstanding shares of Exchangeable Preferred Stock, voting or consenting, as
the case may be, as one class, may also waive compliance with any provision of
the Certificate of Designation.
Under Delaware law, Holders of Exchangeable Preferred Stock will be entitled
to vote as a class upon a proposed amendment to the Certificate of
Incorporation, whether or not entitled to vote thereon by the Certificate of
Incorporation, if the amendment would increase or decrease the aggregate
number of authorized shares of such class, increase or decrease the par value
of the shares of such class, or alter or change the special rights, powers,
preferences or privileges of the shares of such class so as to affect them
adversely. Notwithstanding the foregoing, without the consent of any Holder of
Exchangeable Preferred Stock, the Issuer may amend or supplement the
Certificate of Designation to (i) cure any ambiguity, defect or inconsistency
in the Certificate of Designation or (ii) make any change that, as determined
by the Board of Directors in good faith, does not have a material adverse
effect on the legal rights under the Certificate of Designation of any such
Holder.
CERTAIN COVENANTS
The sole remedy to Holders of Exchangeable Preferred Stock in the event of
the Issuer's failure to comply with any of the covenants described below and
the sole consequence of any such failure will be the voting rights described
above.
Restricted Payments
The Certificate of Designation provides that the Issuer will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly:
(i) declare or pay any dividend or make any other distribution (including
any payment in connection with any merger or consolidation) on account of
any Junior Equity Interests of the Issuer or Equity Interests of any
Restricted Subsidiary (other than dividends or distributions payable in
Junior Equity Interests of the Issuer or Equity Interests of any Restricted
Subsidiary (other than Disqualified Stock) and dividends payable to the
Issuer or any Restricted Subsidiary);
(ii) purchase, redeem or otherwise acquire or retire for value (including
in connection with any merger or consolidation) any Junior Equity Interests
of the Issuer or any Equity Interests of any Restricted Subsidiary held by
Persons other than the Issuer or any Restricted Subsidiary; or
(iii) make any Restricted Investment
(all such payments and other actions set forth in clauses (i) through (iii)
above being collectively referred to as "Restricted Payments"), unless, at
the time of, and after giving effect to, such Restricted Payment:
(a) no Voting Rights Triggering Event shall have occurred and be
continuing or would occur as a consequence thereof;
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(b) the Issuer would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Debt pursuant to the
Consolidated Coverage Ratio test set forth in the first paragraph of the
covenant described below under the caption "--Incurrence of Debt and
Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with (without duplication) the
aggregate amount of all other Restricted Payments made by the Issuer and
its Restricted Subsidiaries after the Issue Date (excluding Restricted
Payments permitted by clauses (ii), (iv) and (v) of the next succeeding
paragraph, but including all other Restricted Payments permitted by the
next succeeding paragraph, is less than the sum (without duplication) of
(i) 50% of the Consolidated Net Income of the Issuer for the period
(taken as one accounting period) from the beginning of the fiscal
quarter during which the Issue Date occurs to the end of the Issuer's
most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit, less 100% of
such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Issuer
from the issue or sale (other than to a Subsidiary) of, or from capital
contributions with respect to, Junior Equity Interests of the Issuer
(other than Disqualified Stock), in either case after the Issue Date,
plus
(iii) the aggregate principal amount (or accreted value, if less) of
Debt, Disqualified Stock or Equity Interests (other than Junior Equity
Interests) of the Issuer or any Restricted Subsidiary issued since the
Issue Date (other than to a Restricted Subsidiary) that has been
converted into Junior Equity Interests (other than Disqualified Stock)
of the Issuer, plus
(iv) 100% of the aggregate net cash received by the Issuer or a
Restricted Subsidiary of the Issuer since the Issue Date from (A)
Restricted Investments, whether through interest payments, principal
payments, dividends or other distributions or payments, or the sale or
other disposition (other than to the Issuer or a Restricted Subsidiary)
thereof made by the Issuer and its Restricted Subsidiaries and (B) a
cash dividend from, or the sale (other than to the Issuer or a
Restricted Subsidiary) of the stock of, an Unrestricted Subsidiary,
plus
(v) upon the redesignation of an Unrestricted Subsidiary as a
Restricted Subsidiary, the fair market value of the Investments of the
Issuer and its Restricted Subsidiaries (other than such Subsidiary) in
such Subsidiary.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would have
complied with the provisions of the Certificate of Designation;
(ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Junior Equity Interests of the Issuer or Equity
Interests of any Restricted Subsidiary in exchange for, or out of the net
cash proceeds of the substantially concurrent sale (other than to a
Restricted Subsidiary of the Issuer) of other Junior Equity Interests of
the Issuer or Equity Interests of any Restricted Subsidiary, or a capital
contribution with respect to Junior Equity Interests of the Issuer (other
than, in each case, any sale of or capital contribution in respect of
Disqualified Stock); provided that the amount of any such net cash proceeds
that are utilized for any such redemption, repurchase, retirement,
defeasance or other acquisition shall be excluded from clause (c) (ii) of
the preceding paragraph;
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(iii) the redemption, repurchase, retirement, defeasance or other
acquisition of Junior Equity Interests upon a Change of Control to the
extent required by the agreement or certificate of designation governing
such Junior Equity Interests, but only (x) if the Issuer shall have
complied with the covenant described under the caption "Repurchases at the
Option of Holders Upon Change of Control" and repurchased all Exchangeable
Preferred Stock tendered pursuant to the offer required by such covenant
prior to purchasing or repaying such Junior Equity Interests, and (y)
within six months after the date such offer is consummated;
(iv) the payment of any dividend by a Restricted Subsidiary of the Issuer
to the holders of its common Equity Interests on a pro rata basis;
(v) to the extent constituting Restricted Payments, the Specified
Affiliate Payments; and
(vi) Restricted Payments in an aggregate amount not to exceed $10
million.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Voting Rights
Triggering Event. For purposes of making such determination, all outstanding
Investments by the Issuer and its Restricted Subsidiaries (except to the
extent repaid in cash) in the Subsidiary so designated, to the extent they do
not constitute Permitted Investments at the time such Subsidiary became an
Unrestricted Subsidiary, will be deemed to be Restricted Payments made at the
time of such designation. The amount of such outstanding Investments will be
equal to the portion of the fair market value of the net assets of any
Subsidiary of the Issuer at the time that such Subsidiary is designated an
Unrestricted Subsidiary that is represented by the interest of the Issuer and
its Restricted Subsidiaries in such Subsidiary, in each case as determined in
good faith by the Board of Directors of the Issuer. Such designation will only
be permitted if such Restricted Payment would be permitted at such time and if
such Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Issuer or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any non-cash Restricted Payment shall be determined
in good faith by the Board of Directors of the Issuer.
In making the computations required by this covenant, (i) the Issuer or the
relevant Restricted Subsidiary may use audited financial statements for the
portions of the relevant period for which audited financial statements are
available on the date of determination and unaudited financial
statements and other current financial data based on the books and records of
the Issuer for the remaining portion of such period and (ii) the Issuer or the
relevant Restricted Subsidiary will be permitted to rely in good faith on the
financial statements and other financial data derived from the books and
records of the Issuer and the Restricted Subsidiary that are available on the
date of determination. If the Issuer makes a Restricted Payment that, at the
time of the making of such Restricted Payment, would in the good faith
determination of the Issuer or any Restricted Subsidiary be permitted under
the requirements of the Certificate of Designation, such Restricted Payment
will be deemed to have been made in compliance with the Certificate of
Designation notwithstanding any subsequent adjustments made in good faith to
the Issuer's or any Restricted Subsidiary's financial statements, affecting
Consolidated Net Income of the Issuer for any period.
For the avoidance of doubt, it is expressly agreed that no payment or other
transaction permitted by clauses (3), (4) and (5) of the covenant described
under "Certain Covenants--Transactions with Affiliates" shall be considered a
Restricted Payment for purposes of, or otherwise restricted by, the
Certificate of Designation.
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Incurrence of Debt and Issuance of Preferred Stock
The Certificate of Designation provides that the Issuer will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable, contingently or otherwise, with respect to (collectively,
"incur") any Debt and that the Issuer will not issue any Disqualified Stock
and will not permit any of its Restricted Subsidiaries to issue any shares of
Preferred Stock; provided, however, that the Issuer and its Restricted
Subsidiaries may incur Debt or issue shares of Disqualified Stock and the
Issuer's Restricted Subsidiaries may issue Preferred Stock, if the
Consolidated Coverage Ratio for the Issuer's most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Debt is incurred or
such Disqualified Stock or Preferred Stock is issued would have been at least
1.75 to 1.00 if such four-quarter period ends on or prior to the second
anniversary of the Issue Date and 2.00 to 1.00 if it ends thereafter,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Debt had been incurred, or the
Disqualified Stock or Preferred Stock had been issued, as the case may be, at
the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Debt (collectively, "Permitted
Debt"):
(i) the incurrence of term and revolving Debt, letters of credit (with
letters of credit being deemed to have a principal amount equal to the
undrawn face amount thereof) and other Debt under Credit Facilities
(including Guarantees by the Issuer or any of its Subsidiaries of synthetic
lease drawings and other loans under the New Credit Facility or of other
Debt under Credit Facilities); provided that the aggregate principal amount
of such Debt outstanding pursuant to this clause (i) does not exceed an
amount equal to $250.0 million;
(ii) the incurrence by the Issuer and its Restricted Subsidiaries of
Existing Debt;
(iii) the incurrence by (A) the Issuer of Debt represented by the Notes
and the Exchange Debentures and (B) the Guarantors of Debt represented by
the Note Guarantees;
(iv) the incurrence by the Issuer or any of its Restricted Subsidiaries
of Acquired Debt;
(v) the incurrence by the Issuer or any of its Restricted Subsidiaries of
Permitted Refinancing Debt in exchange for, or the net proceeds of which
are used to refund, refinance or replace Debt (other than intercompany
Debt) that was permitted by the Certificate of Designation to be incurred;
(vi) the incurrence by the Issuer or any of its Restricted Subsidiaries
of intercompany Debt or Preferred Stock owed or issued to and held by the
Issuer and any of its Restricted Subsidiaries, provided, however, that (A)
any subsequent issuance or transfer of Equity Interests or other action
that results in any such Debt or Preferred Stock being held by a Person
other than the Issuer or a Restricted Subsidiary and (B) any sale or other
transfer of any such Debt or Preferred Stock to a Person that is not either
the Issuer or a Restricted Subsidiary shall be deemed, in each case, to
constitute an incurrence of such Debt or issuance of such Preferred Stock
by the Issuer or such Restricted Subsidiary, as the case may be, that was
not permitted by this clause (vi);
(vii) the incurrence by the Issuer or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred (A) principally for the purpose of
fixing or hedging interest rate risk with respect to any floating rate Debt
that is permitted by the terms of the Certificate of Designation to be
outstanding or (B) principally for the purpose of fixing or hedging
currency exchange rate risk or commodity price risk incurred in the
ordinary course of business;
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(viii) the guarantee by the Issuer or any Restricted Subsidiary of Debt
of the Issuer or a Restricted Subsidiary of the Issuer that was permitted
to be incurred by another provision of this covenant; and
(ix) the incurrence by the Issuer or any of its Restricted Subsidiaries
of additional Debt (which may comprise Debt under the New Credit Facility)
in an aggregate principal amount (or accreted value, as applicable) at any
time outstanding pursuant to this clause (ix) not to exceed an amount equal
to $20.0 million.
For purposes of determining compliance with this covenant, in the event that
an item of Debt meets the criteria of more than one of the categories of
Permitted Debt described in clauses (i) through (ix) above or is entitled to
be incurred pursuant to the first paragraph of this covenant, the Issuer
shall, in its sole discretion, classify such item of Debt in any manner that
complies with this covenant and such item of Debt will be treated as having
been incurred pursuant to only one of such clauses or pursuant to the first
paragraph hereof; provided that all outstanding Debt under the New Credit
Facility immediately following the Recapitalization shall be deemed to have
been incurred pursuant to clause (i) of the definition of Permitted Debt.
Accrual of interest and the accretion of accreted value will be deemed not to
be an incurrence of Debt for purposes of this covenant.
Merger, Consolidation or Sale of all or Substantially all Assets
The Certificate of Designation provides that the Issuer may not consolidate
or merge with or into (whether or not the Issuer is the surviving
corporation), or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its properties or assets in one or more related
transactions, to another Person unless:
(i) the Issuer is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than the Issuer) or to
which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia;
(ii) the Exchangeable Preferred Stock shall be converted into or
exchanged for and shall become shares of the surviving entity having in
respect of such surviving entity substantially the same rights and
privileges that the Exchangeable Preferred Stock had immediately prior to
such transaction with respect to the Issuer and shall not be subordinated
to any Preferred Stock of the surviving entity;
(iii) immediately after such transaction no Voting Rights Triggering
Event shall exist; and
(iv) except in the case of a merger of the Issuer with or into a Wholly
Owned Restricted Subsidiary of the Issuer, the Issuer or the Person formed
by or surviving any such consolidation or merger (if other than the
Issuer), or to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made will, at the time of such
transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter
period, either (x) be permitted to incur at least $1.00 of additional Debt
pursuant to the Consolidated Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "--Incurrence
of Debt and Issuance of Preferred Stock" or (y) have a Consolidated
Coverage Ratio at least equal to the Consolidated Coverage Ratio of the
Issuer for such four-quarter reference period;
Notwithstanding the foregoing clauses (iii) and (iv), (a) any Restricted
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to the Issuer and (b) the Issuer may merge with an
Affiliate incorporated solely for the purpose of reincorporating the Issuer in
another jurisdiction.
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Transactions with Affiliates
The Certificate of Designation provides that the Issuer will not, and will
not permit any of its Restricted Subsidiaries to, make any payment to, or
sell, lease, transfer or otherwise dispose of any of its properties or assets
to, or purchase any property or assets from, or enter into or make or amend
any transaction, contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction"), unless:
(i) such Affiliate Transaction is on terms that, taken as a whole, are no
less favorable to the Issuer or the relevant Restricted Subsidiary than
those that would have been obtained in a comparable transaction by the
Issuer or such Restricted Subsidiary with an unrelated Person; and
(ii) the Issuer delivers to the transfer agent (a) with respect to any
Affiliate Transaction entered into after the Issue Date involving aggregate
consideration in excess of $3.0 million, a resolution of the Board of
Directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (i) above and that such
Affiliate Transaction has been approved by a majority of the members of the
Board of Directors and (b) with respect to any Affiliate Transaction
involving aggregate consideration in excess of $10.0 million, an opinion as
to the fairness to the Holders of such Affiliate Transaction from a
financial point of view issued by an investment banking, appraisal or
accounting firm of national standing.
Notwithstanding the foregoing, the following will not be deemed to be
Affiliate Transactions:
(1) transactions between or among the Issuer and/or its Restricted
Subsidiaries;
(2) Permitted Investments and Restricted Payments that are permitted by
the provisions of the Certificate of Designation described above under the
caption "--Restricted Payments;"
(3) employment agreements, employee benefit plans and related
arrangements entered into in the ordinary course of business and all
payments and other transactions contemplated thereby;
(4) any payments to Investcorp and its Affiliates (whether or not such
Persons are Affiliates of the Issuer) (A) for any financial advisory,
financing, underwriting or placement services or in respect of other
investment banking activities, including in connection with acquisitions or
divestitures, which payments are approved by the Board of Directors of the
Issuer in good faith and (B) of annual management, consulting and advisory
fees and related expenses;
(5) any agreement in effect on the Closing Date (including the
Recapitalization Agreement, the Services Agreement (as amended on April 15,
1998) between the Berkshire Companies Limited Partnership and the Issuer
and the Brevard lease agreement) or any amendment thereto (so long as any
such amendment is not disadvantageous to the Holders in any material
respect) or any payment or other transaction contemplated by any of the
foregoing; and
(6) Debt permitted by paragraph (ix) of the covenant described under the
caption "--Incurrence of Debt and Issuance of Preferred Stock" to the
extent such Debt is on terms that, taken as a whole, are no less favorable
to the Issuer or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable transaction with an unrelated Person.
Reports
Notwithstanding that the Issuer may not be required to remain subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, to the
extent permitted by the Exchange Act, the Issuer will file with the
Commission, and provide, within 15 days after the Issuer is required to file
the same with the Commission, the Trustee and the Holders with the annual
reports and the information, documents and other reports that are specified in
Sections 13 and 15(d) of the Exchange Act. In the event the Issuer is not
permitted to file such reports, documents and information with the Commission,
the Issuer will provide substantially similar information to the Trustee and
the Holders, as if the Issuer were subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act.
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EXCHANGE
The Issuer may at its option exchange all, but not less than all, of the
then outstanding shares of Exchangeable Preferred Stock into Exchange
Debentures on any dividend payment date, provided that (i) on the date of such
exchange such exchange is permitted by the terms of the indenture pursuant to
which the Notes are issued and the New Credit Facility and (ii) the
Recapitalization shall have been consummated. The Issuer shall send a written
notice of exchange by mail to each Holder of shares of Exchangeable Preferred
Stock, which notice shall state, among other things, (i) that the Issuer is
exercising its option to exchange the Exchangeable Preferred Stock for
Exchange Debentures pursuant to the Certificate of Designation and (ii) the
date of exchange (the "Exchange Date"), which date shall not be less than 30
days nor more than 60 days following the date on which such notice is mailed.
On the Exchange Date, Holders of outstanding shares of Exchangeable Preferred
Stock will be entitled to receive a principal amount of Exchange Debentures
equal to the liquidation preference per share, plus an amount in cash (or, on
or prior to August 1, 2003, in principal amount of Exchange Debentures) equal
to all accumulated and unpaid dividends (including an amount equal to a
prorated dividend for the period from the dividend payment date immediately
prior to the Exchange Date to the Exchange Date), as provided below.
The Exchange Debentures will be issued in registered form, without coupons.
Exchange Debentures issued in exchange for Exchangeable Preferred Stock will
be issued in principal amounts of $1,000 and integral multiples thereof to the
extent possible, and will also be issued in principal amounts less than $1,000
so that each Holder of Exchangeable Preferred Stock will receive certificates
representing the entire amount of Exchange Debentures to which his or her
shares of Exchangeable Preferred Stock entitle him or her, provided that the
Issuer may, at its option, pay cash in lieu of issuing an Exchange Debenture
in a principal amount less than $1,000. On and after the Exchange Date,
dividends will cease to accumulate on the outstanding shares of Exchangeable
Preferred Stock, and all rights of the Holders of Exchangeable Preferred Stock
(except the right to receive the Exchange Debentures, an amount in cash equal
to the accumulated and unpaid dividends to the Exchange Date (or, on or prior
to August 1, 2003, in principal amount of Exchange Debentures) and if the
Issuer so elects, cash in lieu of any Exchange Debenture that is in an amount
that is not an integral multiple of $1,000) will terminate. The person
entitled to receive the Exchange Debentures issuable upon such exchange will
be treated for any purposes as the registered Holder of such Exchange
Debentures.
The New Credit Facility and the indenture pursuant to which the Notes are
issued contain limitations with respect to the Issuer's ability to issue the
Exchange Debentures, and any future credit agreements or other agreements
relating to indebtedness to which the Issuer or any of its Subsidiaries become
a party may contain similar limitations. See "Description of the New Notes--
Certain Covenants" and "Description of the New Credit Facility."
The Issuer intends to comply with the provisions of Rule 13e-4 promulgated
pursuant to the Exchange Act in connection with any exchange, to the extent
applicable.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
It is expected that the New Preferred Stock will be subject to provisions
regarding legal and covenant defeasance which are substantially the same as
those with respect to the New Notes set forth under "Description of the New
Notes--Legal Defeasance and Covenant Defeasance."
TRANSFER AGENT AND REGISTRAR
United States Trust Company of New York is the transfer agent and registrar
for the New Preferred Stock.
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BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the New Preferred Stock will initially be issued
in the form of one or more permanent global Preferred Stock certificates in
fully registered form (each, a "Global Preferred Stock Certificate"). Upon
issuance, each Global Preferred Stock Certificate will be deposited with the
Trustee as custodian for, and registered in the name of, a nominee of The
Depository Trust Company ("DTC").
Owners of beneficial interests in a Global Preferred Stock Certificate will
generally not be entitled to receive physical delivery of a physical
certificate for their New Preferred Stock (Certificated Preferred Stock). The
New Preferred Stock is not issuable in bearer form.
Upon the issuance of any Global Preferred Stock Certificates, DTC or its
custodian will credit, on its internal system, the respective liquidation
preference of the individual beneficial interests represented by such Global
Preferred Stock Certificates, to the accounts of persons who have accounts
with such depositary. Such accounts initially will be designated by or on
behalf of the Exchange Agent. Ownership of beneficial interests in a Global
Preferred Stock Certificate will be limited to persons who have accounts with
DTC ("participants") or persons who hold interests through participants.
Ownership of beneficial interests in a Global Preferred Stock Certificate will
be shown on, and the transfer of that ownership will be effected only through,
records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants). Beneficial owners may hold their interests
in a Global Preferred Stock Certificate directly through DTC if they are
participants in such system, or indirectly through organizations which are
participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Preferred Stock Certificate, DTC or such nominee, as the case may be,
will be considered the sole owner or holder of the Exchangeable Preferred
Stock represented by such Global Preferred Stock Certificate for all purposes
under the Certificate of Designation and the Exchangeable Preferred Stock. No
beneficial owner of an interest in a Global Preferred Stock Certificate will
be able to transfer that interest except in accordance with DTC's applicable
procedures, in addition to those provided for under the Certificate of
Designation.
Payments made with respect to the Global Preferred Stock Certificates will
be made to DTC or its nominee, as the case may be, as the registered owner
thereof. The Issuer will not have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in a Global Preferred Stock Certificate or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
The Issuer expects that DTC or its nominee, upon receipt of any payments
made with respect to the Global Preferred Stock Certificates, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the amount of such Global Preferred Stock
Certificates as shown on the records of DTC or its nominee. The Issuer also
expects that payments by participants to owners of beneficial interests in
such Global Preferred Stock Certificates held through such participants will
be governed by standing instructions and customary practices, as is now the
case with securities held for the accounts of customers registered in the
names of nominees for such customers. Such payments will be the responsibility
of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
The Issuer expects that DTC will take any action permitted to be taken by a
holder of Exchangeable Preferred Stock (including the presentation of
Exchangeable Preferred Stock for
167
exchange as described below) only at the direction of one or more participants
to whose account the DTC interests in a Global Preferred Stock Certificate is
credited and only in respect of such portion of the aggregate liquidation
preference of Exchangeable Preferred Stock as to which such participant or
participants has or have given such direction.
The Issuer understands that: DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical
movement of certificates and certain other organizations. Indirect access to
the DTC system is available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in Global Preferred Stock Certificates among
participants of DTC, it is under no obligation to perform or continue to
perform such procedures, and such procedures may be discontinued at any time.
The Issuer will not have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under
the rules and procedures governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Preferred Stock Certificates and a successor depositary is not
appointed by the Issuer within 90 days, the Issuer will issue Certificated
Preferred Stock in exchange for the Global Preferred Stock Certificates.
168
DESCRIPTION OF THE EXCHANGE DEBENTURES
GENERAL
The Exchange Debentures, if issued, will be issued pursuant to an indenture
(the "Exchange Debenture Indenture") by and between the Issuer and United
States Trust Company of New York, as trustee (the "Exchange Debenture
Trustee"). The terms of the Exchange Debentures include those stated in the
Exchange Debenture Indenture and those made part of the Exchange Debenture
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Exchange Debentures are subject to all such terms,
and Holders of Exchange Debentures are referred to the Exchange Debenture
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of the material provisions of the Exchange Debenture Indenture does
not purport to be complete and is qualified in its entirety by reference to
the Exchange Debenture Indenture, including the definitions therein of certain
terms used below. Copies of the proposed form of Exchange Debenture Indenture
are available as set forth below under "--Additional Information." The
definitions of certain terms used in the following summary are set forth below
under "--Certain Definitions." All references in this Description of Exchange
Debentures to the "Issuer" are limited to Harborside Healthcare Corporation
and do not include any of the Issuer's Subsidiaries.
All of the Issuer's Subsidiaries are Restricted Subsidiaries on the date
hereof. However, under certain circumstances, the Issuer will be able to
designate current or future Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to the restrictive covenants set
forth in the Exchange Debenture Indenture.
The Exchange Debentures, if issued, will be general unsecured obligations of
the Issuer, subordinated to all existing and future Senior Debt (including the
Notes and the New Credit Facility). The Exchange Debentures will also be
effectively subordinated to all existing and future Debt of the
Issuer's Subsidiaries. The Exchange Debentures will be issued in fully
registered form only in denominations of $1,000 and integral multiples thereof
(other than as described in "Description of Exchangeable Preferred Stock--
Exchange" or with respect to additional Exchange Debentures issued in lieu of
cash interest as described herein).
PRINCIPAL AND MATURITY OF AND INTEREST ON THE EXCHANGE DEBENTURES
The Exchange Debentures will mature on August 1, 2010, and will be limited
in aggregate principal amount to the liquidation preference of the
Exchangeable Preferred Stock (including any Additional Exchangeable Preferred
Stock), plus without duplication, accumulated and unpaid dividends on the
Exchange Date (plus any additional Exchange Debentures issued in lieu of cash
interest as described herein). Interest on the Exchange Debentures will accrue
at a rate of 13 1/2% per annum from the Exchange Date or from the most recent
interest payment date to which interest has been paid or provided for.
Interest will be payable semi-annually in cash (or, on or prior to August 1,
2003, in additional Exchange Debentures, at the option of the Issuer) in
arrears on February 1 and August 1 of each year, commencing with the first
such date after the Exchange Date, to Exchange Debenture Holders of record on
the immediately preceding January 15 and July 15. Interest on the Exchange
Debentures will be computed on the basis of a 360-day year comprised of twelve
30-day months. Principal, premium, if any and interest on the Exchange
Debentures will be payable at the office or agency of the Issuer maintained
for such purpose within the City and State of New York or, at the option of
the Issuer, payment of interest may be made by check mailed to the Holders of
the Exchange Debentures at their respective addresses set forth in the
register of Holders of Exchange Debentures; provided that all payments of
principal, premium, if any and interest with respect to any Exchange
Debentures the Holders of which have given wire transfer instructions to the
Issuer will be required to be made by wire transfer of immediately available
funds to the accounts specified by the Holders thereof. Until otherwise
designated by the Issuer, the Issuer's office or agency in New York will be
the office of the Exchange Debenture Trustee maintained for such purpose.
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SUBORDINATION
The Debt evidenced by the Exchange Debentures will be unsecured, will be
subordinated in right of payment, as set forth in the Exchange Debenture
Indenture, to all existing and future Senior Debt of the Issuer (including the
Issuer's Obligations under the Notes and the New Credit Facility), will rank
pari passu in right of payment with all existing and future Pari Passu Debt of
the Issuer and will be senior in right of payment to all existing and future
Subordinated Debt of the Issuer. The Exchange Debentures will also be
effectively subordinated to any Secured Debt of the Issuer to the extent of
the value of the assets securing such Debt and to all liabilities of its
Subsidiaries. However, payment from the money or the proceeds of Government
Notes held in any defeasance trust described under "--Legal Defeasance and
Covenant Defeasance" below is not subordinated to any Senior Debt or subject
to the restrictions described herein, so long as the payments into the
defeasance trust were not prohibited pursuant to the subordination provisions
hereinafter described at the time when so paid.
The Issuer conducts substantially all of its operations through its
Subsidiaries and consequently derives substantially all of its income through
its Subsidiaries. Claims of creditors of such Subsidiaries of the Issuer,
including trade creditors of such Subsidiaries generally will have priority
with respect to the assets and earnings of such Subsidiaries over the claims
of creditors of the Issuer, including the Holders of the Exchange Debentures.
The Exchange Debentures, therefore, will be effectively subordinated to
creditors (including trade creditors) of such Subsidiaries.
At June 30, 1998, after giving pro forma effect to the Recapitalization (i)
the outstanding Senior Debt of the Issuer would have been $103.6 million, $4.1
million of which would have been Secured Debt and $99.5 million of which would
have been Debt represented by the Notes, (ii) the total liabilities of the
Subsidiaries of the Issuer (including trade payables) would have been $107.2
million (excluding amounts owed to the Issuer) and (iii) the Issuer and its
Subsidiaries would have had $177.4 million of consolidated Debt. Although the
Exchange Debenture Indenture contains limitations on the amount of additional
Debt which the Issuer and the Restricted Subsidiaries may incur, under certain
circumstances the amount of such Debt could be substantial, such Debt may be
Senior Debt and such Debt may be incurred by Subsidiaries. The Exchange
Debenture Indenture will provide that the Issuer and the Restricted
Subsidiaries may not incur or otherwise become liable for any Debt that is
subordinate or junior in right of payment to any Senior Debt and senior in any
respect in right of payment to the Exchange Debentures. Unsecured Debt is not
deemed to be subordinate or junior to secured Debt merely because it is
unsecured.
Upon any payment or distribution to creditors of the Issuer in a liquidation
or dissolution of the Issuer or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Issuer or its property, an
assignment for the benefit of creditors or any marshaling of the Issuer's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full, in cash or Cash Equivalents, of all Obligations due in
respect of such Senior Debt (including interest after the commencement of any
such proceeding at the rate specified in the applicable Senior Debt, whether
or not allowed or allowable in such proceeding) before the Holders of Exchange
Debentures will be entitled to receive any payment with respect to the
Exchange Debentures, and until all Obligations with respect to Senior Debt are
paid in full, in cash or Cash Equivalents, any payment or distribution to
which the Holders of Exchange Debentures would be entitled shall be made to
the holders of Senior Debt (except that Holders of Exchange Debentures may
receive and retain (i) Permitted Junior Securities and (ii) payments made from
the trust described under "--Legal Defeasance and Covenant Defeasance" so long
as, on the date or dates the respective amounts were paid into the trust, such
payments were made with respect to the Exchange Debentures without violating
the subordination provisions described herein). The term "payment" means, with
respect to the Exchange Debentures, any payment, whether in cash, other assets
or property, or additional Exchange Debentures of interest, principal
(including redemption price and purchase price), premium or any other amount
on, of or in respect of the Exchange Debentures, any other acquisition of
Exchange Debentures and any deposit into the trust described under "--Legal
Defeasance and Covenant Defeasance" below. The verb "pay" has a correlative
meaning.
170
The Issuer also may not make any payment or distribution upon or in respect
of the Exchange Debentures (except from the trust described under "--Legal
Defeasance and Covenant Defeasance") if (i) a default in the payment of any
Obligations with respect to Designated Senior Debt occurs and is continuing (a
"payment default") or any other default on Designated Senior Debt occurs and
the maturity of such Designated Senior Debt is accelerated in accordance with
its terms or (ii) a default, other than a payment default, occurs and is
continuing with respect to Designated Senior Debt that permits holders of the
Designated Senior Debt as to which such default relates to accelerate its
maturity (a "non-payment default") and, in the case of this clause (ii) only,
the Exchange Debenture Trustee receives a notice of such default (a "Payment
Blockage Notice") from the Issuer, a Representative for, or the holders of a
majority of the outstanding principal amount of, any issue of Designated
Senior Debt. Payments on the Exchange Debentures may and shall be resumed (a)
in the case of a payment default, upon the date on which such default is cured
or waived and, in the case of Designated Senior Debt that has been
accelerated, such acceleration has been rescinded, and (b) in case of a non-
payment default, the earlier of the date on which such non-payment default is
cured or waived or 179 days after the date on which the applicable Payment
Blockage Notice is received, unless the maturity of any Designated Senior Debt
has been accelerated. No new period of payment blockage may be commenced on
account of any non-payment default unless and until 360 days have elapsed
since the initial effectiveness of the immediately prior Payment Blockage
Notice. No non-payment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Exchange Debenture Trustee
shall be, or be made, the basis for a subsequent Payment Blockage Notice
unless such default shall have been cured or waived for a period of not less
than 90
days. Notwithstanding any other provision hereof, during any 365 day period,
there must be at least 180 days where there is no Payment Blockage Notice in
effect.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Exchange Debentures may recover less
ratably than other creditors of the Issuer including holders of Senior Debt
(including holders of the Notes) and trade creditors. The Exchange Debenture
Indenture will limit, subject to certain financial tests and exceptions, the
amount of additional Debt, including Senior Debt, that the Issuer and its
Subsidiaries can incur. See "--Certain Covenants--Incurrence of Debt and
Issuance of Preferred Stock."
OPTIONAL REDEMPTION
Except as described in the following paragraphs, the Exchange Debentures
will not be redeemable at the Issuer's option prior to August 1, 2003.
Thereafter, the Exchange Debentures will be subject to redemption at any time
at the option of the Issuer, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the redemption prices (expressed as percentages
of principal amount) set forth below plus accrued and unpaid interest to the
applicable redemption date (subject to the right of Holders on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the twelve-month period beginning on August 1 of the years
indicated below:
YEAR PERCENTAGE
---- ----------
2003............................................. 106.750%
2004............................................. 104.500
2005............................................. 102.250
2006 and thereafter.............................. 100.000
In addition, at any time and from time to time, prior to August 1, 2001, the
Issuer may redeem up to 35% of the Exchange Debentures, at a redemption price
of 113.5% of the principal amount thereof plus accrued and unpaid interest to
the redemption date, with the net cash proceeds received by the Issuer of a
public offering of common stock of the Issuer provided that such redemption
shall occur within 60 days of the date of the closing of such public offering.
171
At any time on or prior to August 1, 2003, the Exchange Debentures may be
redeemed as a whole but not in part at the option of the Issuer upon the
occurrence of a Change of Control, upon not less than 30 nor more than 60
days' prior notice (but in no event may any such redemption occur more than 90
days after the occurrence of such Change of Control) mailed by first-class
mail to each Holder's registered address, at a redemption price equal to 100%
of the principal amount thereof plus the Applicable Premium as of, and accrued
but unpaid interest to, the redemption date (subject to the right of Holders
on the relevant record date to receive interest due on the relevant interest
payment date).
"Applicable Premium" means, with respect to an Exchange Debenture at any
redemption date, the greater of (i) 1.0% of the principal amount of such
Exchange Debenture or (ii) the excess of (A) the present value at such time of
(1) the redemption price of such Exchange Debenture at August 1, 2003 (such
redemption price being set forth in the table above) plus (2) all required
interest payments due on such Exchange Debenture through August 1, 2003
(whether in cash or additional Exchange Debentures, but excluding accrued but
unpaid interest, if any, on the redemption date), computed using a discount
rate equal to the Treasury Rate plus 50 basis points, over (B) the principal
amount of such Exchange Debenture, if greater, on the redemption date.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H. 15(519)
which has become publicly available at least two Business Days prior
to the redemption date (or, if such Statistical Release is no longer
published, any publicly available source or similar market data)) most nearly
equal to the period from the redemption date to August 1, 2003, provided,
however, that if the period from the redemption date to August 1, 2003 is not
equal to the constant maturity of a United States Treasury security for which
a weekly average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the
weekly average yields of United States Treasury securities for which such
yields are given, except that if the period from the redemption date to August
1, 2003 is less than one year, the weekly average yield on actually traded
United States Treasury securities adjusted to a constant maturity of one year
shall be used.
SELECTION AND NOTICE
If less than all of the Exchange Debentures are to be redeemed at any time,
selection of Exchange Debentures for redemption will be made by the Exchange
Debenture Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Exchange Debentures are
listed, or, if the Exchange Debentures are not so listed, on a pro rata basis,
by lot or by such method as the Exchange Debenture Trustee shall deem fair and
appropriate; provided that no Exchange Debentures of $1,000 or less shall be
redeemed in part. Notices of redemption shall be mailed by first class mail at
least 30 but not more than 60 days before the redemption date to each Holder
of Exchange Debentures to be redeemed at its registered address. Notices of
redemption may not be conditional. If any Exchange Debenture is to be redeemed
in part only, the notice of redemption that relates to such Exchange Debenture
shall state the portion of the principal amount thereof to be redeemed. A new
Exchange Debenture in a principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Exchange Debenture. Exchange Debentures called for redemption
become due on the date fixed for redemption. On and after the redemption date,
interest ceases to accrue on Exchange Debentures or portions of them called
for redemption.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, unless all Exchange Debentures
have been called for redemption pursuant to the provisions described above
under the caption "--Optional
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Redemption," each Holder of Exchange Debentures will have the right to require
the Issuer to repurchase all or any part (equal to a principal amount of
$1,000 or an integral multiple thereof) of such Holder's Exchange Debentures
pursuant to an offer described more fully in the Exchange Debenture Indenture
(the "Exchange Debenture Change of Control Offer") at an offer price in cash
equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest to the date of purchase.
The Exchange Debenture Indenture will provide that, prior to complying with
the provisions of this covenant, but in any event within 90 days following a
Change of Control, the Issuer will either repay all outstanding Senior Debt or
obtain the requisite consents, if any, under all agreements governing
outstanding Senior Debt to permit the repurchase of Exchange Debentures
required by this covenant, unless notice of redemption of all Exchange
Debentures has then been given pursuant to the provisions described under the
caption "--Optional Redemption" above and such redemption is permitted by the
terms of outstanding Senior Debt. The Issuer will publicly announce the
results of the Exchange Debenture Change of Control Offer on or as soon as
practicable after the date that payment is made pursuant to the Change of
Control Offer (the "Exchange Debenture Change of Control Payment Date").
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Exchange Debenture Indenture are
applicable. Except as described above with respect to a Change of Control, the
Exchange Debenture Indenture does not contain provisions that permit the Holders
of the Exchange Debentures to require that the Issuer repurchase or redeem the
Exchange Debentures in the event of a takeover, recapitalization or similar
transaction. The Change of Control purchase feature is a result of negotiations
between the Issuer and the Placement Agents. Management has no present intention
to engage in a transaction involving a Change of Control, although it is
possible that the Issuer would decide to do so in the future. Subject to the
limitations discussed below, the Issuer could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Exchange Debenture
Indenture, but that could increase the amount of Debt outstanding at such time
or otherwise affect the Issuer's capital structure or credit ratings.
The New Credit Facility and the indenture governing the Notes prohibit the
Issuer from purchasing any Exchange Debentures, and the New Credit Facility
also provides that certain change of control events with respect to the Issuer
will constitute a default thereunder. The indenture governing the Notes
requires an offer be made to repurchase all outstanding Notes upon a Change of
Control, unless all Notes have then been called for redemption, and restricts
the ability of the Issuer to purchase Exchangeable Preferred Stock until such
offer has been made or no Notes remain outstanding. See "Description of the
New Notes--Repurchase at the Option of Holders--Change of Control" and "--
Certain Covenants--Restricted Payments." Any future credit agreements or other
agreements relating to Senior Debt to which the Issuer becomes a party or that
may be entered into by Subsidiaries of the Issuer may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Issuer is prohibited from purchasing Exchange Debentures, the Issuer
could seek the consent of its lenders and the holders of the Notes to the
purchase of Exchange Debentures or could attempt to refinance the borrowings
that contain such prohibition. If the Issuer does not obtain such a consent or
repay such borrowings, the Issuer will remain prohibited from purchasing
Exchange Debentures. In such case, the Issuer's failure to purchase tendered
Exchange Debentures would constitute an Event of Default under the Exchange
Debenture Indenture which would, in turn, constitute a default under the New
Credit Facility or any such future credit or other agreement. In such
circumstances, the subordination provisions in the Exchange Debenture
Indenture would restrict payments to the Holders of Exchange Debentures. In
any event, the ability of the Issuer to purchase all Notes tendered upon a
Change of Control or repay any such other borrowings will be limited by the
Issuer's financial resources. See "Risk Factors--Potential Inability to Fund a
Change of Control Offer."
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The Issuer will not be required to make an Exchange Debenture Change of
Control Offer upon a Change of Control if a third party makes and consummates
an Exchange Debenture Change of Control Offer.
"Change of Control" means the occurrence of any of the following events:
(i) prior to the first public offering of Voting Stock of the Issuer, the
Initial Control Group ceases to be the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of
more than 50% of the total voting power of the Voting Stock of the Issuer,
whether as a result of the issuance of securities of the Issuer, any
merger, consolidation, liquidation or dissolution of the Issuer, any direct
or indirect transfer of securities by the Initial Control Group or
otherwise (for purposes of this clause (i), the Initial Control Group shall
be deemed to beneficially own all Voting Stock of an entity (the "specified
entity") held by any other entity (the "parent entity") so long as the
Initial Control Group beneficially owns (as so defined), directly or
indirectly, in the aggregate a majority of the voting power of the Voting
Stock of the parent entity);
(ii) following the first public offering of Voting Stock of the Issuer
(A) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more members of the Initial Control Group,
is or becomes the beneficial owner (as defined in clause (i) above),
directly or indirectly, of more than 40% of the total voting power of the
Voting Stock of the Issuer and (B) the Initial Control Group "beneficially
owns" (as defined in clause (i) above), directly or indirectly, in the
aggregate a lesser percentage of the total voting power of the Voting Stock
of the Issuer, than such other person and does not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the Board of Directors of the Issuer (for purposes
of this clause (ii), such other person shall be deemed to beneficially own
all Voting Stock of a specified entity held by a parent entity, if such
other person "beneficially owns" (as defined in clause (i) above), directly
or indirectly, in the aggregate more than 40% of the voting power of the
Voting Stock of such parent entity and the Initial Control Group
"beneficially owns" (as defined in clause (i) above), directly or
indirectly, in the aggregate a lesser percentage of the voting power of the
Voting Stock of such parent entity and does not have the right or ability
by voting power, contract or otherwise to elect or designate for election a
majority of the board of directors of such parent entity); or
(iii) at any time after the first public offering of common stock of the
Issuer, any person other than the Initial Control Group (or their
designated board members), (A)(I) nominates one or more individuals for
election to the Board of Directors of the Issuer and (II) solicits proxies,
authorizations or consents in connection therewith and (B) such number of
nominees elected to serve on the Board of Directors in such election and
all previous elections after the Closing Date represents a majority of the
Board of Directors of the Issuer following such election.
"Initial Control Group" means Investcorp, its Affiliates, any Person acting
in the capacity of an underwriter or initial purchaser in connection with a
public or private offering of the Issuer's Capital Stock, any employee benefit
plan of the Issuer or any of its Subsidiaries or any participant therein, a
trustee or other fiduciary holding securities under any such employee benefit
plan or any Permitted Transferee of any of the foregoing Persons.
"Permitted Transferee" means, with respect to any Person, (i) any other
Person, directly or indirectly, controlling or controlled by or under direct
or indirect common control with such specified Person, (ii) the spouse, former
spouse, lineal descendants, heirs, executors, administrators, testamentary
trustees, legatees or beneficiaries of any such Person, (iii) a trust, the
beneficiaries of which, or a corporation or partnership or limited liability
company, the stockholders, general or limited partners or members of which,
include only such Person or his or her spouse, lineal descendants or heirs, in
each case to whom such Person has transferred, or through which it holds, the
beneficial
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ownership of any securities of the Issuer and (iv) any investment fund or
investment entity that is a subsidiary of such Person or a Permitted
Transferee of such Person.
ASSET SALES
The Exchange Debenture Indenture will provide that the Issuer will not, and
will not permit any of its Restricted Subsidiaries to, consummate an Asset
Sale unless (i) the Issuer (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the
fair market value of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) at least 75% of the consideration therefor
received by the Issuer or such Restricted Subsidiary is in the form of cash or
Cash Equivalents; provided that the amount of (x) any liabilities (as shown on
the Issuer's or such Restricted Subsidiary's most recent balance sheet), of
the Issuer or any Restricted Subsidiary (other than liabilities that are by
their terms subordinated to the Exchange Debentures) that are assumed by the
transferee of any such assets, or from which the Issuer and its Restricted
Subsidiaries are released in writing by the creditor with respect thereto, and
(y) any securities, notes or other obligations received by the Issuer or any
such Restricted Subsidiary from such transferee that are converted by the
Issuer or such Restricted Subsidiary into cash (to the extent of the cash
received) within 180 days after receipt, shall be deemed, in each case, to be
cash for purposes of this provision; provided, further, however, that this
clause (ii) shall not apply to any sale of Equity Interests of or other
Investments in Unrestricted Subsidiaries.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Issuer may apply such Net Proceeds, at its option, (a) to repay Senior
Debt, Debt of any Restricted Subsidiary or Pari Passu Debt (other than Debt
owed to the Issuer or a Subsidiary of the Issuer, and provided that if the
Issuer shall so reduce Pari Passu Debt, it will equally and ratably make an
Asset Sale Offer (in accordance with the procedures set forth below for an
Asset Sale Offer) to all Holders), (b) to invest in properties and assets that
will be used or useful in the business of the Issuer or any of its
Subsidiaries, or (c) to the acquisition of a controlling interest in another
business, the making of a capital expenditure or the acquisition of other
assets, in each case, that will be used or useful in the business of the
Issuer or any of its Restricted Subsidiaries; provided that if during such 360
day period the Issuer or a Restricted Subsidiary enters into a definitive
agreement committing it to apply such Net Proceeds in accordance with the
requirements of clause (b) or (c), such 360 day period will be extended for a
period not to exceed 180 days with respect to the amount of Net Proceeds so
committed until required to be paid in accordance with such agreement (or, if
earlier, until termination of such agreement). Any Net Proceeds from Asset
Sales that are not applied or invested as provided in the first sentence of
this paragraph will be deemed to constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $10.0 million, the Exchange
Debenture Indenture will provide that the Issuer will (i) make an offer to all
Holders of Exchange Debentures, and (ii) prepay, purchase or redeem (or make
an offer to do so) any other Pari Passu Debt of the Issuer in accordance with
provisions requiring the Issuer to prepay, purchase or redeem such Debt with
the proceeds from any Asset Sales (or offer to do so), pro rata in proportion
to the respective principal amounts (or accreted value, as applicable) of the
Exchange Debentures and such other Debt required to be prepaid, purchased or
redeemed or tendered for, in the case of the Exchange Debentures pursuant to
such offer (an "Asset Sale Offer") to purchase the maximum principal amount of
Exchange Debentures that may be purchased out of such pro rata portion of the
Excess Proceeds, at an offer price in cash in an amount equal to 100% of their
principal amount plus accrued and unpaid interest (subject to the right of
Holders of record on a record date to receive interest on the relevant
interest payment date, in accordance with the procedures set forth in the
Exchange Debenture Indenture). To the extent that the aggregate principal
amount of Exchange Debentures and Pari Passu Debt tendered pursuant to an
Asset Sale Offer or other offer is less than the Excess Proceeds, the Issuer
may use any remaining Excess Proceeds for general corporate purposes. If the
aggregate principal amount of Exchange Debentures surrendered by Holders
thereof exceeds the pro rata portion of such Excess Proceeds to be used to
purchase
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Exchange Debentures, the Exchange Debenture Trustee shall select the Exchange
Debentures to be purchased on a pro rata basis. Upon completion of such offer
to purchase, the amount of Excess Proceeds shall be reset at zero.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws or regulations are applicable in connection with the
repurchase of the Exchange Debentures pursuant to an Asset Sale Offer. To the
extent that the provisions of any applicable securities laws or regulations
conflict with the provisions of the Exchange Debenture Indenture, the Issuer
will comply with such securities laws and regulations and shall not be deemed
to have breached its obligations described in the Exchange Debenture Indenture
by virtue thereof.
CERTAIN COVENANTS
Restricted Payments
The Exchange Debenture Indenture will provide that the Issuer will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly:
(i) declare or pay any dividend or make any other distribution (including
any payment in connection with any merger or consolidation) on account of
the Issuer's or any of its Restricted Subsidiaries' Equity Interests (other
than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) and dividends payable to the Issuer or any Restricted
Subsidiary);
(ii) purchase, redeem or otherwise acquire or retire for value (including
in connection with any merger or consolidation) any Equity Interests of the
Issuer (or any Restricted Subsidiary held by Persons other than the Issuer
or any Restricted Subsidiary);
(iii) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value, any Subordinated Debt of
the Issuer, except (A) a payment of interest, principal or other related
Obligations at Stated Maturity and (B) the purchase, repurchase or other
acquisition or retirement of Subordinated Debt of the Issuer in
anticipation of satisfying a sinking fund obligation, principal installment
or final maturity, in each case due within one year of the date of
purchase, repurchase or other acquisition or retirement; or
(iv) make any Restricted Investment
(all such payments and other actions set forth in clauses (i) through (iv)
above being collectively referred to as "Restricted Payments"), unless, at
the time of, and after giving effect to, such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Issuer would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Debt pursuant to the
Consolidated Coverage Ratio test set forth in the first paragraph of the
covenant described below under the caption "--Incurrence of Debt and
Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with (without duplication) the
aggregate amount of all other Restricted Payments made by the Issuer and
its Restricted Subsidiaries after the Issue Date (excluding Restricted
Payments permitted by clauses (ii), (iii)(A), (iv), (v), (vi)(A) and
(vii) of the next succeeding paragraph, but including all other
Restricted Payments permitted by the next succeeding paragraph), is less
than the sum (without duplication) of
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(i) 50% of the Consolidated Net Income of the Issuer for the period
(taken as one accounting period) from the beginning of the fiscal
quarter during which the Issue Date occurs to the end of the Issuer's
most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit, less 100% of
such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Issuer
from the issue or sale (other than to a Subsidiary) of, or from capital
contributions with respect to, Equity Interests of the Issuer (other
than Disqualified Stock), in either case after the Issue Date, plus
(iii) the aggregate principal amount (or accreted value, if less) of
Debt or Disqualified Stock of the Issuer or any Restricted Subsidiary
issued since the Issue Date (other than to a Restricted Subsidiary)
that has been converted into Equity Interests (other than Disqualified
Stock) of the Issuer, plus
(iv) 100% of the aggregate net cash received by the Issuer or a
Restricted Subsidiary of the Issuer since the Issue Date from (A)
Restricted Investments, whether through interest payments, principal
payments, dividends or other distributions or payments, or the sale or
other disposition (other than to the Issuer or a Restricted Subsidiary)
thereof made by the Issuer and its Restricted Subsidiaries and (B) a
cash dividend from, or the sale (other than to the Issuer or a
Restricted Subsidiary) of the stock of, an Unrestricted Subsidiary,
plus
(v) upon the redesignation of an Unrestricted Subsidiary as a
Restricted Subsidiary, the fair market value of the Investments of the
Issuer and its Restricted Subsidiaries (other than such Subsidiary) in
such Subsidiary.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would have
complied with the provisions of the Exchange Debenture Indenture;
(ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Equity Interests or Subordinated Debt in exchange for,
or out of the net cash proceeds of the substantially concurrent sale (other
than to a Restricted Subsidiary of the Issuer) of, other Equity Interests
(other than any Disqualified Stock) of, or a capital contribution to, the
Issuer; provided that the amount of any such net cash proceeds that are
utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition shall be excluded from clause (c) (ii) of the preceding
paragraph;
(iii) the redemption, repurchase, retirement, defeasance or other
acquisition of (A) Subordinated Debt made by an exchange for, or with the
net cash proceeds from an incurrence of, Permitted Refinancing Debt or (B)
Subordinated Debt or Preferred Equity Interests (other than Subordinated
Debt or Preferred Equity Interests held by Affiliates of the Issuer) upon a
Change of Control or Asset Sale to the extent required by the agreement
governing such Subordinated Debt or the certificate of designation
governing such Preferred Equity Interests, as the case may be, but only (x)
if the Issuer shall have complied with the covenant described under the
caption "Repurchases at the Option of Holders -- Change of Control" or "--
Asset Sales", as the case may be, and repurchased all Exchange Debentures
tendered pursuant to the offer required by such covenants prior to
purchasing or repaying such Subordinated Debt or Preferred Equity
Interests, as the case may be, (y) in the case of an Asset Sale, to the
extent of the remaining Excess Proceeds offered to Holders pursuant to the
Asset Sale Offer and (z) within six months after the date such offer is
consummated;
(iv) the payment of any dividend by a Restricted Subsidiary of the Issuer
to the holders of its common Equity Interests on a pro rata basis;
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(v) to the extent constituting Restricted Payments, the Specified
Affiliate Payments;
(vi) (A) the payment of any regular quarterly dividends in respect of the
Exchangeable Preferred Stock in the form of additional shares of
Exchangeable Preferred Stock having the terms and conditions set forth in
the Certificate of Designation for the Exchangeable Preferred Stock as in
effect on the Issue Date; and (B) commencing August 1, 2003, the payment of
regular quarterly cash dividends (in the amount no greater than that
provided for in the Certificate of Designation for the Exchangeable
Preferred Stock as in effect on the Issue Date), out of funds legally
available therefor, on any of the shares of Exchangeable Preferred Stock
issued on the Issue Date or subsequently issued in payment of dividends in
respect of such shares of Exchangeable Preferred Stock issued on the Issue
Date, provided that, at the time of and immediately after giving effect to
the payment of such cash dividend, no Default or Event of Default shall
have occurred and be continuing;
(vii) the exchange of Exchangeable Preferred Stock for Exchange
Debentures in accordance with the terms of the Certificate of Designation
for such Exchangeable Preferred Stock as in effect on the Issue Date; and
(viii) Restricted Payments in an aggregate amount not to exceed $10
million.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Issuer and its Restricted Subsidiaries (except to the extent repaid in cash)
in the Subsidiary so designated, to the extent they do not constitute
Permitted Investments at the time such Subsidiary became an Unrestricted
Subsidiary, will be deemed to be Restricted Payments made at the time of such
designation. The amount of such outstanding Investments will be
equal to the portion of the fair market value of the net assets of any
Subsidiary of the Issuer at the time that such Subsidiary is designated an
Unrestricted Subsidiary that is represented by the interest of the Issuer and
its Restricted Subsidiaries in such Subsidiary, in each case as determined in
good faith by the Board of Directors of the Issuer. Such designation will only
be permitted if such Restricted Payment would be permitted at such time and if
such Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Issuer or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any non-cash Restricted Payment shall be determined
in good faith by the Board of Directors of the Issuer.
In making the computations required by this covenant, (i) the Issuer or the
relevant Restricted Subsidiary may use audited financial statements for the
portions of the relevant period for which audited financial statements are
available on the date of determination and unaudited financial statements and
other current financial data based on the books and records of the Issuer for
the remaining portion of such period and (ii) the Issuer or the relevant
Restricted Subsidiary will be permitted to rely in good faith on the financial
statements and other financial data derived from the books and records of the
Issuer and the Restricted Subsidiary that are available on the date of
determination. If the Issuer makes a Restricted Payment that, at the time of
the making of such Restricted Payment, would in the good faith determination
of the Issuer or any Restricted Subsidiary be permitted under the requirements
of the Exchange Debenture Indenture, such Restricted Payment will be deemed to
have been made in compliance with the Exchange Debenture Indenture
notwithstanding any subsequent adjustments made in good faith to the Issuer's
or any Restricted Subsidiary's financial statements, affecting Consolidated
Net Income of the Issuer for any period.
For the avoidance of doubt, it is expressly agreed that no payment or other
transaction permitted by clauses (3), (4) and (5) of the covenant described
under "Certain Covenants--Transactions with
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Affiliates" shall be considered a Restricted Payment for purposes of, or
otherwise restricted by, the Exchange Debenture Indenture.
Incurrence of Debt and Issuance of Preferred Stock
The Exchange Debenture Indenture will provide that the Issuer will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable, contingently or otherwise, with respect to (collectively,
"incur") any Debt and that the Issuer will not issue any Disqualified Stock
and will not permit any of its Restricted Subsidiaries to issue any shares of
Preferred Stock; provided, however, that the Issuer and its Restricted
Subsidiaries may incur Debt or issue shares of Disqualified Stock and the
Issuer's Restricted Subsidiaries may issue Preferred Stock, if the
Consolidated Coverage Ratio for the Issuer's most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Debt is incurred or
such Disqualified Stock or Preferred Stock is issued would have been at least
1.75 to 1.00 if such four quarter period ends on or prior to the second
anniversary of the Issue Date and 2.00 to 1.00 if it ends thereafter,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Debt had been incurred, or the
Disqualified Stock or Preferred Stock had been issued, as the case may be, at
the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Debt (collectively, "Permitted
Debt"):
(i) the incurrence of term and revolving Debt, letters of credit (with
letters of credit being deemed to have a principal amount equal to the
undrawn face amount thereof) and other Debt under Credit Facilities
(including Guarantees by the Issuer or any of its Subsidiaries of synthetic
lease drawings and other loans under the New Credit Facility or of other
Debt under Credit Facilities); provided that the aggregate principal amount
of such Debt outstanding pursuant to this clause (i) does not exceed an
amount equal to $250.0 million;
(ii) the incurrence by the Issuer and its Restricted Subsidiaries of
Existing Debt and Debt outstanding on the Exchange Date that was permitted
to be incurred by the Certificate of Designation;
(iii) the incurrence by the Issuer of Debt represented by Notes, the Note
Guarantees, and the Exchange Debentures issued upon the exchange of the
Exchangeable Preferred Stock or issued thereafter in payment of interest on
the Exchange Debentures, to the extent such interest payments are made
pursuant to the terms of the Exchange Debenture Indenture;
(iv) the incurrence by the Issuer or any of its Restricted Subsidiaries of
Acquired Debt;
(v) the incurrence by the Issuer or any of its Restricted Subsidiaries of
Permitted Refinancing Debt in exchange for, or the net proceeds of which
are used to refund, refinance or replace Debt (other than intercompany
Debt) that was permitted by the Exchange Debenture Indenture to be
incurred;
(vi) the incurrence by the Issuer or any of its Restricted Subsidiaries of
intercompany Debt or Preferred Stock owed or issued to and held by the
Issuer and any of its Restricted Subsidiaries, provided, however, that (X)
any such Debt of the Issuer shall be subordinated and junior in right of
payment to the Exchange Debentures and (Y)(A) any subsequent issuance or
transfer of Equity Interests or other action that results in any such Debt
or Preferred Stock being held by a Person other than the Issuer or a
Restricted Subsidiary and (B) any sale or other transfer of any such Debt
or Preferred Stock to a Person that is not either the Issuer or a
Restricted Subsidiary shall be deemed, in each case, to constitute an
incurrence of such Debt or issuance of such Preferred Stock by the Issuer
or such Restricted Subsidiary, as the case may be, that was not permitted
by this clause (vi);
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(vii) the incurrence by the Issuer or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred (A) principally for the purpose of
fixing or hedging interest rate risk with respect to any floating rate Debt
that is permitted by the terms of the Exchange Debenture Indenture to be
outstanding or (B) principally for the purpose of fixing or hedging
currency exchange rate risk or commodity price risk incurred in the
ordinary course of business;
(viii) the guarantee by the Issuer or any Restricted Subsidiary of Debt of
the Issuer or a Restricted Subsidiary of the Issuer that was permitted to
be incurred by another provision of this covenant; and
(ix) the incurrence by the Issuer or any of its Restricted Subsidiaries of
additional Debt (which may comprise Debt under the New Credit Facility) in
an aggregate principal amount (or accreted value, as applicable) at any
time outstanding, pursuant to this clause (ix) not to exceed an amount
equal to $20.0 million.
For purposes of determining compliance with this covenant, in the event that
an item of Debt meets the criteria of more than one of the categories of
Permitted Debt described in clauses (i) through (ix) above or is entitled to
be incurred pursuant to the first paragraph of this covenant, the Issuer
shall, in its sole discretion, classify such item of Debt in any manner that
complies with this covenant and such item of Debt will be treated as having
been incurred pursuant to only one of such clauses or pursuant to the first
paragraph hereof; provided that all outstanding Debt under the New Credit
Facility immediately following the Recapitalization shall be deemed to have
been incurred pursuant to clause (i) of the definition of Permitted Debt.
Accrual of interest and the accretion of accreted value will be deemed not to
be an incurrence of Debt for purposes of this covenant.
Liens
The Exchange Debenture Indenture will provide that the Issuer will not, and
will not permit any of its Restricted Subsidiaries to, create, incur, assume
or otherwise cause or suffer to exist or become effective any Lien of any kind
securing Debt or trade payables (other than Permitted Liens) upon any of their
property or assets, now owned or hereafter acquired, unless all payments due
under the Exchange Debenture Indenture and the Exchange Debentures are secured
on an equal and ratable basis with the obligations so secured until such time
as such obligations are no longer secured by a Lien; provided that (i) if such
other Debt constitutes Subordinated Debt or is otherwise subordinate or junior
in right of payment to the Obligations under the Exchange Debenture Indenture
or the Exchange Debentures, as the case may be, such Lien is expressly made
prior and senior in priority to the Lien securing such other Debt, or (ii) in
any other case, such Lien ranks equally and ratably with or prior to the Lien
securing the other Debt or obligations so secured.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Exchange Debenture Indenture will provide that the Issuer will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
create or otherwise cause or suffer to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i)(a) pay dividends or make any other distributions to the
Issuer or any of its Restricted Subsidiaries (1) on its Capital Stock or (2)
with respect to any other interest or participation in, or measured by, its
profits, or (b) pay any indebtedness owed to the Issuer or any of its
Restricted Subsidiaries, (ii) make loans or advances to the Issuer or any of
its Restricted Subsidiaries or (iii) transfer any of its properties or assets
to the Issuer or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of:
(a) Existing Debt and Debt outstanding on the Exchange Date that was
permitted to be incurred by the Certificate of Designation;
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(b) the Exchange Debenture Indenture, the Exchange Debentures, the
Indenture, the Notes and any Additional Notes, the Certificate of
Designation, the Exchangeable Preferred Stock and any other agreement
entered into after the Issue Date, provided that the encumbrances or
restrictions in such agreements are not materially more restrictive than
those contained in the foregoing agreements;
(c) any agreement or other instrument of a Person acquired by the Issuer
or any of its Restricted Subsidiaries as in effect at the time of such
acquisition (but not created in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired;
(d) purchase money obligations (including Capital Lease Obligations) for
property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (iii) above on the property
so acquired;
(e) in the case of clause (iii), any encumbrance or restriction (1) that
restricts in a customary manner the subletting, assignment, or transfer of
any property or asset that is subject to a lease, license or similar
contract, (2) by virtue of any transfer of, agreement to transfer, option
or right with respect to, or Lien on, any property or assets of the Issuer
or any Restricted Subsidiary not otherwise prohibited by the Exchange
Debenture Indenture or (3) contained in security agreements or mortgages
securing Debt to the extent such encumbrance or restriction restricts the
transfer of the property subject to such security agreements or mortgages;
(f) contracts for the sale of assets, including any restriction with
respect to a Restricted Subsidiary imposed pursuant to an agreement entered
into for the sale or disposition of all or substantially all of the Capital
Stock or assets of such Restricted Subsidiary pending the closing of such
sale or disposition;
(g) contractual encumbrances or restrictions in effect on the Closing
Date, including pursuant to the New Credit Facility and its related
documentation;
(h) restrictions on cash or other deposits or net worth imposed by
leases, credit agreements or other agreements entered into in the ordinary
course of business;
(i) customary provisions in joint venture agreements and other similar
agreements;
(j) any encumbrances or restrictions created with respect to Debt of
Restricted Subsidiaries permitted to be incurred subsequent to the Issue
Date pursuant to the provisions of the covenant described under the caption
"--Incurrence of Debt and Issuance of Preferred Stock" or operating leases,
provided that the Board of Directors of the Issuer determines (as evidenced
by a resolution of the Board of Directors) in good faith at the time such
encumbrances or restrictions are created that such encumbrances or
restrictions would not reasonably be expected to impair the ability of the
Issuer to make payments of interest and scheduled payments of principal on
the Exchange Debentures, in each case as and when due; and
(k) any encumbrances or restrictions of the type referred to in clauses
(i), (ii) and (iii) imposed by any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings
of the contracts, instruments or obligations referred to in clauses (a)
through (j), provided that such amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings,
taken as a whole, are, in the good faith judgment of the Issuer, not
materially more restrictive with respect to such encumbrances or
restrictions than those contained in the contracts, instruments or
obligations prior to such amendment, modification, restatement, renewal,
increase, supplement, refunding, replacement or refinancing.
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Merger, Consolidation or Sale of all or Substantially all Assets
The Exchange Debenture Indenture will provide that the Issuer may not
consolidate or merge with or into (whether or not the Issuer is the surviving
corporation), or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its properties or assets in one or more related
transactions, to another Person unless:
(i) the Issuer is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than the Issuer) or to
which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia;
(ii) the Person formed by or surviving any such consolidation or merger
(if other than the Issuer) or the Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made
assumes all the obligations of the Issuer under the Exchange Debentures and
the Exchange Debenture Indenture pursuant to a supplemental indenture in a
form reasonably satisfactory to the Exchange Debenture Trustee;
(iii) immediately after such transaction no Default or Event of Default
exists; and
(iv) except in the case of a merger of the Issuer with or into a Wholly
Owned Restricted Subsidiary of the Issuer, the Issuer or the Person formed
by or surviving any such consolidation or merger (if other than the
Issuer), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made will, at the time of such
transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter
period, either (x) be permitted to incur at least $1.00 of additional Debt
pursuant to the Consolidated Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "--Incurrence
of Debt and Issuance of Preferred Stock" or (y) have a Consolidated
Coverage Ratio at least equal to the Consolidated Coverage Ratio of the
Issuer for such four-quarter reference period.
Notwithstanding the foregoing clauses (iii) and (iv), (a) any Restricted
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to the Issuer and (b) the Issuer may merge with an
Affiliate incorporated solely for the purpose of reincorporating the Issuer in
another jurisdiction.
Transactions with Affiliates
The Exchange Debenture Indenture will provide that the Issuer will not, and
will not permit any of its Restricted Subsidiaries to, make any payment to, or
sell, lease, transfer or otherwise dispose of any of its properties or assets
to, or purchase any property or assets from, or enter into or make or amend
any transaction, contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction"), unless:
(i) such Affiliate Transaction is on terms that, taken as a whole, are no
less favorable to the Issuer or the relevant Restricted Subsidiary than
those that would have been obtained in a comparable transaction by the
Issuer or such Restricted Subsidiary with an unrelated Person; and
(ii) the Issuer delivers to the Exchange Debenture Trustee (a) with
respect to any Affiliate Transaction entered into after the Issue Date
involving aggregate consideration in excess of $3.0 million, a resolution
of the Board of Directors set forth in an Officers' Certificate certifying
that such Affiliate Transaction complies with clause (i) above and that
such Affiliate Transaction has been approved by a majority of the members
of the Board of Directors and (b) with respect to any Affiliate Transaction
involving aggregate consideration in excess of $10.0 million, an opinion as
to the fairness to the Holders of such Affiliate Transaction from a
financial point of view issued by an investment banking, appraisal or
accounting firm of national standing.
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Notwithstanding the foregoing, the following will not be deemed to be
Affiliate Transactions:
(1) transactions between or among the Issuer and/or its Restricted
Subsidiaries;
(2) Permitted Investments and Restricted Payments that are permitted by
the provisions of the Exchange Debenture Indenture described above under
the caption "-- Restricted Payments;"
(3) employment agreements, employee benefit plans and related
arrangements entered into in the ordinary course of business and all
payments and other transactions contemplated thereby;
(4) any payments to Investcorp and its Affiliates (whether or not such
Persons are Affiliates of the Issuer) (A) for any financial advisory,
financing, underwriting or placement services or in respect of other
investment banking activities, including in connection with acquisitions or
divestitures, which payments are approved by the Board of Directors of the
Issuer in good faith and (B) of annual management, consulting and advisory
fees and related expenses;
(5) any agreement in effect on the Closing Date (including the
Recapitalization Agreement, the Services Agreement (as amended on April 15,
1998) between the Berkshire Companies Limited Partnership and the Issuer
and the Brevard lease agreement) or any amendment thereto (so long as any
such amendment is not disadvantageous to the Holders in any material
respect) or any payment or other transaction contemplated by any of the
foregoing; and
(6) Debt permitted by paragraph (ix) of the covenant described under the
caption "--Incurrence of Debt and Issuance of Preferred Stock" to the
extent such Debt is on terms that, taken as a whole, are no less favorable
to the Issuer or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable transaction with an unrelated Person.
Restriction on Senior Subordinated Debt
The Exchange Debenture Indenture will provide that the Issuer will not incur
any Debt that is expressly subordinate in right of payment to any Senior Debt
and senior in any respect in right of payment to the Exchange Debentures.
Reports
Notwithstanding that the Issuer may not be required to remain subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, to the
extent permitted by the Exchange Act, the Issuer will file with the Securities
and Exchange Commission (the "Commission"), and provide within 15 days after
the Issuer is required to file the same with the Commission, the Exchange
Debenture Trustee and the Holders with the annual reports and the information,
documents and other reports that are specified in Sections 13 and 15(d) of the
Exchange Act. In the event the Issuer is not permitted to file such reports,
documents and information with the Commission, the Issuer will provide
substantially similar information to the Exchange Debenture Trustee and the
Holders, as if the Issuer were subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act.
EVENTS OF DEFAULT AND REMEDIES
The Exchange Debenture Indenture will provide that each of the following
constitutes an Event of Default with respect to the Exchange Debentures:
(i) default for 30 days in the payment when due of interest on the
Exchange Debentures (whether or not prohibited by the subordination
provisions of the Exchange Debenture Indenture);
(ii) default in payment when due of the principal of or premium, if any,
on the Exchange Debentures (whether or not prohibited by the subordination
provisions of the Exchange Debenture Indenture);
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(iii) failure by the Issuer for 30 days after receipt of a notice
specifying such failure to comply with the provisions described under the
captions "--Repurchase at Option of Holders--Change of Control," "--
Repurchase at the Option of Holders--Asset Sales," "--Certain Covenants--
Restricted Payments," "--Certain Covenants--Incurrence of Debt and Issuance
of Preferred Stock" or "--Certain Covenants--Merger, Consolidation or Sale
of all or Substantially all Assets;"
(iv) failure by the Issuer for 60 days after receipt of a notice
specifying such failure to comply with any of its other agreements in the
Exchange Debenture Indenture or the Exchange Debentures;
(v) the failure by the Issuer or any Restricted Subsidiary that is a
Significant Subsidiary to pay any Debt within any applicable grace period
after final maturity or acceleration by the holders thereof because of a
default if the total amount of such Debt unpaid or accelerated at the time
exceeds $15.0 million;
(vi) any judgment or decree for the payment of money in excess of $15.0
million (net of any insurance or indemnity payments actually received in
respect thereof prior to or within 90 days from the entry thereof, or to be
received in respect thereof in the event any appeal thereof shall be
unsuccessful) is entered against the Issuer or any Significant Subsidiary
that is a Restricted Subsidiary and is not discharged, waived or stayed and
either (A) an enforcement proceeding has been commenced by any creditor
upon such judgment or decree or (B) there is a period of 90 days following
the entry of such judgment or decree during which such judgment or decree
is not discharged, waived or the execution thereof stayed; and
(vii) certain events of bankruptcy or insolvency with respect to the
Issuer or any of its Restricted Subsidiaries that is a Significant
Subsidiary.
If any Event of Default occurs and is continuing, the Exchange Debenture
Trustee or the Holders of at least 25% in principal amount of the then
outstanding Exchange Debentures may declare all the Exchange Debentures to be
due and payable. Upon such a declaration, such amounts shall be due and
payable immediately; provided, however, that if upon such declaration there
are any amounts outstanding under the New Credit Facility and the amounts
thereunder have not been accelerated, such amounts shall be due and payable
upon the earlier of the time such amounts are accelerated or five Business
Days after receipt by the Issuer and the Representative of the lenders under
the New Credit Facility of such declaration. Notwithstanding the foregoing, in
the case of an Event of Default arising from certain events of bankruptcy or
insolvency with respect to the Issuer, all outstanding Exchange Debentures
will become due and payable without further action or notice. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Exchange Debentures may direct the Exchange Debenture Trustee in
its exercise of any trust or power.
The Holders of a majority in aggregate principal amount of the Exchange
Debentures then outstanding by notice to the Exchange Debenture Trustee may on
behalf of the Holders of all of the Exchange Debentures waive any existing
Default or Event of Default and its consequences under the Exchange Debenture
Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Exchange Debentures.
Subject to the provisions of the Exchange Debenture Indenture relating to
the duties of the Exchange Debenture Trustee, in case an Event of Default
occurs and is continuing, the Exchange Debenture Trustee will be under no
obligation to exercise any of the rights or powers under the Exchange
Debenture Indenture at the request or direction of any of the Holders unless
such Holders have offered to the Exchange Debenture Trustee reasonable
indemnity or security against any loss, liability or expense. Except to
enforce the right to receive payment of principal, premium (if any), interest
when due, no Holder may pursue any remedy with respect to the Exchange
Debenture Indenture or the Exchange Debentures unless (i) such Holder has
previously given the Exchange Debenture Trustee notice that an Event of
Default is continuing, (ii) Holders of at least 25% in principal
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amount of the outstanding Exchange Debentures have requested the Exchange
Debenture Trustee to pursue the remedy, (iii) such Holders have offered the
Exchange Debenture Trustee reasonable security or indemnity against any loss,
liability or expense, (iv) the Exchange Debenture Trustee has not complied
with such request within 60 days after the receipt of the request and the
offer of security or indemnity, and (v) the Holders of a majority in principal
amount of the outstanding Exchange Debentures have not given the Exchange
Debenture Trustee a direction inconsistent with such request within such 60-
day period. Subject to certain restrictions, the Holders of a majority in
principal amount of the outstanding Exchange Debentures are given the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Exchange Debenture Trustee or of exercising any trust or
power conferred on the Exchange Debenture Trustee.
The Exchange Debenture Trustee, however, may refuse to follow any direction
that conflicts with law or the Exchange Debenture Indenture or that the
Exchange Debenture Trustee determines is
unduly prejudicial to the rights of any other Holder or that would involve the
Exchange Debenture Trustee in personal liability. Prior to taking any action
under the Exchange Debenture Indenture, the Exchange Debenture Trustee will be
entitled to indemnification satisfactory to it in its sole discretion against
all losses and expenses caused by taking or not taking such action.
The Exchange Debenture Indenture provides that if a Default occurs and is
continuing and is known to the Exchange Debenture Trustee, the Exchange
Debenture Trustee must mail to each Holder notice of the Default within the
earlier of 90 days after it occurs or 30 days after it is known to a trust
officer or written notice of it is received by the Exchange Debenture Trustee.
Except in the case of a Default in the payment of principal of, premium (if
any), interest on any Exchange Debenture, the Exchange Debenture Trustee may
withhold notice if and so long as a committee of its trust officers in good
faith determines that withholding notice is in the interests of holders of
Exchange Debentures. In addition, the Issuer is required to deliver to the
Exchange Debenture Trustee, within 120 days after the end of each fiscal year,
a certificate indicating whether the signers thereof actually know of any
Default that occurred during the previous year. The Issuer also is required to
deliver to the Exchange Debenture Trustee, forthwith upon any Senior Officer
obtaining actual knowledge of any such Default, written notice of any event
which would constitute certain Defaults, their status and what action the
Issuer is taking or proposes to take in respect thereof.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder or Affiliate of
the Issuer, as such, shall have any liability for any obligations of the
Issuer under the Exchange Debentures, the Exchange Debenture Indenture or for
any claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder of Exchange Debentures by accepting an Exchange
Debenture waives and releases all such liabilities. The waiver and release are
part of the consideration for issuance of the Exchange Debentures. Such waiver
may not be effective to waive liabilities under the federal securities laws
and it is the view of the Commission that such a waiver is against public
policy.
SATISFACTION AND DISCHARGE
Upon the request of the Issuer, the Exchange Debenture Indenture will cease
to be of further effect (except as to surviving rights of registration of
transfer or exchange of the Exchange Debentures, as expressly provided for in
the Exchange Debenture Indenture) and the Exchange Debenture Trustee, at the
expense of the Issuer, will execute proper instruments acknowledging
satisfaction and discharge of the Exchange Debenture Indenture, any security
agreements relating thereto and the Exchange Debentures when (a) either (i)
all the Exchange Debentures theretofore authenticated and delivered (other
than destroyed, lost or stolen Exchange Debentures that have been replaced or
paid and Exchange Debentures that have been subject to defeasance under "--
Legal Defeasance and Covenant Defeasance") have been delivered to the Exchange
Debenture Trustee for cancellation or
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(ii) all Exchange Debentures not theretofore delivered to the Exchange
Debenture Trustee for cancellation (A) have become due and payable, (B) will
become due and payable at maturity within one year or (C) are to be called for
redemption within one year under arrangements satisfactory to the Exchange
Debenture Trustee for the giving of notice of redemption by the Exchange
Debenture Trustee in the name, and the expense, of the Issuer, and the Issuer
has irrevocably deposited or caused to be deposited with the Exchange
Debenture Trustee funds in trust for the purpose in an amount sufficient to
pay and discharge the entire Debt on such Exchange Debentures not theretofore
delivered to the Exchange Debenture Trustee for cancellation, for principal
(and premium, if any, on) and interest on the Exchange Debentures to the date
of such deposit (in case of Exchange Debentures that have become due and
payable) or to the Stated Maturity or redemption date, as the case may be; (b)
the Issuer has paid or caused to be paid all sums payable under the Exchange
Debenture Indenture by the Issuer; or (c) the Issuer has delivered to the
Exchange Debenture Trustee an Officers' Certificate and an Opinion of Counsel,
each stating that all conditions precedent provided in the Exchange Debenture
Indenture relating to the satisfaction and discharge of the Exchange Debenture
Indenture, the security agreements relating thereto and the Exchange Debentures
have been complied with.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuer may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Exchange Debentures
("Legal Defeasance") and cure all then existing Events of Default, except for
(i) the rights of Holders of outstanding Exchange Debentures to receive
payments in respect of the principal of, premium, if any, and interest on such
Exchange Debentures when such payments are due from the trust referred to
below, (ii) the Issuer's obligations with respect to the Exchange Debentures
concerning issuing temporary Exchange Debentures, registration of Exchange
Debentures, mutilated, destroyed, lost or stolen Exchange Debentures and the
maintenance of an office or agency for payment and money for Exchange
Debenture payments held in trust, (iii) the rights, powers, trusts, duties and
immunities of the Exchange Debenture Trustee, and the Issuer's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Exchange
Debenture Indenture. In addition, the Issuer may, at its option and at any
time, elect to have the obligations of the Issuer released with respect to
certain covenants that are described in the Exchange Debenture Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Exchange Debentures. In the event Covenant Defeasance occurs, certain
events (not including non-payment, and, solely with respect to the Issuer,
bankruptcy, receivership, rehabilitation and insolvency events) described
under "Events of Default" will no longer constitute an Event of Default with
respect to the Exchange Debentures.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Issuer must irrevocably deposit with the Exchange Debenture Trustee, in trust,
for the benefit of the Holders of the Exchange Debentures cash in U.S.
dollars, non-callable Government Notes, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm
of independent public accountants, to pay the principal of, premium, if any,
and interest on the outstanding Exchange Debentures on the stated maturity or
on the applicable redemption date, as the case may be, and the Issuer must
specify whether the Exchange Debentures are being defeased to maturity or to a
particular redemption date; (ii) in the case of Legal Defeasance, the Issuer
shall have delivered to the Exchange Debenture Trustee an opinion of counsel
in the United States reasonably acceptable to the Exchange Debenture Trustee
confirming that, subject to customary assumptions and exclusions, (A) the
Issuer has received from, or there has been published by, the Internal Revenue
Service a ruling or (B) since the Issue Date, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, subject to customary
assumptions and exclusions, the Holders of the outstanding Exchange Debentures
will not recognize
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income, gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance,
the Issuer shall have delivered to the Exchange Debenture Trustee an opinion
of counsel in the United States reasonably acceptable to the Exchange
Debenture Trustee confirming that, subject to customary assumptions and
exclusions, the Holders of the outstanding Exchange Debentures will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Covenant Defeasance had not occurred; (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of
funds to be applied to such deposit and the grant of any Lien securing such
borrowing) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Exchange Debenture Indenture) to which the Issuer
or any of its Subsidiaries is a party or by which the Issuer or any of its
Subsidiaries is bound; (vi) the Issuer must have delivered to the Exchange
Debenture Trustee an opinion of counsel, subject to customary assumptions and
exclusions, to the effect that after the 91st day following the deposit, the
trust funds will not be part of any "estate" formed by the bankruptcy or
reorganization of the Issuer or subject to the "automatic stay" under the
Bankruptcy Code or, in the case of Covenant Defeasance, will be subject to a
first priority Lien in favor of the Exchange Debenture Trustee for the benefit
of the Holders; (vii) the Issuer must deliver to the Exchange Debenture Trustee
an Officers' Certificate stating that the deposit was not made by the Issuer
with the intent of preferring the Holders of Exchange Debentures over the other
creditors of the Issuer with the intent of defeating, hindering, delaying or
defrauding creditors of the Issuer or others; and (viii) the Issuer must deliver
to the Exchange Debenture Trustee an Officers' Certificate and an opinion of
counsel (which opinion of counsel may be subject to customary assumptions and
exclusions), each stating that all conditions precedent relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Exchange Debentures in accordance with the
Exchange Debenture Indenture. The Registrar and the Exchange Debenture Trustee
may require a Holder, among other things, to furnish appropriate endorsements
and transfer documents and the Issuer may require a Holder to pay any taxes
and fees required by law or permitted by the Exchange Debenture Indenture. The
Issuer is not required to transfer or exchange any Exchange Debenture selected
for redemption or repurchase. Also, the Issuer is not required to transfer or
exchange any Exchange Debenture for a period of 15 days before a selection of
Exchange Debentures to be redeemed or before any repurchase offer.
The Exchange Debentures will be issued in registered form and the registered
Holder of an Exchange Debenture will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Exchange
Debenture Indenture or the Exchange Debentures may be amended or supplemented
with the consent of the Holders of at least a majority in principal amount of
the Exchange Debentures then outstanding (including consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Exchange
Debentures), and any existing default or compliance with any provision of the
Exchange Debenture Indenture or the Exchange Debentures may be waived with the
consent of the Holders of a majority in principal amount of the then
outstanding Exchange Debentures (including consents obtained in connection
with a tender offer or exchange offer for Exchange Debentures).
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Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Exchange Debentures held by a non-consenting Holder):
(i) reduce the principal amount of Exchange Debentures whose Holders must
consent to an amendment, supplement or waiver;
(ii) reduce the principal of, change the fixed maturity of any Exchange
Debenture, reduce any premium payable upon optional redemption of the
Exchange Debentures or otherwise alter the provisions with respect to the
redemption or repurchase of the Exchange Debentures (other than provisions
relating to the covenants described above under the caption "--Repurchase
at the Option of Holders");
(iii) reduce the rate of, or change the time for payment of, interest on
any Exchange Debenture;
(iv) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest on the Exchange Debentures (except a
rescission of acceleration of the Exchange Debentures by the Holders of at
least a majority in aggregate principal amount of the Exchange Debentures
and a waiver of the payment default that resulted from such acceleration);
(v) make any Exchange Debenture payable in money other than that stated
in the Exchange Debentures;
(vi) impair the rights of Holders of Exchange Debentures to receive
payments of principal of or premium, if any, or interest on the Exchange
Debentures; or
(vii) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Exchange
Debentures, the Issuer and the Exchange Debenture Trustee may amend or
supplement the Exchange Debenture Indenture or the Exchange Debentures to cure
any ambiguity, defect or inconsistency, to provide for uncertificated Exchange
Debentures in addition to or in place of certificated Exchange Debentures
(provided that the uncertificated Exchange Debentures are issued in registered
form for purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Exchange Debentures are described in Section 163(f)(2)(B) of
the Code), to provide for the assumption of the Issuer's obligations to
Holders of Exchange Debentures in the case of a merger, consolidation or sale
of assets, to make any change that would provide any additional rights or
benefits to the Holders of Exchange Debentures or that, as determined by the
Board of Directors in good faith, does not have a material adverse effect on
the legal rights under the Exchange Debenture Indenture of any such Holder, or
to comply with requirements of the Commission in order to effect or maintain
the qualification of the Exchange Debenture Indenture under the Trust
Indenture Act.
CONCERNING THE EXCHANGE DEBENTURE TRUSTEE
The Exchange Debenture Indenture will contain certain limitations on the
rights of the Exchange Debenture Trustee, should the Exchange Debenture
Trustee become a creditor of the Issuer, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Exchange Debenture Trustee will be
permitted to engage in other transactions; however, if the Exchange Debenture
Trustee acquires any conflicting interest the Exchange Debenture Trustee must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Exchange Debenture Indenture will provide that in case an Event of
Default shall occur (which shall not be cured), the Exchange Debenture Trustee
will be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs.
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ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Exchange
Debenture Indenture without charge by writing to the Issuer at the following
address: Harborside Healthcare Corporation, 470 Atlantic Avenue, Boston,
Massachusetts 02110.
BOOK-ENTRY; DELIVERY AND FORM
It is expected that the Exchange Debentures will have provisions relating to
book-entry, delivery and form that are substantially the same as those with
respect to the Notes set forth under "Description of the New Notes--Book-
Entry; Delivery and Form."
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Certificate of
Designation and in the Exchange Debenture Indenture. Reference is made to the
Certificate of Designation and the Exchange Debenture Indenture for a full
disclosure of all such terms, as well as any other capitalized terms used
herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i) Debt of any
other Person existing at the time such other Person is merged with or into or
became a Restricted Subsidiary of such specified Person, (ii) Debt incurred by
such specified Person, its Restricted Subsidiaries or such other Person for
the purpose of financing the acquisition of such other Person or its assets
(provided that such other Person becomes or, in the case of an asset purchase,
the person acquiring such assets is, a Restricted Subsidiary and (iii) Debt
secured by a Lien encumbering any asset acquired by such specified Person.
"Additional Notes" means any additional notes that may be issued under the
indenture pursuant to which the Notes were issued.
"Affiliate" of any specified Person means (i) any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person, (ii) any other Person that owns, directly
or indirectly, 5% or more of such specified Person's Voting Stock or (iii) any
Person who is a director or officer (a) of such Person, (b) of any Subsidiary
of such Person or (c) of any Person described in clause (i) or (ii) above. For
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlling," "controlled by" and "under common control with"), as
used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities,
by agreement or otherwise.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including by way of a sale and leaseback) (provided that
the sale, lease, conveyance or other disposition of all or substantially all
of the assets of the Issuer will be governed by the provisions of the Exchange
Debenture Indenture described above under the caption "--Certain Covenants--
Merger, Consolidation or Sale of all or Substantially all Assets" and not by
the provisions of the Asset Sale covenant), and (ii) the issue or sale by the
Issuer or any of its Restricted Subsidiaries of Equity Interests of any of the
Issuer's Subsidiaries (other than director's qualifying shares), in the case
of either clause (i) or (ii), whether in a single transaction or a series of
related transactions (a) that have a fair market value in excess of 2.5% of
Total Assets or (b) for net proceeds in excess of 2.5% of Total Assets.
Notwithstanding the foregoing, the following will not be Asset Sales: (i) a
transfer of assets by the Issuer to a Restricted Subsidiary or by a Restricted
Subsidiary to the Issuer or to another Restricted Subsidiary, (ii) an issuance
of Equity Interests by a Restricted Subsidiary to the Issuer or to another
Restricted Subsidiary, (iii) a Restricted Payment or Permitted Investment that
is permitted by
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the covenant described above under the caption "--Certain Covenants--
Restricted Payments" (including any formation of or contribution of assets to
a Subsidiary or joint venture), (iv) leases or subleases, in the ordinary
course of business, to third parties of real property owned in fee or leased
by the Issuer or its Subsidiaries, (v) a disposition, in the ordinary course
of business, of a lease of real property, (vi) any disposition of property of
the Issuer or any of its Subsidiaries that, in the reasonable judgment of the
Issuer, has become uneconomic, obsolete or worn out, (vii) any disposition of
property or assets (including any disposition of inventory, accounts
receivable and any licensing agreements) in the ordinary course of business,
(viii) the sale of Cash Equivalents and Investment Grade Securities or any
disposition of cash, (ix) any exchange of property or assets by the Issuer or
a Restricted Subsidiary in exchange for cash or Cash Equivalents or property
or assets that will be used or useful in the business conducted by the Issuer
or any of its Restricted Subsidiaries, provided any such cash and Cash
Equivalents are applied as if they were Net Proceeds of an Asset Sale, and (x)
the sale or factoring of receivables on customary market terms pursuant to
Credit Facilities but only if the proceeds thereof received by the Issuer and
its Restricted Subsidiaries represent the fair market value of such
receivables.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person, or any authorized committee of the Board of
Directors of such Person.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any similar participation in profits and losses or equity of a Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of one year or less from the date of
acquisition, bankers' acceptances with maturities not exceeding one year and
overnight bank deposits, in each case with any commercial bank or trust
company having capital and surplus in excess of $300.0 million, (iv)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (ii) and (iii) above entered into
with any financial institution meeting the qualifications specified in clause
(iii) above, (v) commercial paper having the highest rating obtainable from
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings
Services, a division of the McGraw-Hill Companies, Inc. ("S&P") and in each
case maturing within one year after the date of acquisition, (vi) investment
funds investing 95% of their assets in securities of the types described in
clauses (ii)-(v) above, (vii) readily marketable direct obligations issued by
any state of the United States of America or any political subdivision thereof
having one of the two highest rating categories obtainable from either Moody's
or S&P and (viii) Debt with a rating of "A" or higher from S&P or "A2" or
higher from Moody's and having a maturity of not more than one year from the
date of acquisition.
"Closing Date" means August 11, 1998, the date on which HH Acquisition Corp.
was merged with and into the Issuer.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commodity Hedging Agreements" means any futures contract or other similar
agreement or arrangement designed to protect the Issuer or any Restricted
Subsidiary against fluctuations in commodities prices.
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"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period (A) plus (without
duplication), to the extent deducted in computing such Consolidated Net
Income, (i) Consolidated Interest Expense and the amortization of debt
issuance costs, commissions, fees and expenses of such Person and its
Restricted Subsidiaries for such period, (ii) provision for taxes based on
income or profits (including franchise taxes) of such Person and its
Restricted Subsidiaries for such period, (iii) depreciation and amortization
expense, including amortization of inventory write-up under APB 16,
amortization of intangibles (including goodwill and the non-cash costs of
Interest Rate Agreements, Commodity Hedging Agreements or Currency Agreements,
license agreements and non-competition agreements), non-cash amortization of
Capital Lease Obligations, and organization costs, (iv) non-cash expenses
related to the amortization of management fees paid on or prior to the Closing
Date, (v) expenses and charges related to any equity offering or incurrence of
Debt permitted to be incurred by the Exchange Debenture Indenture (including
any such expenses or charges relating to the Recapitalization), (vi) the
amount of any restructuring charge or reserve, (vii) unrealized gains and
losses from hedging, foreign currency or commodities translations and
transactions, (viii) expenses consisting of internal software development
costs that are expensed during the period but could have been capitalized in
accordance with GAAP, (ix) any write-downs, write-offs, and other non-cash
charges, items and expenses, (x) the amount of expense relating to any
minority interest in a Restricted Subsidiary, and (xi) costs of surety bonds
in connection with financing activities, and (B) minus any cash payment for
which a reserve or charge of the kind described in clauses (vi), (ix) or (x)
of subclause (A) above was taken previously during such period.
"Consolidated Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Consolidated Interest Expense
of such Person and its Restricted Subsidiaries for such period. In the event
that the Issuer or any of its Restricted Subsidiaries incurs, assumes,
Guarantees, redeems or repays any Debt (other than revolving credit
borrowings) or issues or redeems Preferred Stock subsequent to the commencement
of the period for which the Consolidated Coverage Ratio is being calculated but
prior to the date on which the event for which the calculation of the
Consolidated Coverage Ratio is made (the "Calculation Date"), then the
Consolidated Coverage Ratio shall be calculated giving pro forma effect to such
incurrence, assumption, Guarantee, redemption or repayment of Debt, or such
issuance or redemption of Preferred Stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. For purposes of
making the computation referred to above, Investments, acquisitions,
dispositions, mergers and consolidations that have been made by the Issuer or
any of its Restricted Subsidiaries during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date, and
discontinued operations determined in accordance with GAAP on or prior to the
Calculation Date, shall be given effect on a pro forma basis assuming that all
such Investments, acquisitions, dispositions, mergers and consolidations or
discontinued operations (and the reduction or increase of any associated
Consolidated Interest Expense and the change in Consolidated Cash Flow resulting
therefrom, including because of reasonably anticipated cost savings) had
occurred on the first day of the four-quarter reference period. If since the
beginning of such period any Person (that subsequently became a Restricted
Subsidiary or was merged with or into the Issuer or any Restricted Subsidiary
since the beginning of such period) shall have made any Investment, acquisition,
disposition, merger or consolidation or determined a discontinued operation,
that would have required adjustment pursuant to this definition, then the
Consolidated Coverage Ratio shall be calculated giving pro forma effect thereto
for such period as if such Investment, acquisition, disposition, merger or
consolidation or discontinued operations had occurred at the beginning of the
applicable four-quarter period. For purposes of this definition, whenever pro
forma effect is to be given to a transaction, the pro forma calculations shall
be made in good faith by a financial or accounting officer of the Issuer. If any
Debt to which pro forma effect is given bears interest at a floating rate, the
interest expense on such Debt shall be calculated as if the rate in effect on
the Calculation Date had been the applicable interest rate
191
for the entire period (taking into account any Interest Rate Agreement in
effect on the Calculation Date). Interest on a Capital Lease Obligation shall
be deemed to accrue at an interest rate reasonably determined by a responsible
financial or accounting officer of the Issuer to be the rate of interest
implicit in such Capital Lease Obligation in accordance with GAAP. Interest on
Debt that may optionally be determined at an interest rate based upon a factor
of a prime or similar rate, a eurocurrency interbank offered rate, or other
rate, shall be deemed to have been based upon the rate actually chosen, or, if
none, then based upon such optional rate chosen as the Issuer may designate.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum, without duplication, of (i) the consolidated net interest
expense of such Person and its Restricted Subsidiaries for such period,
whether paid or accrued (including amortization of original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred
in respect of letter of credit or bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations relating to Interest Rate
Agreements or Currency Agreements with respect to Debt, excluding, however,
(A) amortization of debt issuance costs, commissions, fees and expenses, (B)
customary commitment, administrative and transaction fees and charges and (C)
expenses attributable to letters of credit or similar arrangements supporting
insurance certificates issued to customers in the ordinary course of
business), (ii) any interest expense on Debt of another Person that is
Guaranteed by or secured by a Lien on assets of such Person or one of its
Restricted Subsidiaries (but only to the extent such Guarantee or Lien has
then been called upon), and (iii) cash dividends paid in respect of any
Preferred Stock of such Person or any Restricted Subsidiary of such Person
held by Persons other than the Issuer or a Subsidiary, in each case, on a
consolidated basis and in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the referent Person or a Restricted Subsidiary of such Person, (ii) the
Net Income of any Restricted Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that Restricted
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been obtained) or,
directly or indirectly, prohibited by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary or its
stockholders unless such restriction with respect to the payment of dividends
has been permanently waived, (iii) except for purposes of calculating
"Consolidated Cash Flow," the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, (iv) the cumulative effect of a change in accounting principles
shall be excluded (effected either through cumulative effect adjustment or a
retroactive application, in each case, in accordance with GAAP), (v) to the
extent deducted in determining Net Income, the fees, expenses and other costs
incurred in connection with the Recapitalization, including payments to
management contemplated by the Recapitalization Agreement, shall be excluded,
and (vi) to the extent deducted in determining Net Income, any non-cash charges
resulting from any write-up, write-down or write-off of assets, of the Issuer
and its Restricted Subsidiaries in connection with the Recapitalization, shall
be excluded.
"Credit Facilities" means, with respect to the Issuer, one or more debt
facilities (including the New Credit Facility) or commercial paper facilities
with banks, insurance companies or other institutional lenders providing for
revolving credit loans, term loans, synthetic lease financing, notes,
receivables factoring or other financing (including through the sale of
receivables to such lenders or to special purpose entities formed to borrow
from or issue securities to such lenders against such receivables)
192
or letters of credit or other credit facilities, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in whole or in
part from time to time.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement to which the Issuer or any
Restricted Subsidiary is a party or of which it is a beneficiary.
"Debt" means, with respect to any Person (without duplication), (i) any
indebtedness of such Person, whether or not contingent, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof) or banker's
acceptances or representing Capital Lease Obligations or the balance deferred
and unpaid of the purchase price of any property, which purchase price is due
more than six months after the date of placing such property in final service
or taking final delivery thereof, or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, (ii) all indebtedness
under clause (i) of other Persons secured by a Lien on any asset of such
Person (whether or not such indebtedness is assumed by such Person) provided
that the amount of indebtedness of such Person shall be the lesser of (A) the
fair market value of such asset at such date of determination and (B) the
amount of such indebtedness of such other Persons, and (iii) to the extent not
otherwise included, the Guarantee by such Person of any Debt under clause (i)
of any other Person; provided, however, that Debt shall not include (a)
obligations of the Issuer or any of its Restricted Subsidiaries arising from
agreements of the Issuer or a Restricted Subsidiary providing for
indemnification, adjustment of purchase price or similar obligations, in each
case, incurred or assumed in connection with the disposition of any business,
assets or a Subsidiary, other than guarantees of Debt incurred by any Person
acquiring all or any portion of such business, assets or a Subsidiary for the
purpose of financing such acquisition; provided, however, that (x) such
obligations are not reflected on the balance sheet of the Issuer or any
Restricted Subsidiary (contingent obligations referred to in a footnote to
financial statements and not otherwise reflected on the balance sheet will not
be deemed to be reflected on such balance sheet for purposes of this clause (x))
and (y) the maximum assumable liability in respect of all such obligations shall
at no time exceed the gross proceeds including noncash proceeds (the fair market
value of such noncash proceeds being measured at the time received and without
giving effect to any subsequent changes in value) actually received by the
Issuer and its Restricted Subsidiaries in connection with such disposition, (b)
(A) obligations under (or constituting reimbursement obligations with respect
to) letters of credit, performance bonds, surety bonds, appeal bonds, completion
guarantees or similar instruments issued in connection with the ordinary course
of business conducted by the Issuer, including letters of credit in respect of
workers' compensation claims, security or lease deposits and self-insurance,
provided, however, that upon the drawing of such letters of credit or other
instrument, such obligations are reimbursed within 30 days following such
drawing, and (B) obligations arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of day-light overdrafts) drawn against insufficient funds in
the ordinary course of business; provided, however, that such obligations are
extinguished within three business days of incurrence, or (c) retentions in
connection with purchasing assets in the ordinary course of business of the
Issuer and its Restricted Subsidiaries. The amount of any Debt outstanding as of
any date shall be the lesser of (i) the accreted value thereof and (ii) the
principal amount thereof, provided that the amount of Permitted Debt under
clause (i) or (ix) of the definition thereof, at the Issuer's election, but
without duplication, may be reduced by the principal amount (not to exceed $7.5
million) of the note receivable issued to the Issuer before the Issue Date in
connection with the leasing of certain nursing home facilities in the State of
Connecticut.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
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"Designated Senior Debt" means (i) any Debt outstanding under the New Credit
Facility, (ii) the Notes (including any Additional Notes) and the Note
Guarantees and (iii) any other Senior Debt permitted under the Exchange
Debenture Indenture the principal amount of which is $25.0 million or more and
that has been designated by the Issuer as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event (other than as a result of a
Change of Control), matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the
Holder thereof, in whole or in part, on or prior to the date on which the
Exchangeable Preferred Stock is subject to mandatory redemption as described
in "Description of the Exchangeable Preferred Stock--Mandatory Redemption";
provided, however, that if such Capital Stock is issued to any plan for the
benefit of employees of the Issuer or its Subsidiaries or by any such plan to
such employees, such Capital Stock shall not constitute Disqualified Stock
solely because it may be required to be repurchased by the Issuer in order to
satisfy applicable statutory or regulatory obligations. For the avoidance of
doubt, Exchangeable Preferred Stock shall not be considered "Disqualified
Stock."
"Exchange Date" means the date on which the Exchangeable Preferred Stock is
exchanged for Exchange Debentures.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Debentures" means the Exchange Debentures of the Issuer due 2010
issued in exchange for the Exchangeable Preferred Stock and any Exchange
Debentures issued as payments in kind interest thereon.
"Exchange Debenture Holder" means the Person in whose name an Exchange
Debenture is registered.
"Exchange Debenture Indenture" means the indenture pursuant to which the
Exchange Debentures are to be issued as it may from time to time be amended or
supplemented.
"Exchangeable Preferred Stock" means the Exchangeable Preferred Stock of the
Issuer Due 2010 issued on the Issue Date, any Exchangeable Preferred Stock
issued as payment of dividends thereon and any Preferred Stock containing
terms substantially identical to the Exchangeable Preferred stock that are
issued and exchanged for the Exchangeable Preferred Stock.
"Exchangeable Preferred Stock Holder" means the Person in whose name a share
of Exchangeable Preferred Stock is registered.
"Existing Debt" means Debt of the Issuer and its Restricted Subsidiaries
(other than Debt under the New Credit Facility) in existence on the Issue
Date, until such amounts are repaid.
"Foreign Subsidiary" means any Subsidiary of the Issuer formed under the
laws of any jurisdiction other than the United States or any political
subdivision thereof substantially all of the assets of which are located
outside of the United States or that conducts substantially all of its
business outside of the United States.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession. All ratios and computations based on GAAP contained in the
Exchange Debenture Indenture shall be computed in conformity with GAAP as in
effect as of the Issue Date.
194
"Government Notes" means non-callable direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including letters of credit and reimbursement
agreements in respect thereof), of all or any part of any Debt.
"Guarantors" means, at any time after the Closing Date, (i) each of the
Issuer's Subsidiaries on the Closing Date, other than the Subsidiary Non-
Guarantors on such date and (ii) each Restricted Subsidiary that executes and
delivers a Note Guarantee after the Closing Date, and their respective
successors and assigns, in each case until released from its Note Guarantee in
accordance with the terms of the Indenture.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under Interest Rate Agreements, Currency Agreements or Commodity
Hedging Agreements.
"Holder" means (i) with respect to any share of Exchangeable Preferred
Stock, a Person in whose name such share of Exchangeable Preferred Stock is
registered in the register for the Exchangeable Preferred Stock, and (ii) with
respect to any Exchange Debenture, a Person in whose name such Exchange
Debenture is registered in the register for the Exchange Debentures.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement, repurchase agreement, futures contract or other financial
agreement or arrangement designed to protect the Issuer or any Restricted
Subsidiary against fluctuations in interest rates.
"Investcorp" means Investcorp S.A. and certain affiliates thereof.
"Investment Grade Securities" means (i) securities issued or directly and
fully guaranteed or insured by the United States government or any agency or
instrumentality thereof (other than Cash Equivalents) having maturities of not
more than one year from the date of acquisition, (ii) debt securities or debt
instruments with a rating of BBB- or higher by S&P or Baa3 or higher by
Moody's or the equivalent of such rating by such rating organization, or, if
no rating of S&P or Moody's then exists, the equivalent of such rating by any
other nationally recognized securities rating agency, but excluding any debt
securities or instruments constituting loans or advances among the Issuer and
its Subsidiaries having maturities of not more than one year from the date of
acquisition, and (iii) investments in any fund that invests exclusively in
investments of the type described in clauses (i) and (ii), which fund may also
hold immaterial amounts of cash pending investment and/or distribution.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Debt or other obligations, but
excluding advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person), advances
or capital contributions (excluding commission, travel, payroll,
entertainment, relocation and similar advances to officers and employees made
in the ordinary course of business), purchases or other acquisitions for
consideration of Debt, Equity Interests or other securities. If the Issuer or
any Restricted Subsidiary of the Issuer sells or otherwise disposes of any
Equity Interests of any direct or indirect Subsidiary of the Issuer such that,
after giving effect to any such sale or disposition, such Person is no longer
a Subsidiary of the Issuer, the Issuer shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair
market value of the Equity Interests of such Subsidiary not sold or disposed
of in an amount determined as provided in the third to last paragraph of the
covenant described above under the caption "--Restricted Payments."
"Issue Date" means July 29, 1998, the date on which the Exchangeable
Preferred Stock was originally issued.
195
"Issuer" means Harborside Healthcare Corporation.
"Junior Equity Interests" means Junior Securities or warrants, options or
other rights to acquire Junior Securities (but excluding any debt security
that is convertible into, or exchangeable for, Junior Securities).
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement or any lease in the
nature thereof); provided that in no event shall an operating lease be deemed
to constitute a Lien.
"Net Income" means, with respect to any Person and any period, the net
income (or loss) of such Person for such period, determined in accordance with
GAAP and before any reduction in respect of Preferred Stock dividends,
excluding, however, (i) any extraordinary or non-recurring gains or losses or
charges and gains or losses or charges from the sale of assets outside the
ordinary course of business, together with any related provision for taxes on
such gain or loss or charges and (ii) deferred financing costs written off in
connection with the early extinguishment of Debt; provided, however, that Net
Income shall be deemed to include any increases during such period to
shareholder's equity of such Person attributable to tax benefits from net
operating losses and the exercise of stock options that are not otherwise
included in Net Income for such period.
"Net Proceeds" means the aggregate cash proceeds received by the Issuer or
any of its Restricted Subsidiaries in respect of any Asset Sale (including any
cash received upon the sale or other disposition of any non-cash consideration
received in any Asset Sale), net of the direct costs relating to such Asset Sale
(including legal, accounting and investment banking fees, and brokerage and
sales commissions) and any relocation, redundancy and closing costs incurred as
a result thereof, taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), amounts applied to the repayment of principal, premium (if any)
and interest on Debt that is not subordinated to the Exchange Debentures
required (other than required by clause (a) of the second paragraph of "--
Repurchase at the Option of Holders--Asset Sales") to be paid as a result of
such transaction, all distributions and other payments required to be made to
minority interest holders in Subsidiaries or joint ventures as a result of such
Asset Sale, and any deduction of appropriate amounts to be provided by the
Issuer as a reserve in accordance with GAAP against any liabilities associated
with the asset disposed of in such transaction and retained by the Issuer after
such sale or other disposition thereof, including pension and other post-
employment benefit liabilities and liabilities related to environmental matters
or against any indemnification obligations associated with such transaction.
"New Credit Facility" means the collective reference to the Credit
Agreement, dated as of August 11, 1998, among the Issuer and certain
Subsidiaries of the Issuer named therein and the financial institutions named
therein, any Credit Documents (as defined therein) and any related notes,
collateral documents, letters of credit, participation agreements, guarantees,
and other documents part of or relating to the Synthetic Lease Facility (as
defined in the Credit Agreement), including any appendices, exhibits or
schedules to any of the foregoing (as the same may be in effect from time to
time), in each case, as such agreements may be amended, modified, supplemented
or restated from time to time, or refunded, refinanced, restructured,
replaced, renewed, repaid or extended from time to time (whether with the
original agents and lenders or other agents or lenders or otherwise, and
whether provided under the original credit agreement or other credit
agreements or otherwise).
"Note Guarantee" means the Guarantee by each Guarantor of the Issuers
Obligations under the Notes.
"Notes" means the 11% Senior Subordinated Discount Notes Due 2008 issued by
the Issuer.
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"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages, guarantees and other liabilities
payable under the documentation governing any Debt, in each case whether now
or hereafter existing, renewed or restructured, whether or not from time to
time decreased or extinguished and later increased, created or incurred,
whether or not arising on or after the commencement of a proceeding under
Title 11, U.S. Code or any similar federal or state law for the relief of
debtors (including post-petition interest) and whether or not allowed or
allowable as a claim in any such proceeding.
"Officers" means any of the following: Chairman, President, Chief Executive
Officer, Treasurer, Chief Financial Officer, Executive Vice President, Senior
Vice President, Vice President, Assistant Vice President, Secretary, Assistant
Secretary or any other officer reasonably acceptable to the Exchange Debenture
Trustee.
"Officers' Certificate" means a certificate signed by two Officers.
"Pari Passu Debt" means any Debt of the Issuer other than Subordinated Debt
and Senior Debt.
"Permitted Investments" means (a) any Investment in the Issuer or in a
Restricted Subsidiary (including in any Equity Interests of a Restricted
Subsidiary); (b) any Investment in cash, Cash Equivalents or Investment Grade
Securities; (c) any Investment by the Issuer or any Restricted Subsidiary of
the Issuer in a Person, if as a result of such Investment (i) such Person
becomes a Restricted Subsidiary or (ii) such Person, in one transaction or a
series of substantially concurrent related transactions, is merged, consolidated
or amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Issuer or a Restricted Subsidiary; (d) any
securities or other assets received or other Investments made as a result of the
receipt of non-cash consideration from an Asset Sale that was made pursuant to
and in compliance with the covenant described above under the caption "--
Repurchase at the Option of Holders--Asset Sales" or in connection with any
other disposition of assets not constituting an Asset Sale; (e) any acquisition
of assets solely in exchange for the issuance of Equity Interests (other than
Disqualified Stock) of the Issuer; (f) loans or advances to employees (or
guarantees of third party loans to employees) in the ordinary course of
business; (g) stock, obligations or securities received in satisfaction of
judgments, foreclosure of liens or settlement of debts (whether pursuant to a
plan of reorganization or similar arrangement); (h) receivables owing to the
Issuer or any Restricted Subsidiary, if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms (including such concessionary terms as the Issuer or such Restricted
Subsidiary deems reasonable); (i) any Investment existing on the Issue Date or
made pursuant to legally binding written commitments in existence on the Issue
Date; (j) Investments in Interest Rate Agreements, Currency Agreements and
Commodity Hedging Agreements otherwise permitted under the Exchange Debenture
Indenture; and (k) additional Investments having an aggregate fair market value,
taken together with all other Investments made pursuant to this clause (k) that
are at that time outstanding, not to exceed 15.0% of Total Assets at the time of
such Investment (with the fair market value of each Investment being measured at
the time made and without giving effect to subsequent changes in value).
"Permitted Junior Securities" shall mean debt or equity securities of the
Issuer or any successor corporation issued pursuant to a plan of
reorganization or readjustment of the Issuer that are subordinated to the
payment of all Senior Debt at least to the same extent that the Exchange
Debentures are subordinated to the payment of all Senior Debt on the Exchange
Date, so long as (i) the effect of the use of this defined term in the
subordination provisions described under the caption "Subordination" is not to
cause the Exchange Debentures to be treated as part of (a) the same class of
claims as the Senior Debt or (b) any class of claims pari passu with, or
senior to, the Senior Debt for any payment or distribution in any case or
proceeding or similar event relating to the liquidation, insolvency,
bankruptcy, dissolution, winding up or reorganization of the Issuer and (ii)
to the extent that
197
any Senior Debt outstanding on the date of consummation of any such plan of
reorganization or readjustment is not paid in full in cash on such date,
either (a) the holders of any such Senior Debt not so paid in full in cash
have consented to the terms of such plan of reorganization or readjustment or
(b) such holders receive securities which constitute Senior Debt and which
have been determined by the relevant court to constitute satisfaction in full
in money or money's worth of any Senior Debt not paid in full in cash.
"Permitted Liens" means (i) Liens securing Senior Debt of the Issuer or
unsubordinated Debt of a Restricted Subsidiary (in each case including related
Obligations) that was permitted by the terms of the Exchange Debenture
Indenture to be incurred; (ii) Liens in favor of the Issuer or any Restricted
Subsidiary; (iii) Liens on property of a Person existing at the time such
Person is merged into or consolidated with the Issuer or any Restricted
Subsidiary of the Issuer; provided that such Liens were in existence prior to
the contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Issuer or a Restricted Subsidiary, as the case may be; (iv) Liens on property
existing at the time of acquisition thereof by the Issuer or any Restricted
Subsidiary of the Issuer, provided that such Liens were in existence prior to
the contemplation of such acquisition and do not extend to any assets other
than those acquired; (v) banker's Liens, rights of setoff and Liens to secure
the performance of bids, tenders, trade or government contracts (other than
for borrowed money), leases, licenses, statutory obligations, surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in the
ordinary course of business; (vi) without limitation of clause (i), Liens to
secure Acquired Debt; (vii) Liens existing on the Closing Date; (viii) Liens
for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings,
provided that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor; (ix) Liens incurred in the
ordinary course of business of the Issuer or any Restricted Subsidiary of the
Issuer with respect to obligations that do not exceed $5.0 million at any one
time outstanding and that (a) are not incurred in connection with the borrowing
of money or the obtaining of advances or credit (other than trade credit in the
ordinary course of business) and (b) do not in the aggregate materially detract
from the value of the property or materially impair the use thereof in the
operation of business by the Issuer or such Restricted Subsidiary; (x)
carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or
other like Liens arising in the ordinary course of business in respect of
obligations that are not yet due or that are bonded or that are being contested
in good faith and by appropriate proceedings if adequate reserves with respect
thereto are maintained on the books of the Issuer or such Restricted Subsidiary,
as the case may be, in accordance with GAAP; (xi) pledges or deposits in
connection with workmen's compensation, unemployment insurance and other social
security legislation; (xii) easements (including reciprocal easement
agreements), rights-of-way, building, zoning and similar restrictions, utility
agreements, covenants, reservations, restrictions, encroachments, changes, and
other similar encumbrances or title defects incurred, or leases or subleases
granted to others, in the ordinary course of business, that do not in the
aggregate materially detract from the aggregate value of the properties of the
Issuer and its Subsidiaries, taken as a whole, or in the aggregate materially
interfere with or adversely affect in any material respect the ordinary conduct
of the business of the Issuer and its Subsidiaries on the properties subject
thereto, taken as a whole; (xiii) Liens on goods (and the proceeds thereof) and
documents of title and the property covered thereby securing Debt in respect of
commercial letters of credit; (xiv) (A) mortgages, Liens, security interests,
restrictions, encumbrances or any other matters of record that have been placed
by any developer, landlord or other third party on property over which the
Issuer or any Restricted Subsidiary of the Issuer has easement rights or on any
real property leased by the Issuer or any Restricted Subsidiary on the Issue
Date and subordination or similar agreements relating thereto and (B) any
condemnation or eminent domain proceedings affecting any real property; (xv)
leases or subleases to third parties; (xvi) Liens in connection with workmen's
compensation obligations and general liability exposure of the Issuer and its
Restricted Subsidiaries; (xvii) Liens arising by reason of a judgment, decree or
court order, to the extent not otherwise resulting
198
in an Event of Default; (xviii) Liens securing Hedging Obligations entered
into in the ordinary course of business; (xix) without limitation of clause
(i), Liens securing Permitted Refinancing Debt permitted to be incurred under
the Exchange Debenture Indenture or amendments or renewals of Liens that were
permitted to be incurred, provided, in each case, that (A) such Liens do not
extend to an additional property or asset of the Issuer or a Restricted
Subsidiary and (B) such Liens do not secure Debt in excess of the amount of
Permitted Refinancing Debt permitted to be incurred under the Exchange
Debenture Indenture or the principal amount of (or accreted value, if
applicable), plus accrued interest on, the Debt (plus the amount of reasonable
premium and fees and expenses incurred in connection therewith) secured by the
Lien being amended or renewed, as the case may be; (xx) Liens that secure Debt
of a Person existing at the time such Person becomes a Restricted Subsidiary
of the Issuer, provided that such Liens do not extend to any assets other than
those of the Person that became a Restricted Subsidiary of the Issuer, and
(xxi) any provision for the retention of title to an asset by the vendor or
transferor of such asset which asset is acquired by the Issuer or any
Restricted Subsidiary in a transaction entered into in the ordinary course of
business of the issuer or such Restricted Subsidiary and for which kind of
transaction it is normal market practice for such retention of title provision
to be included.
"Permitted Refinancing Debt" means any Debt of the Issuer or any of its
Restricted Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other Debt of
the Issuer or any of its Restricted Subsidiaries incurred in compliance with
the Exchange Debenture Indenture; provided that: (i) the principal amount (or
accreted value, if applicable) of such Permitted Refinancing Debt does not
exceed the principal amount of (or accreted value, if applicable), plus accrued
interest on, the Debt so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable premium and fees and expenses incurred
in connection therewith); (ii) in the case of term Debt, (1) principal payments
required under such Permitted Refinancing Debt have a Stated Maturity no earlier
than the earlier of (A) the Stated Maturity of those under the Debt being
refinanced and (B) the maturity date of the Exchange Debentures and (2) such
Permitted Refinancing Debt has a Weighted Average Life to Maturity equal to or
greater than the lesser of the Weighted Average Life to Maturity of the Debt
being extended, refinanced, renewed, replaced, defeased or refunded and the
Weighted Average Life to Maturity of the Exchange Debentures; (iii) if the Debt
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Exchange Debentures, such Permitted
Refinancing Debt has a final maturity date later than the final maturity date
of, and is subordinated in right of payment to, the Exchange Debentures on terms
at least as favorable to the Holders of Exchange Debentures as those contained
in the documentation governing the Debt being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Debt is incurred either by the
Issuer or by its Restricted Subsidiary who is the obligor on the Debt being
extended, refinanced, renewed, replaced, defeased or refunded. The Issuer may
Incur Permitted Refinancing Debt not more than six months prior to the
application of the proceeds thereof to repay the Debt to be refinanced; provided
that upon the Incurrence of such Permitted Refinancing Debt, the Issuer shall
provide written notice thereof to the Exchange Debenture Trustee, specifically
identifying the Debt to be refinanced with Permitted Refinancing Debt.
"Preferred Stock" means, with respect to any Person, any Capital Stock of
such Person (however designated) that is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over
shares of Capital Stock of any other class of such Person. With respect to the
Issuer, "Preferred Stock" includes the Exchangeable Preferred Stock.
"Preferred Equity Interests" means Preferred Stock and all warrants, options
or other rights to acquire Preferred Stock (but excluding any debt security
that is convertible into, or exchangeable for, Preferred Stock).
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"Recapitalization" means the recapitalization of Harborside Healthcare
Corporation pursuant to which HH Acquisition Corp. was merged with and into
the Issuer and the financing transactions related thereto.
"Recapitalization Agreement" means the Agreement and Plan of Merger dated as
of April 15, 1998 by and between HH Acquisition Corp. and Harborside
Healthcare Corporation, as amended through the Closing Date.
"Representative" means any agent or representative in respect of any
Designated Senior Debt; provided that if, and for so long as, any Designated
Senior Debt lacks such a representative, then the Representative for such
Designated Senior Debt shall at all times constitute the holders of a majority
in outstanding principal amount of such Designated Senior Debt.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Secured Debt" means any Debt of the Issuer or any Subsidiary secured by a
Lien.
"Senior Debt" means (i) all Debt of the Issuer outstanding under the New
Credit Facility and all Hedging Obligations with respect thereto, (ii) all
Debt represented by the Notes (including any Additional Notes), (iii) any
other Debt (including Acquired Debt) permitted to be incurred by the Issuer
under the terms of the Exchange Debenture Indenture, unless the instrument
under which such Debt is incurred expressly provides that it is on a parity
with or subordinated in right of payment to the Exchange Debentures, and (iv)
all Obligations with respect to the foregoing. Notwithstanding anything to the
contrary in the foregoing, Senior Debt will not include (v) any liability for
federal, state, local or other taxes owed or owing by the Issuer, (w) any Debt
of the Issuer to any of its Subsidiaries, officers, employees or other
Affiliates (other than Debt under any Credit Facility to any such Affiliate),
(x) any trade payables, (y) that portion of Debt incurred in violation of the
covenant described above under "Incurrence of Debt and Preferred Stock" (but
as to any such Debt under any Credit Facility, such violation shall be deemed
not to exist for purposes of this clause (y) if the lenders have obtained a
representation from a Senior Officer of the Issuer to the effect that the
issuance of such Debt does not violate such covenant) or (z) any Debt or
obligation of the Issuer which is expressly subordinated in right of payment
to any other Debt or obligation of the Issuer including any Subordinated Debt
of the Issuer.
"Senior Officer" means the Chief Executive Officer or the Chief Financial
Officer of the Issuer.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such regulation is in effect on the Issue
Date.
"Specified Affiliate Payments" means:
(i) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of the Issuer or any Restricted Subsidiary of
the Issuer, held by any future, present or former employee, director,
officer or consultant of the Issuer (or any of its Restricted Subsidiaries)
pursuant to any management equity subscription agreement, stock option
agreement, put agreement, stockholder agreement or similar agreement that
may be in effect from time to time; provided that the aggregate price paid
for all such repurchased, redeemed, acquired or retired Equity Interests
shall not exceed $3.0 million in any calendar year (with unused amounts in
any calendar year being carried over to succeeding calendar years subject
to a maximum amount of repurchases, redemptions or other acquisitions
pursuant to this clause (i) (without giving effect to
200
the immediately following proviso) of $10.0 million in any calendar year)
and no payment default on Senior Debt or the Exchange Debentures shall have
occurred and be continuing; provided further that such amount in any
calendar year may be increased by an amount not to exceed (A) the cash
proceeds received by the Issuer (including by way of capital contribution)
since the Issue Date from the sale of Equity Interests of the Issuer to
employees, directors, officers or consultants of the Issuer or its
Subsidiaries that occurs in such calendar year (it being understood that
such cash proceeds shall be excluded from clause (c)(ii) of the first
paragraph under the covenant described under the caption "--Certain
Covenants--Restricted Payments") plus (B) the cash proceeds from key man
life insurance policies received by the Issuer and its Restricted
Subsidiaries in such calendar year (including proceeds from the sale of
such policies to the person insured thereby); and provided, further, that
cancellation of Debt owing to the Issuer from employees, directors,
officers or consultants of the Issuer or any of its Subsidiaries in
connection with a repurchase of Equity Interests of the Issuer will not be
deemed to constitute a Restricted Payment for purposes of the Exchange
Debenture Indenture;
(ii) repurchases of Equity Interests deemed to occur upon exercise of
stock options or warrants as a result of the payment of all or a portion of
the exercise price of such options or warrants with Equity Interests;
(iii) payments by the Issuer to shareholders or members of management of
the Issuer and its Subsidiaries in connection with the Recapitalization;
and
(iv) payments or transactions permitted under clause (5) of the second
paragraph of the covenant described under "--Certain Covenants--Transaction
with Affiliates;
"Stated Maturity" means, with respect to any installment of interest on or
principal of, or any other amount payable in respect of, any series of Debt,
the date on which such interest, principal or other amount was scheduled to be
paid in the documentation governing such Debt, and shall not include any
contingent obligations to repay, redeem or repurchase any such interest,
principal or other amount prior to the date scheduled for the payment thereof.
"Subordinated Debt" means any Debt of the Issuer (whether outstanding on the
Issue Date or thereafter incurred) that is subordinate or junior in right of
payment to the Exchange Debentures pursuant to written agreement.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof). Unless the context otherwise requires, "Subsidiary" refers to a
Subsidiary of the Issuer.
"Subsidiary Non-Guarantors" means (i) each of the Subsidiaries of the Issuer
on the Closing Date that do not issue or are released from a Note Guarantee,
(ii) each Unrestricted Subsidiary, and (iii) each Restricted Subsidiary formed
or acquired after the Closing Date that does not execute and deliver or is
released from a Note Guarantee.
"Total Assets" means, at any time, the total consolidated assets of the
Issuer and its Restricted Subsidiaries at such time.
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"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, and (ii) any Subsidiary of an Unrestricted Subsidiary; but in the
case of any Subsidiary referred to in clause (i) (or any Subsidiary of any
such Subsidiary) only to the extent that such Subsidiary: (a) is not party to
any agreement, contract, arrangement or understanding with the Issuer or any
Restricted Subsidiary of the Issuer unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to the Issuer or
such Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Issuer; and (b) except in the case of a
Foreign Subsidiary, is a Person with respect to which neither the Issuer nor
any of its Restricted Subsidiaries has any direct or indirect obligation (x)
to subscribe for additional Equity Interests or (y) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results. Any such designation by the Board of
Directors shall be evidenced to the Exchange Debenture Trustee by filing with
the Exchange Debenture Trustee a certified copy of the Board Resolution giving
effect to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under the caption "--Certain Covenants--Restricted
Payments." If, at any time, any Unrestricted Subsidiary referred to in clause
(ii) of the first sentence of this definition (or any Subsidiary thereof)
would fail to meet the foregoing requirements as an Unrestricted Subsidiary,
it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the
Exchange Debenture Indenture and any Debt of such Subsidiary shall be deemed
to be incurred by a Restricted Subsidiary of the Issuer as of such date (and,
if such Debt is not permitted to be incurred as of such date under the
covenant described under the caption "--Certain Covenants--Incurrence of Debt
and Issuance of Preferred Stock," the Issuer shall be in default of such
covenant). The Board of Directors of the Issuer may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Debt by a Restricted
Subsidiary of the Issuer of any outstanding Debt of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such Debt is
permitted under the covenant described under the caption "--Certain
Covenants--Incurrence of Debt and Issuance of Preferred Stock," calculated on
a pro forma basis as if such designation had occurred at the beginning of the
four-quarter reference period, and (ii) no Default or Event of Default would
be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person, excluding, however, Exchangeable Preferred Stock.
"Weighted Average Life to Maturity" means, when applied to any Debt at any
date, the number of years obtained by dividing (i) the sum of the products
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal,
including payment at final maturity, in respect thereof, by (b) the number of
years (calculated to the nearest one-twelfth) that will elapse between such
date and the making of such payment, by (ii) the then outstanding principal
amount of such Debt.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person.
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U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material U.S. federal income tax
consequences of the acquisition, ownership and disposition of the Notes and
the Exchangeable Preferred Stock, and the ownership and disposition of the
Exchange Debentures. It is based on provisions of the U.S. Internal Revenue
Code of 1986, as amended (the "Code"), existing and proposed Treasury
regulations promulgated thereunder (the "Treasury Regulations") and
administrative and judicial interpretations thereof, all as of the date hereof
and all of which are subject to change, possibly on a retroactive basis. The
following relates only to Old Securities, and New Securities received
therefor, that are held by holders (each, a "Holder") who hold the Securities
as capital assets. This summary does not address all of the tax consequences
that may be relevant to particular Holders in light of their personal
circumstances, or to certain types of Holders (such as banks and other
financial institutions, real estate investment trusts, regulated investment
companies, insurance companies, foreign persons, tax-exempt organizations,
dealers in securities, persons who have hedged the interest rate on the Notes
or the dividend rate on the Exchangeable Preferred Stock, persons whose
functional currency is not the U.S. dollar or persons who hold the Notes, the
Exchangeable Preferred Stock or the Exchange Debentures as part of a
"straddle," "hedge" or "conversion transaction"). In addition, this summary
does not include any description of the tax laws of any state, local or non-
U.S. government that may be applicable to a particular Holder.
INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES TO THEM OF THE ACQUISITION,
OWNERSHIP AND DISPOSITION OF THE NOTES, THE EXCHANGEABLE PREFERRED STOCK AND
THE EXCHANGE DEBENTURES, AS WELL AS THE TAX CONSEQUENCES UNDER STATE, LOCAL,
NON-U.S. AND OTHER U.S. FEDERAL TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES
IN TAX LAWS BEFORE DETERMINING WHETHER TO PARTICIPATE IN THE EXCHANGE OFFER.
THE EXCHANGE OFFER
The exchange of Old Securities for New Securities pursuant to the Exchange
Offer will not constitute a material modification of the terms of the
Securities and, accordingly, such exchange will not constitute an exchange for
federal income tax purposes. Accordingly, such exchange will have no federal
income tax consequences to holders of Securities, either those who exchange or
those who do not.
THE NOTES AND THE EXCHANGE DEBENTURES
Accrual of Original Issue Discount. The Notes were issued at a substantial
discount from their principal amount and, further, cash interest will not
begin to accrue on the Notes until August 1, 2003. Accordingly, Holders of the
Notes will be required to include stated interest and original issue discount
("OID") on the Notes in gross income in accordance with the OID provisions of
the Code discussed below, and will be required to include amounts in income
with respect to such Notes prior to the receipt of cash payments attributable
to such income, without regard to whether the Holder is a cash or accrual
method taxpayer. Exchange Debentures issued on or before August 1, 2003 will
likely be treated as having been issued with OID. Exchange Debentures issued
after August 1, 2003 will not be issued with OID unless, generally, their
stated redemption price at maturity exceeds their issue price by more than a
specified de minimis amount. The issue price of an Exchange Debenture will
depend upon whether the Exchange Debenture, or the Exchangeable Preferred
Stock exchanged therefor, is "publicly traded" within a specified time period
following the exchange, or, if not so traded, whether the Exchange Debenture
bears "adequate stated interest. An additional Exchange Debenture (a
"Secondary Debenture") issued in payment of interest with respect to an
initially issued Exchange Debenture (an "Initial Debenture") will not be
considered as payment made on the Initial Debenture and will be aggregated
with the Initial Debenture for purposes of computing the amount and accrual of
OID on the Initial Debenture. Similar treatment will be applied when
additional Exchange Debentures are issued on Secondary Debentures.
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Holders of the Notes and the Exchange Debentures will be required to accrue
OID on the Notes or the Exchange Debentures, as the case may be, in income for
federal income tax purposes on a constant yield basis, which ordinarily will
result in the inclusion of increasing amounts of OID in income in successive
accrual periods.
A subsequent purchaser of a Note or an Exchange Debenture issued with OID
will be required to include annual accruals of OID in gross income in
accordance with the rules described above, but the amount of OID includable in
gross income may vary depending upon the price paid for the Note or the
Exchange Debenture by such subsequent purchaser. If a subsequent purchaser
purchases a Note or an Exchange Debenture at a cost that is less than its
stated redemption amount at maturity but that is in excess of its adjusted
issue price (i.e., its issue price increased by OID previously includable in
gross income of prior holders and decreased by cash payments), the includable
OID will be reduced by an amount equal to the OID multiplied by a fraction the
numerator of which is such excess and the denominator of which is the amount
of OID for the period remaining after the subsequent purchaser's purchase
until maturity.
The Company will furnish annually to the Internal Revenue Service ("IRS")
and to Holders (other than with respect to certain exempt Holders, including,
in particular, corporations) information with respect to the OID accruing
while the Notes or Exchange Debentures are held by such Holders.
Market Discount. A Holder that purchases a Note or an Exchange Debenture at
a discount (the "Market Discount") from its adjusted issue price that exceeds
a specified de minimis amount may be subject to the "market discount" rules of
Sections 1276 through 1278 of the Code. These rules provide, in part, that
gain on the sale or other disposition of a debt instrument and partial
payments on a debt instrument are treated as ordinary income to the extent of
accrued Market Discount. Unless the Holder elects to include Market Discount
in income on a constant yield basis, the accrued Market Discount at any time
generally would be the amount calculated by multiplying the Market Discount by
a fraction, the numerator of which is the number of days the obligation has
been held by the Holder and the denominator of which is the number of days
after the Holder's acquisition of the obligation up to and including its
maturity date. As an alternative to the inclusion of Market Discount on the
foregoing basis, the Holder may elect to include Market Discount in income
currently as it accrues on all Market Discount instruments acquired by such
Holder in that taxable year or thereafter, in which case the deferred interest
rule described below will not apply. This election will apply to all Market
Discount obligations acquired by the electing Holder on or after the first day
of the first taxable year to which the election applies. The election may be
revoked only with the consent of the IRS. Purchasers that acquire a Note or an
Exchange Debenture with Market Discount should consult their tax advisors
regarding the manner in which accrued Market Discount is calculated and the
election to include such Market Discount in income currently.
The Market Discount rules also provide for the deferral of interest
deductions with respect to debt incurred to purchase or carry a debt
instrument that has Market Discount in excess of the aggregate amount of
interest (including OID) includable in such holder's gross income for the
taxable year with respect to such debt instrument.
Bond Premium on Exchange Debentures. If Exchangeable Preferred Stock is
exchanged for Exchange Debentures that have an issue price in excess of their
stated redemption price at maturity (or earlier call date, if applicable), the
Exchange Debenture will be considered to have been issued at a "premium."
Special rules apply in the case of an Exchange Debenture acquired prior to any
optional redemption date. The Holder of such Exchange Debenture may deduct
such premium as amortizable bond premium over the term of the Exchange
Debentures (taking into account earlier call dates, as appropriate) under a
yield-to-maturity formula as such Holder takes interest into income under its
method of accounting, but only if an election by the Holder under Section 171
of the Code is made or is already in effect. An election under Section 171 is
available only if the Exchange Debentures are
204
held as capital assets, is revocable only with the consent of the IRS and
applies to all obligations owned or subsequently acquired by the Holder. If a
Holder acquires an Exchange Debenture at a premium and does not elect to
amortize such premium, the Holder will be required to report the full amount
of stated interest and OID on the Exchange Debenture as ordinary income, even
though the Holder may be required to recognize a capital loss (which may not
be available to offset ordinary income) on a sale or other disposition of the
Exchange Debenture.
Sale, Exchange or Retirement of the Notes and the Exchange Debentures. Upon
the sale, exchange, redemption, retirement at maturity or other disposition of
a Note or an Exchange Debenture, a Holder will generally recognize taxable
gain or loss equal to the difference between the sum of the cash and the fair
market value of all other property received on such disposition and such
Holder's adjusted federal income tax basis in the Note or Exchange Debenture.
The adjusted basis of the Note or the Exchange Debenture generally will equal
the Holder's cost, increased by any OID or market discount includable in
income by the Holder with respect to such Note or Exchange Debenture, and
reduced by the payments previously received by the Holder (other than
qualified stated interest) and any premium amortized by such Holder with
respect to the instrument. Any such gain or loss will, subject to the
preceding discussion of the market discount rules, be capital gain or loss,
and will be long-term capital gain or loss if, at the time of such
disposition, the Holder's holding period for the Note or Exchange Debenture
for more than one year. In the case of noncorporate persons, the maximum
federal income tax rate that would apply to such capital gain is 20% if the
Holder's holding period for the Note or the Exchange Debenture is more than
twelve months at the time of disposition. The deductibility of capital losses
is subject to limitations as described in the Code.
Applicable High Yield Discount Obligations. The Notes are applicable high
yield discount obligations ("AHYDOs"). Accordingly, the Company will be
allowed to deduct the OID on the Notes only when it is paid. In the event the
Exchange Debentures constitute AHYDOs, a portion of the OID accruing on the
Exchange Debentures may be treated as a dividend generally eligible for the
dividends-received deduction in the case of corporate Holders, and the Company
would not be entitled to deduct the "disqualified portion" of the OID accruing
on the Exchange Debentures and would be allowed to deduct the remainder of the
OID only when paid in cash. Because the amount of OID, if any, attributable to
the Exchange Debentures will be determined at the time such Exchange
Debentures are issued, it is impossible currently to determine whether
Exchange Debentures will be treated as AHYDOs.
Backup Withholding and Information Reporting. In general, a Holder of a Note
will be subject to backup withholding at the rate of 31% with respect to
interest, OID, principal and premium, if any, paid on a Note, and the proceeds
of a sale of a Note, unless such Holder (a) is an entity that is exempt from
withholding (including corporations, tax-exempt organizations and certain
qualified nominees) and, when required, demonstrates this fact, or (b)
provides the payor with its taxpayer identification number ("TIN") (which for
an individual would be the Holder's social security number), certifies that
the TIN provided to the payor is correct and that the Holder has not been
notified by the IRS that it is subject to backup withholding due to
underreporting of interest or dividends, and otherwise complies with
applicable requirements of the backup withholding rules. In addition, such
payments of principal, OID, premium and interest to, and the proceeds of, a
sale of a Note by Holders that are not exempt entities will generally be
subject to information reporting requirements. A Holder who does not provide
the payor with his correct TIN may be subject to penalties imposed by the IRS.
The Company will report to Holders and to the IRS the amount of any
"reportable payments" (including any interest paid) and any amounts withheld
with respect to the Notes during the calendar year. The amount of any backup
withholding from a payment to a Holder will be allowed as a credit against
such Holder's U.S. federal income tax liability and may entitle such Holder to
a refund, provided that the required information is furnished to the IRS.
205
THE EXCHANGEABLE PREFERRED STOCK
Classification of Exchangeable Preferred Stock and Exchange Debentures. The
Company intends to treat the Exchangeable Preferred Stock as equity of the
Company and the Exchange Debentures as indebtedness of the Company for U.S.
federal income tax purposes, and this discussion is based on the assumption
that such treatment will be respected. The Company's treatment is not binding
on the IRS or the courts and there can be no assurance that the IRS will not
take a different position concerning the tax consequences of the purchase,
ownership or disposition of the Exchangeable Preferred Stock or Exchange
Debentures than that described herein.
Distributions on Exchangeable Preferred Stock. Distributions on the
Exchangeable Preferred Stock that are paid from the Company's current or
accumulated earnings and profits, as determined under U.S. federal income tax
principles, whether paid in cash or in additional shares of Exchangeable
Preferred Stock ("Dividend Shares") will be taxable to a Holder as ordinary
dividend income in an amount equal to such cash or the fair market value of
such Dividend Shares on the date of distribution. To the extent, if any, that
the amount of any such distribution is not made out of the Company's current
or accumulated earnings and profits, as determined under U.S. federal income
tax principles, such distribution will first reduce the Holder's adjusted tax
basis in the Exchangeable Preferred Stock and, to the extent such distribution
exceeds such adjusted tax basis, will be treated as capital gain. In the case
of a distribution of Dividend Shares, such basis reduction should be offset on
an overall standpoint by a corresponding amount of tax basis for a Holder in
such Dividend Shares. A Holder's initial tax basis in any Dividend Shares
distributed by the Company generally will equal the fair market value of such
Dividend Shares on the date of their distribution. The holding period for such
Dividend Shares will commence with their distribution, and will not include
the Holder's holding period for outstanding shares of Exchangeable Preferred
Stock with respect to which such Dividend Shares were distributed. There can
be no assurance that the Company will have sufficient earnings and profits (as
determined for U.S. federal income tax purposes) to cause all distributions on
the Exchangeable Preferred Stock to be treated as dividends for U.S. federal
income tax purposes. For purposes of the remainder of this discussion, the
term "dividend" refers to a distribution paid out of allocable earnings and
profits, unless the context indicates otherwise.
Dividends received by corporate Holders generally will be eligible for the
70% dividends received deduction under Section 243 of the Code. There are,
however, many exceptions and restrictions relating to the availability of the
dividends received deduction including restrictions relating to the holding
period of the stock under Section 246(c) of the Code and debt-financed
portfolio stock under Section 246A of the Code.
Under Section 1059 of the Code, the tax basis of any shares of Exchangeable
Preferred Stock held by a corporate Holder for two years or less (ending on
the earliest of the date on which the Company declares, announces or agrees to
the payment of an actual or constructive dividend) is reduced (but not below
zero) by the non-taxed portion of an "extraordinary dividend" for which a
dividends received deduction is allowed. Special rules under Section 1059
exist with respect to extraordinary dividends for "qualified preferred
dividends." Corporate Holders are urged to consult their tax advisors
regarding the extent, if any, to which the exceptions and restrictions and
rules under Section 1059 of the Code apply to the purchase, ownership and
disposition of the Exchangeable Preferred Stock.
Preferred Stock Discount. Pursuant to Section 305(c) of the Code, Holders of
Exchangeable Preferred Stock received as Dividend Shares may be required to
treat the difference between the redemption price and issue price (likely, the
fair market value) of Exchangeable Preferred Stock as constructive
distributions that are includable in income on an economic accrual basis.
Dividend Shares received by Holders of the Exchangeable Preferred Stock may
bear Preferred Stock Discount depending upon the issue price of such Dividend
Shares. If shares of Exchangeable
206
Preferred Stock (including Dividend Shares) bear Preferred Stock Discount,
such shares generally will have different tax characteristics from other
shares of Exchangeable Preferred Stock and might trade separately, which might
adversely affect the liquidity of such shares.
Holders should consult their tax advisors regarding the extent, if any, to
which Section 305 will apply to Dividend Shares.
Redemption, Sale or Exchange of Exchangeable Preferred Stock. A redemption
of shares of Exchangeable Preferred Stock for cash generally will be treated
as a sale or exchange of such shares if the Holder does not own, actually or
constructively, any stock of the Company other than the redeemed Exchangeable
Preferred Stock. If the Holder does own, actually or constructively, such
other Company stock (including Exchangeable Preferred Stock or other stock of
the Company not so redeemed), a redemption of the Exchangeable Preferred Stock
may be treated as a dividend to the extent of the Company's current and
accumulated earnings and profits (as determined for U.S. federal income tax
purposes). Such dividend treatment would not apply if the redemption is
"substantially disproportionate" with respect to the Holder under Section
302(b)(2) of the Code or is "not essentially equivalent to a dividend" with
respect to such Holder under Section 302(b)(1) of the Code.
If the redemption of the Exchangeable Preferred Stock for cash is treated as
a sale or exchange, the Holder would recognize capital gain or loss in an
amount equal to the difference between the amount of cash received on such
redemption (except to the extent the redemption price of the Exchangeable
Preferred Stock is attributable to dividends declared by the Board of
Directors of the Company prior to the redemption, which generally will be
taxable as ordinary income) and such Holder's adjusted tax basis in the
Exchangeable Preferred Stock.
Similarly, gain or loss realized by a Holder on the sale of Exchangeable
Preferred Stock will be subject to U.S. federal income tax as capital gain or
loss in an amount equal to the difference between the sum of the amount of
cash and the fair market value of other property received and the Holder's
adjusted basis in the Exchangeable Preferred Stock.
Gain or loss realized by a Holder on the exchange of Exchangeable Preferred
Stock for Exchange Debentures will be subject to the same general rules as a
redemption for cash, except that the Holder would realize capital gain or loss
in an amount equal to the difference between the issue price of the Exchange
Debentures received (as determined for purposes of computing the OID on such
Exchange Debentures) and such Holder's adjusted tax basis in the Exchangeable
Preferred Stock. See "--The Notes and the Exchange Debentures--Accrual of
Original Issue Discount."
If a redemption or exchange of Exchangeable Preferred Stock is treated as a
distribution that is taxable as a dividend, the amount of the distribution
will be measured by the amount of cash or the issue price of the Exchange
Debentures, as the case may be, received by the Holder. The Holder's adjusted
tax basis in the redeemed Exchangeable Preferred Stock will be transferred to
any remaining stock holdings in the Company. If the Holder does not retain any
actual stock ownership in the Company (having only a constructive stock
interest), the Holder may lose such basis entirely. In addition, in the event
of dividend treatment, a corporate Holder, under certain circumstances, may be
required to reduce its basis in its remaining shares of stock of the Company
(and possibly recognize gain) under the "extraordinary dividend" provision of
Section 1059 of the Code.
Backup Withholding and Information Reporting. In general, a Holder will be
subject to backup withholding at the rate of 31% with respect to dividends on
the Exchangeable Preferred Stock and principal, interest, OID and premium on
the Exchange Debentures, in the same manner as are the Holders of Notes, as
described more fully above under " --The Notes and the Exchange Debentures--
Backup Withholding and Information Reporting."
207
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Securities for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Securities. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of New Securities received in exchange for Old
Securities where such Old Securities were acquired as a result of market-
making activities or other trading activities. The Issuer has agreed that for
a period of 90 days after the Expiration Date, it will make this Prospectus,
as amended or supplemented, available to any broker-dealer for use in
connection with any such resale. In addition, until [ ], 1999 (90 days
after the date of this Prospectus), all dealers effecting transactions in the
New Securities may be required to deliver a prospectus.
Neither the Issuer nor any of the Guarantors will receive any proceeds from
any sale of New Securities by broker-dealers. New Securities received by
broker-dealers for their own account pursuant to the Exchange Offer may be
sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the New
Securities or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or at negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such New Securities. Any broker-dealer that resells New
Securities that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Securities may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit on any such resale of New Securities and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The New Securities will constitute a new issue of securities with no
established trading market. The Issuer does not intend to list the New
Securities on any national securities exchange or to seek approval for
quotation through any automated quotation system. The Issuer has been advised
by the Placement Agents that following completion of the Exchange Offer, the
Placement Agents intend to make a market in the New Securities. However, the
Placement Agents are not obligated to do so and any market-making activities
with respect to the New Securities may be discontinued at any time without
notice. Accordingly, no assurance can be given that an active public or other
market will develop for the New Securities or as to the liquidity of or the
trading market for the New Securities. If a trading market does not develop or
is not maintained, holders of the New Securities may experience difficulty in
reselling the New Securities or may be unable to sell them at all. If a market
for the New Securities develops, any such market may cease at any time. If a
public trading market develops for the New Securities, future trading prices
of the New Securities will depend on many factors, including, among other
things, prevailing interest rates, the market for similar securities, the
financial conditions and results of operations of the Issuer and other factors
beyond the control of the Issuer, including general economic conditions.
Notwithstanding the registration of the New Securities in the Exchange Offer,
holders who are "affiliates" of the Issuer (within the meaning of Rule 405
under the Securities Act) may publicly offer for sale or resell the New
Securities only in compliance with the provisions of Rule 144 under the
Securities Act or any other available exemptions under the Securities Act.
For a period of 90 days after the Expiration Date, the Issuer will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the
Letter of Transmittal. The Issuer has agreed to pay all expenses incident to
the Exchange Offer (including the expenses of one counsel for the holders of
the Old Securities), other than commissions or concessions of any brokers or
dealers, and will indemnify the
208
holders of the Old Securities (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Issuer by Gibson, Dunn & Crutcher LLP, New York, New York. Gibson, Dunn &
Crutcher LLP has provided a tax opinion in connection with the Exchange Offer.
EXPERTS
The consolidated financial statements of Harborside Healthcare Corporation
as of December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997, included in this Prospectus, have been audited by
PricewaterhouseCoopers LLP, independent accountants, as indicated in their
report with respect thereto included herein.
The combined financial statements of Cushman Management Associates, Inc. and
Affiliates as of December 31, 1995 and 1996 and for each of the two years in
the period ended December 31, 1996, included in this Prospectus, have been
audited by Landa & Altsher, P.C., independent accountants, as indicated in
their report with respect thereto included herein.
The financial statements of Canterbury Care Center, Inc. and Related
Companies as of December 31, 1995 and December 31, 1996 and for each of the
two years in the period ended December 31, 1996, included in this Prospectus,
have been audited by Cummins, Krasik & Hohl Co., independent accountants, as
indicated in their report with respect thereto included herein.
209
INDEX TO FINANCIAL STATEMENTS
PAGE
----
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES:
Report of Independent Accountants....................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997............ F-3
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997.................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1995, 1996 and 1997................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Condensed Consolidated Balance Sheet as of June 30, 1998 (unaudited).... F-34
Condensed Consolidated Statements of Operations for the three months and
six months ended June 30, 1997 and 1998 (unaudited).................... F-35
Condensed Consolidated Statement of Changes in Stockholders' Equity for
the six months ended June 30, 1998 (unaudited)......................... F-36
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 1997 and 1998 (unaudited)..................................... F-37
Notes to Condensed Consolidated Financial Statements (unaudited)........ F-38
THE MASSACHUSETTS FACILITIES:
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES:
Independent Auditors' Report............................................ F-47
Combined Balance Sheet at December 31, 1995 and 1996.................... F-48
Combined Statements of Operations and Owners' Equity for the years ended
December 31, 1995 and 1996............................................. F-49
Combined Statement of Cash Flows for the years ended December 31, 1995
and 1996............................................................... F-50
Notes to Combined Financial Statements.................................. F-51
THE DAYTON FACILITIES:
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES:
Independent Auditors' Report............................................ F-57
Combined Balance Sheets at December 31, 1995 and 1996................... F-58
Combined Statements of Operations and Accumulated Deficit for the years
ended December 31, 1995 and 1996....................................... F-60
Combined Statements of Cash Flows for the years ended December 31, 1995
and 1996............................................................... F-61
Notes to Combined Financial Statements.................................. F-62
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Harborside Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of Harborside
Healthcare Corporation and its subsidiaries (the "Company") as of December 31,
1996 and 1997 and the related consolidated statements of operations, changes
in stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Harborside
Healthcare Corporation and subsidiaries as of December 31, 1996 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 13, 1998
F-2
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
AS OF DECEMBER 31, 1996 AND 1997
1996 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 9,722 $ 8,747
Accounts receivable, net of allowances for doubtful
accounts of $1,860 and $1,871, respectively............... 22,984 32,416
Prepaid expenses and other............................... 3,570 6,644
Demand note due from limited partnership (Note D)........ 1,369 --
Deferred income taxes (Note L)........................... 1,580 2,150
-------- --------
Total current assets................................... 39,225 49,957
Restricted cash (Note C)................................... 3,751 5,545
Investment in limited partnership (Note D)................. 256 67
Property and equipment, net (Note E)....................... 95,187 96,872
Intangible assets, net (Note F)............................ 3,004 8,563
Note receivable (Note G)................................... -- 7,487
Deferred income taxes (Note L)............................. 376 71
-------- --------
Total assets........................................... $141,799 $168,562
======== ========
LIABILITIES
Current liabilities:
Current maturities of long-term debt (Note I)............ 169 186
Current portion of capital lease obligation (Note J)..... 3,744 3,924
Accounts payable......................................... 6,011 7,275
Employee compensation and benefits....................... 8,639 10,741
Other accrued liabilities................................ 2,177 4,417
Accrued interest......................................... 19 251
Current portion of deferred income....................... 368 609
Income taxes payable (Note L)............................ 1,272 --
-------- --------
Total current liabilities.............................. 22,399 27,403
Long-term portion of deferred income (Note H).............. 2,948 3,559
Long-term debt (Note I).................................... 18,039 33,456
Long-term portion of capital lease obligation (Note J)..... 53,533 52,361
-------- --------
Total liabilities...................................... 96,919 116,779
-------- --------
Commitments and contingencies (Notes D, H and N)
STOCKHOLDERS' EQUITY (NOTE M)
Common stock, $.01 par value, 30,000,000 shares authorized,
8,000,000 and 8,008,665 shares issued and outstanding..... 80 80
Additional paid-in capital................................. 48,340 48,440
Retained earnings (deficit)................................ (3,540) 3,263
-------- --------
Total stockholders' equity............................. 44,880 51,783
-------- --------
Total liabilities and stockholders' equity........... $141,799 $168,562
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997
---------- ---------- ----------
Total net revenues........................ $ 109,425 $ 165,412 $ 221,777
---------- ---------- ----------
Expenses:
Facility operating...................... 89,378 132,207 176,404
General and administrative.............. 5,076 7,811 10,953
Service charges paid to affiliate (Note
Q)..................................... 700 700 708
Special compensation and other (Note
M)..................................... -- 1,716 --
Depreciation and amortization........... 4,385 3,029 4,074
Facility rent........................... 1,907 10,223 12,446
---------- ---------- ----------
Total expenses........................ 101,446 155,686 204,585
---------- ---------- ----------
Income from operations.................... 7,979 9,726 17,192
Other:
Interest expense, net................... (5,107) (4,634) (5,853)
Loss on investment in limited partner-
ship (Note D).......................... (114) (263) (189)
Gain on sale of facilities, net (Note
P)..................................... 4,869 -- --
Minority interest in net income (Notes B
and P)................................. (6,393) -- --
---------- ---------- ----------
Income before income taxes and extraordi-
nary loss................................ 1,234 4,829 11,150
Income taxes (Note L)..................... -- (809) (4,347)
---------- ---------- ----------
Income before extraordinary loss.......... 1,234 4,020 6,803
Extraordinary loss on early retirement of
debt, net of taxes of $843 (Note I)...... -- (1,318) --
---------- ---------- ----------
Net income................................ $ 1,234 $ 2,702 $ 6,803
========== ========== ==========
Net income per share--basic............... $ .85
==========
Net income per share--diluted............. $ .84
==========
Pro forma data (unaudited--Notes B and L):
Historical income before income taxes
and extraordinary loss................. 1,234 4,829
Pro forma income taxes.................. (481) (799)
---------- ----------
Pro forma income before extraordinary
loss..................................... 753 4,030
Extraordinary loss, net................. -- (1,318)
---------- ----------
Pro forma net income...................... $ 753 $ 2,712
========== ==========
Pro forma net income per share (basic and
diluted):
Pro forma income before extraordinary
loss................................... $ 0.17 $ 0.63
Extraordinary loss, net................. -- 0.21
---------- ----------
Pro forma net income.................... $ 0.17 $ 0.42
========== ==========
Weighted average number of common shares
used in per share computations:
Basic................................... 4,425,000 6,396,142 8,037,026
Diluted................................. 4,425,000 6,396,142 8,138,793
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
------ ---------- --------- -------
Stockholders' equity, December 31, 1994... $44 $10,298 $(7,476) $ 2,866
Net income for the year ended December
31, 1995............................... -- -- 1,234 1,234
Contributions........................... -- 30 -- 30
--- ------- ------- -------
Stockholders' equity, December 31, 1995... 44 10,328 (6,242) 4,130
Net income for the year ended December
31, 1996............................... -- -- 2,702 2,702
Purchase of equity interests............ -- 1,028 -- 1,028
Distributions........................... -- (140) -- (140)
Proceeds of initial public offering,
net.................................... 36 37,124 -- 37,160
--- ------- ------- -------
Stockholders' equity, December 31, 1996... 80 48,340 (3,540) 44,880
Net income for the year ended December
31, 1997............................... -- -- 6,803 6,803
Exercise of options..................... -- 100 -- 100
--- ------- ------- -------
Stockholders' equity, December 31, 1997... $80 $48,440 $ 3,263 $51,783
=== ======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997
-------- -------- --------
Operating activities:
Net income..................................... $ 1,234 $ 2,702 $ 6,803
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest............................ 6,393 234 --
Gain on sale of facilities, net.............. (4,869) -- --
Loss on refinancing of debt.................. -- 1,318 --
Depreciation of property and equipment....... 3,924 2,681 3,589
Amortization of intangible assets............ 461 348 485
Amortization of deferred income.............. -- (369) (449)
Loss from investment in limited partnership.. 114 263 189
Amortization of loan costs and fees.......... 109 103 257
Accretion of interest on capital lease obli-
gation...................................... -- 1,419 2,952
Deferred interest............................ -- (114) --
Common stock grant........................... -- 225 --
Other........................................ 14 -- --
-------- -------- --------
7,380 8,810 13,826
Changes in operating assets and liabilities:
(Increase) in accounts receivable............ (7,573) (13,017) (9,432)
(Increase) in prepaid expenses and other..... (456) (1,780) (3,074)
(Increase) in deferred income taxes.......... -- (1,956) (265)
Increase in accounts payable................. 1,345 1,977 1,264
Increase in employee compensation and bene-
fits........................................ 1,385 4,144 2,102
Increase (decrease) in accrued interest...... (490) (6) 232
Increase in other accrued liabilities........ 295 1,118 2,240
Increase (decrease) in income taxes payable.. -- 2,115 (1,272)
-------- -------- --------
Net cash provided by operating activities...... 1,886 1,405 5,621
-------- -------- --------
Investing activities:
Additions to property and equipment............ (3,081) (5,104) (5,274)
Facility acquisition deposits.................. (3,000) 3,000 --
Additions to intangibles....................... (1,202) (950) (6,301)
Transfers to restricted cash, net.............. (760) (996) (1,794)
Receipt of note receivable..................... -- -- (7,487)
Repayment of demand note from limited partner-
ship.......................................... -- -- 1,369
Issuance of Demand note from limited partner-
ship.......................................... (1,255) -- --
Payment of costs related to sale of facili-
ties.......................................... (884) -- --
Proceeds from sale of facilities............... 47,000 -- --
-------- -------- --------
Net cash provided (used) by investing activi-
ties.......................................... 36,818 (4,050) (19,487)
-------- -------- --------
Financing activities:
Borrowings under revolving line of credit...... -- -- 15,600
Payment of long-term debt...................... (9,800) (25,288) (166)
Principal payments of capital lease obliga-
tion.......................................... -- (6,766) (3,944)
Debt prepayment penalty........................ (1,154) (1,517) --
Note payable to an affiliate................... 2,000 (2,000) --
Receipt of cash in connection with lease....... -- 3,685 1,301
Dividend distribution.......................... -- (140) --
Distributions to minority interest............. (3,636) (33,727) --
Purchase of equity interests and other contri-
butions....................................... 30 803 --
Exercise of stock options...................... -- -- 100
Proceeds from sale of common stock............. -- 37,160 --
-------- -------- --------
Net cash provided (used) by financing activi-
ties.......................................... (12,560) (27,790) 12,891
-------- -------- --------
Net increase (decrease) in cash and cash equiva-
lents.......................................... 26,144 (30,435) (975)
Cash and cash equivalents, beginning of year.... 14,013 40,157 9,722
-------- -------- --------
Cash and cash equivalents, end of year.......... $ 40,157 $ 9,722 $ 8,747
======== ======== ========
Supplemental Disclosure:
Interest paid.................................. 6,208 4,060 3,371
Income taxes paid.............................. -- 760 5,783
Noncash investing and financing activities:
Property and equipment additions by capital
lease......................................... -- 57,625 --
Capital lease obligation incurred.............. -- 57,625 --
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS:
Harborside Healthcare Corporation and its subsidiaries (the "Company")
operate long-term care facilities and provide rehabilitation therapy services.
As of December 31, 1997, the Company owned thirteen facilities, operated
thirty additional facilities under various leases and owned a rehabilitation
therapy services company. The Company accounts for its investment in one of
its owned facilities using the equity method (see Note D).
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 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 approximately $37,160,000. A portion of the proceeds was
used to repay some of the Company's long-term debt (see Note I).
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
combined financial statements and the interest of the Unitholders was
reflected as minority interest. In March 1996, a liquidating distribution was
paid to the Unitholders (see Notes H and P).
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 combined
financial statements include a pro forma income tax provision for each period
presented, as if the Company had always owned the Predecessor Entities (see
Note L).
C. SIGNIFICANT ACCOUNTING POLICIES:
The Company uses the following accounting policies for financial reporting
purposes:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements (combined prior to June 14, 1996)
include the accounts of the Company and its subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
TOTAL NET REVENUES
Total net revenues include net patient service revenues, rehabilitation
therapy service revenues from contracts to provide services to non-affiliated
long-term care facilities and management fees from the facility owned by Bowie
L.P. (see Note D) and two additional facilities (See Note H).
F-7
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net patient service revenues payable by patients at the Company's facilities
are recorded at established billing rates. Net patient service revenues to be
reimbursed by contracts with third-party payors, primarily the Medicare and
Medicaid programs, are recorded at the amount estimated to be realized under
these contractual arrangements. Revenues from Medicare and Medicaid are
generally based on reimbursement of the reasonable direct and indirect costs
of providing services to program participants or a prospective payment system.
The Company separately estimates revenues due from each third party with which
it has a contractual arrangement and records anticipated settlements with
these parties in the contractual period during which services were rendered.
The amounts actually reimbursable under Medicare and Medicaid are determined
by filing cost reports which are then audited and generally retroactively
adjusted by the payor. Legislative changes to state or Federal reimbursement
systems may also retroactively affect recorded revenues. Changes in estimated
revenues due in connection with Medicare and Medicaid may be recorded by the
Company subsequent to the year of origination and prior to final settlement
based on improved estimates. Such adjustments and final settlements with third
party payors, which could materially and adversely affect the Company, are
reflected in operations at the time of the adjustment or settlement. Accounts
receivable, net, at December 31, 1996 and 1997 includes $10,667,000 and
$8,296,000, respectively, of estimated settlements due from third party payors
and $5,194,000 and $6,115,000, respectively, of estimated settlements due to
third party payors.
In addition, direct and allocated indirect costs reimbursed under the
Medicare program are subject to regional limits. The Company's costs generally
exceed these limits and accordingly, the Company is required to submit
exception requests to recover such excess costs. The Company has recorded
approximately $8,229,000 in accounts receivable as of December 31, 1997,
related to these exception requests. The Company believes it will be
successful in collecting these receivables; however, the failure to recover
these costs in the future could materially and adversely affect the Company.
Beginning in 1995, total net revenues includes revenues recorded by the
Company's rehabilitation therapy subsidiary (which does business under the
name "Theracor") for therapy services provided to non-affiliated long-term
care facilities.
CONCENTRATIONS
A significant portion of the Company's revenues are derived from the
Medicare and Medicaid programs. There have been, and the Company expects that
there will continue to be, a number of proposals to limit reimbursement
allowable to long-term care facilities under these programs. On August 5,
1997, the Balanced Budget Act of 1997 (the "Balanced Budget Act") was signed
into law. This act is effective for cost reporting periods beginning after
July 1, 1998 and as such will not affect the Company until January 1, 1999.
The Balanced Budget Act amends Medicare reimbursement methodology, converting
it from a cost-based system to a prospective payment system. Approximately
65%, 65%, and 66% of the Company's net revenues in the years ended December
31, 1995, 1996 and 1997, respectively, are from the Company's participation in
the Medicare and Medicaid programs. As of December 31, 1996 and 1997,
$17,560,000 and $20,936,000, respectively, of net accounts receivable were due
from the Medicare and Medicaid programs.
FACILITY OPERATING EXPENSES
Facility operating expenses include expenses associated with the normal
operations of a long-term care facility. The majority of these costs consist
of payroll and employee benefits related to nursing, housekeeping and dietary
services provided to patients, as well as maintenance and
F-8
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
administration of the facilities. Other significant facility operating
expenses include: the cost of rehabilitation therapies, medical and pharmacy
supplies, food and utilities. Beginning in 1995, facility operating expenses
include expenses associated with services rendered by Theracor to non-
affiliated facilities.
PROVISION FOR DOUBTFUL ACCOUNTS
Provisions for uncollectible accounts receivable of $1,240,000, $1,116,000
and $1,188,000 are included in facility operating expenses for the years ended
December 31, 1995, 1996 and 1997, respectively. Individual patient accounts
deemed to be uncollectible are written off against the allowance for doubtful
accounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the period reported. Actual
results could differ from those estimates. Estimates are used when accounting
for the collectibility of receivables, depreciation and amortization, employee
benefit plans, taxes and contingencies.
NET INCOME (PRO FORMA NET INCOME) PER SHARE
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share", which revised the methodology of calculating net income per share.
The Company adopted SFAS No. 128 in the fourth quarter of 1997. All net income
per share and pro forma net income per share amounts for all periods have been
presented in accordance with, and where appropriate have been restated to
conform with, the requirements of SFAS No. 128.
Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during 1997. The
computation of diluted net income per share is similar to that of basic net
income per share except that the number of shares is increased to reflect the
number of additional common shares that would have been outstanding if the
dilutive potential common shares had been issued. Dilutive potential common
shares for the Company consist of shares issuable upon exercise of the
Company's stock options. Pro forma net income per share for the years ended
December 31, 1995 and 1996 is calculated based upon the common shares of the
Company (4,400,000) issued in accordance with the Reorganization Agreement.
Pursuant to Securities and Exchange Commission staff requirements, stock
options issued within one year of an initial public offering, calculated using
the treasury stock method and the initial public offering price of $11.75 per
share, have been included in the calculation of pro forma net income per
common share as if they were outstanding for all periods presented.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures that extend the
lives of affected assets are capitalized, while maintenance and repairs are
charged to expense as incurred. Upon the retirement or sale of an asset, the
cost of the asset and any related accumulated depreciation are removed from
the balance sheet, and any resulting gain or loss is included in net income.
F-9
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation expense includes the amortization of capital assets and is
estimated using the straight-line method. These estimates are calculated using
the following estimated useful lives:
Buildings and improvements 31.5 to 40 years
Furniture and equipment 5 to 10 years
Leasehold improvements over the life of the lease
Land improvements 8 to 40 years
INTANGIBLE ASSETS
Intangible assets consist of amounts identified in connection with certain
facility acquisitions accounted for under the purchase method and certain
deferred costs which were incurred in connection with various financings (see
Notes F and I).
In connection with each of its acquisitions, the Company reviewed the assets
of the acquired facility and assessed its relative fair value in comparison to
the purchase price. Certain acquisitions resulted in the allocation of a
portion of the purchase price to the value associated with the existence of a
workforce in place, residents in place at the date of acquisition and
covenants with sellers which limit their ability to engage in future
competition with the Company's facilities. The assets recognized from an
assembled workforce and residents in place are amortized using the straight-
line method over the estimated periods (from three to seven years) during
which the respective benefits would be in place. Covenants not-to-compete are
being amortized using the straight-line method over the period during which
competition is restricted.
Goodwill resulted from the acquisition of certain assets for which the
negotiated purchase prices exceeded the allocations of the fair market value
of identifiable assets. The Company's policy is to evaluate each acquisition
separately and identify an appropriate amortization period for goodwill based
on the acquired property's characteristics. Goodwill is being amortized using
the straight-line method over a 20 to 40 year period.
Costs incurred in obtaining financing (including loans, letters of credit
and facility leases) are amortized as interest expense using the straight-line
method (which approximates the interest method) over the term of the related
financial obligation.
ASSESSMENT OF LONG-LIVED ASSETS
The Company periodically reviews the carrying value of its long-lived assets
(primarily property and equipment and intangible assets) to assess the
recoverability of these assets; any impairments would be recognized in
operating results if a diminution in value considered to be other than
temporary were to occur. As part of this assessment, the Company reviews the
expected future net operating cash flows from its facilities, as well as the
values included in appraisals of its facilities, which have periodically been
obtained in connection with various financial arrangements. The Company has
not recognized any adjustments as a result of these assessments.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with
maturities of three months or less at the date of their acquisition by the
Company.
RESTRICTED CASH
Restricted cash consists of cash set aside in escrow accounts as required by
several of the Company's leases and other financing arrangements.
F-10
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." These pronouncements are effective for financial statement
periods beginning after December 15, 1997. The Company does not believe that
these new pronouncements will have material effect on its future financial
statements.
D. INVESTMENT IN LIMITED PARTNERSHIP:
In April 1993, a subsidiary of the Company acquired a 75% partnership
interest in Bowie L.P., which developed a 120-bed long-term care facility in
Maryland that commenced operations on May 1, 1994. The remaining 25% interest
in Bowie L.P. is owned by a non-affiliated party. The Company records its
investment in Bowie L.P. using the equity method. Although the Company owns a
majority interest in Bowie L.P., the Company only maintains a 50% voting
interest and accordingly does not exercise control over the operations of
Bowie L.P. In addition, the non-affiliated party has the option to purchase
the Company's partnership interest during the sixty-day period prior to the
seventh anniversary of the facility's opening and each subsequent anniversary
thereafter. If the option is exercised, the purchase price would be equal to
the fair market value of the Company's interest at the date on which the
option is exercised. The Company is entitled to 75% of the facility's net
income and manages this facility in return for a fee equal to 5.5% of the
facility's net revenues (effective September 1995). Prior to this date, the
management fee approximated $10,000 per month. The Company recorded $234,000,
$445,000 and $445,000 in management fees from this management contract for the
years ended December 31, 1995, 1996 and 1997, respectively.
Bowie L.P. obtained a $4,377,000 construction loan from a bank to finance
the construction of the facility. Bowie L.P. also obtained a $1,000,000 line
of credit from the bank to finance pre-opening costs and working capital
requirements. On July 31, 1995, the line of credit converted to a term loan.
In March of 1997, the entire loan was repaid with the proceeds of a $6,400,000
note from another bank. As of December 31, 1996 and 1997, Bowie L.P. owed
$4,964,000 and $6,300,000, respectively, on these loans. Interest on the loan
is payable monthly at the bank's prime rate or a LIBOR rate plus 1.5%. This
loan limits Bowie L.P.'s ability to borrow additional funds and to make
acquisitions, dispositions and distributions. Additionally, the loan contains
covenants with respect to maintenance of specified levels of net worth,
working capital and debt service coverage.
The loan is collateralized by each partner's partnership interest as well as
all of the assets of Bowie L.P. The loan is also guaranteed by the Company and
additional collateral pledged by the non-affiliated partner. The Bowie L.P.
partnership agreement states that each partner will contribute an amount in
respect of any liability incurred by a partner in connection with a guarantee
of the partnership's debt, so that the partners each bear their proportionate
share of the liability based on their percentage ownership of the partnership.
The results of operations of Bowie L.P. are summarized below:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
Net operating revenues..................... $7,595,000 $8,104,000 $8,311,000
Net operating expenses..................... 7,236,000 7,758,000 8,052,000
Net loss................................... (152,000) (351,000) (252,000)
F-11
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The financial position of Bowie L.P. was as follows:
AS OF DECEMBER 31,
---------------------
1996 1997
---------- ----------
Current assets........................................... $2,511,000 $2,275,000
Non-current assets....................................... 4,882,000 4,695,000
Current liabilities...................................... 2,335,000 722,000
Non-current liabilities.................................. 4,716,000 6,158,000
Partners' equity......................................... 342,000 90,000
On December 28, 1995, the Company advanced $1,255,000 to Bowie L.P. to
support additional facility working capital requirements by means of a demand
note bearing interest at 9.0% per annum. This advance was repaid by Bowie L.P.
during 1997.
E. PROPERTY AND EQUIPMENT:
The Company's property and equipment are stated at cost and consist of the
following as of December 31:
1996 1997
------------ ------------
Land................................................. $ 2,994,000 $ 3,270,000
Land improvements.................................... 3,077,000 3,387,000
Leasehold improvements............................... 2,371,000 3,157,000
Buildings and improvements........................... 28,764,000 30,529,000
Equipment, furnishings and fixtures.................. 7,835,000 9,565,000
Assets under capital lease........................... 63,125,000 63,532,000
------------ ------------
108,166,000 113,440,000
Less accumulated depreciation........................ 12,979,000 16,568,000
------------ ------------
$ 95,187,000 $ 96,872,000
============ ============
F. INTANGIBLE ASSETS:
Intangible assets are stated at cost and consist of the following as of
December 31:
1996 1997
------------ ------------
Patient lists........................................ $ 1,459,000 $ 1,459,000
Assembled workforce.................................. 930,000 930,000
Covenant not to compete.............................. 1,838,000 1,838,000
Organization costs................................... 256,000 380,000
Goodwill............................................. -- 2,166,000
Deferred financing costs............................. 2,563,000 6,574,000
------------ ------------
7,046,000 13,347,000
Less accumulated amortization........................ 4,042,000 4,784,000
------------ ------------
$ 3,004,000 $ 8,563,000
============ ============
G. NOTE RECEIVABLE:
In connection with the acquisition of the five Connecticut facilities on
December 1, 1997, the Company received a note receivable from the owner in the
amount of $7,487,000. Interest is earned at the rate of 9% per annum, and
payments are due monthly, in arrears, commencing January 1, 1998
F-12
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and continuing until November 30, 2010, at which time the entire principal
balance is due. The proceeds of the note were used to repay certain
indebtedness. The note is collateralized by various mortgage interests and
other collateral.
H. OPERATING LEASES:
In March 1993, a subsidiary of the Company entered into an agreement with a
non-affiliated entity to lease two long-term care facilities in Ohio with 289
beds for a period of ten years. The lease agreement, which became effective in
June 1993, provides for fixed annual rental payments of $900,000. At the end
of the ten-year period, the Company has the option to acquire the facilities
for $8,500,000, or to pay a $500,000 termination fee and relinquish the
operation of the facilities to the lessor. On the effective date of the lease,
the subsidiary paid $1,200,000 to the lessor for a covenant not-to-compete
which remains in force through June 2003.
Effective October 1, 1994, a subsidiary of the Company entered into an
agreement with a related party to lease a 100 bed long-term care facility in
Florida for a period of ten years. The lease agreement provides for annual
rental payments of $551,250 in the initial twelve-month period and annual
increases of 2% thereafter. The Company has the option to exercise two
consecutive five-year lease renewals. The Company also has the right to
purchase the facility at fair market value at any time after the fifth
anniversary of the commencement of the lease. The lease agreement also
required the Company to escrow funds equal to three months' base rent.
Effective April 1, 1995, a subsidiary of the Company entered into an
agreement with Meditrust to lease a 100-bed long-term care facility in Ohio
for a period of ten years. The lease agreement provides for annual rental
payments of $698,400 in the initial twelve-month period. The Company is also
required to make additional rental payments beginning April 1, 1996 in an
amount equal to 5.0% of the difference between the facility's operating
revenues in each applicable year and the operating revenues in the twelve-
month base period which commenced on April 1, 1995. The annual additional rent
payment will not exceed $14,650. At the end of the initial lease period, the
Company has the option to exercise two consecutive five-year lease renewals.
The lease agreement also required the Company to escrow funds equal to three
months base rent. The Company's obligations under the lease are collateralized
by, among other things, an interest in any property improvements made by the
Company and by a second position on the facility's accounts receivable. The
Company also has the right to purchase the facility at its fair market value
on the eighth and tenth anniversary dates of the commencement of the lease and
at the conclusion of each lease renewal.
Effective January 1, 1996, a subsidiary of the Company entered into an
agreement with Meditrust to lease the Seven Facilities formerly owned by KYP
(see Note P). The lease agreement provides for annual rental payments of
$4,582,500 in the initial twelve-month period and annual increases based on
changes in the consumer price index thereafter. The lease has an initial term
of ten years with two consecutive five-year renewal terms exercisable at the
Company's option. The lease agreement also required the Company to escrow
funds in an amount equal to three months base rent. The Company's obligations
under the lease are collateralized by, among other things, an interest in any
property improvements made by the Company and by a second position on the
related facilities' accounts receivable. In conjunction with the lease, the
Company was granted a right of first refusal and an option to purchase the
facilities as a group, which option is exercisable at the end of the eighth
year of the initial term and at the conclusion of each renewal term. The
purchase option is exercisable at the greater of the fair market value of the
facilities at the time of exercise or Meditrust's original investment.
F-13
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective January 1, 1996, a subsidiary of the Company entered into an
agreement with Meditrust to lease six long-term care facilities with a total
of 537 licensed beds in New Hampshire. The lease agreement provides for annual
rental payments of $2,324,000 in the initial twelve-month period and annual
rental increases based on changes in the consumer price index thereafter. The
lease has an initial term of ten years with two consecutive five-year renewal
terms exercisable at the Company's option. The lease agreement also required
the Company to escrow funds in an amount equal to three months base rent. In
addition, the lease agreement required the Company to establish a renovation
escrow account in the amount of $560,000 to fund facility renovations
identified in the agreement. The renovation escrow funds are released upon
completion of the required renovations. As of December 31, 1997, $325,000 of
these funds remained in escrow pending completion of the specified
renovations. The Company's obligations under the lease are collateralized by,
among other things, an interest in any property improvements made by the
Company and by a second position on the related facilities' accounts
receivable. In conjunction with the lease, the Company was granted a right of
first refusal and an option to purchase the facilities as a group, which is
exercisable at the end of the eighth year of the initial term and at the
conclusion of each renewal term. The purchase option is exercisable at the
greater of 90% of the fair market value of the facilities at the time of
exercise or Meditrust's original investment. In connection with this lease,
the Company received a cash payment of $3,685,000 from Meditrust which was
recorded as deferred income and is being amortized over the ten-year initial
lease term as a reduction of rental expense.
The Meditrust leases contain cross-default and cross-collateralization
provisions. A default by the Company under one of these leases could adversely
affect a significant number of the Company's properties and result in a loss
to the Company of such properties. In addition, the leases permit Meditrust to
require the Company to purchase the facilities upon the occurrence of a
default.
Effective March 1, 1997, the Company entered into an agreement with a non-
affiliated party to lease one long-term care facility with 163 beds in
Baltimore, Maryland for a period of ten years. The lease agreement provides
for fixed annual rental payments of $900,000 for the first three years and
annual increases based on changes in the consumer price index thereafter. From
July 1, 1999 through August 28, 2000, the Company has the option to acquire
the facility for $10,000,000. After August 28, 2000, the purchase price
escalates in accordance with a schedule. On the effective date of the lease,
the Company paid $1,000,000 to the lessor in exchange for the purchase option.
This option payment is being amortized over the life of the lease.
As of August 1, 1997, the Company acquired four long-term care facilities
with 401 beds in Massachusetts. The Company financed this acquisition through
an operating lease with a real estate investment trust (the "REIT"). The lease
provides for annual rental payments of $1,576,000 in the initial twelve-month
period and annual increases based on changes in the consumer price index
thereafter. The lease has an initial term of ten years with, at the Company's
option, eight consecutive five-year renewal terms. In conjunction with the
lease, the Company was granted a right of first refusal and an option to
purchase the facilities as a group, which option is exercisable at the end of
the initial lease term and at the conclusion of each renewal term. The
purchase option is exercisable at the fair market value of the facilities at
the time of exercise.
On August 28, 1997, the Company obtained a five-year $25,000,000 synthetic
leasing facility (the "Leasing Facility") from the same group of banks that
provided the "Credit Facility" (see Note I). The Company used $23,600,000 of
the funds available through the Leasing Facility to lease the Dayton, Ohio
facilities from a master trust in September 1997. The master trust, which was
capitalized by investors with a 3% equity interest and 97% debt, acquired the
Dayton, Ohio facilities from their
F-14
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
previous owner and leases the facilities to the Company. The equity
contributions to the master trust remains at risk for the duration of the
lease term. Acquisitions made through the Leasing Facility are accounted for
financial reporting purposes as operating leases with an initial lease term,
which expires at the expiration date of the Leasing Facility in August 2002.
The Company's rental payments to the Master Trust are determined based on the
purchase price and an interest factor which is based on LIBOR (or at the
Company's option, the agent bank's prime rate) and which varies with the
Company's leverage ratio (as defined). As of December 31, 1997 the interest
rate for amounts outstanding under this facility was approximately 7.5%. The
Company has the right to purchase facilities acquired through the Leasing
Facility for an amount equal to the purchase price at the date of acquisition.
The Company's obligations under the lease are collateralized by a collateral
pool which also collateralizes the Company's borrowings under its Credit
Facility.
Under the terms of each of the facility leases described above, the Company
is responsible for the payment of all real estate and personal property taxes,
as well as other reasonable costs required to operate, maintain, insure and
repair the facilities.
Future minimum rent commitments under the Company's non-cancelable operating
leases as of December 31, 1997 are as follows:
1998......................................................... $ 19,423,000
1999......................................................... 19,617,000
2000......................................................... 19,811,000
2001......................................................... 20,005,000
2002......................................................... 20,199,000
Thereafter................................................... 76,545,000
------------
$175,600,000
============
I. LONG-TERM DEBT:
In October 1994, certain of the Predecessor Entities refinanced $29,189,000
of the then outstanding bank debt, and as a result, recorded a loss of
$453,000. This loss included a payment of $384,000 upon the termination of a
related interest rate protection agreement, which was required pursuant to the
terms of the bank debt in order to effectively fix the interest rate on such
debt. The retirement of this debt was financed by the concurrent borrowing of
$42,300,000 from Meditrust. Using proceeds from the Offering, on June 14, 1996
the Company repaid $25,000,000 of this debt, incurring a prepayment penalty of
$1,517,000. Additionally, the Company wrote-off $544,000 of deferred financing
costs related to the retired debt and incurred $100,000 of additional
transaction costs. The loss on this early retirement of debt totaled
$2,161,000 and is presented as an extraordinary loss in the Statement of
Operations for the year ended December 31, 1996 net of the related estimated
income tax benefit of $843,000. The Meditrust debt was collateralized by the
assets of certain of the Predecessor Entities (the "Seven S Corporations"),
and subsequent to the debt paydown, the remaining debt is cross-collateralized
by the assets of four facilities (the "Four Facilities"). The Meditrust debt
bears interest at the annual rate of 10.65%. Additional interest payments are
also required commencing on January 1, 1997 in an amount equal to 0.3% of the
difference between the operating revenues of the Four Facilities in each
applicable year and the operating revenues of the Four Facilities during a
twelve-month base period which commenced October 1, 1995. The Meditrust debt
is cross-collateralized by the assets of each of the Four Facilities. The loan
agreement with Meditrust places certain restrictions on the Four Facilities;
among them, the agreement restricts their ability to incur additional debt or
to make significant dispositions of assets. The Four Facilities are also
required to maintain a debt service coverage ratio of at least 1.2 to 1.0 (as
defined in the loan
F-15
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
agreement) and a current ratio of at least 1.0 to 1.0. The Meditrust loan
agreement contains a prepayment penalty, which decreases from 1.5% of the then
outstanding balance in the sixth year to none in the ninth year.
A subsidiary of the Company assumed a first mortgage note (the "Note") with
a remaining balance of $1,775,000 as part of the acquisition of a long-term
care facility in 1988. The Note requires the annual retirement of principal in
the amount of $20,000. The Company pays interest monthly at the rate of 14%
per annum on the outstanding principal amount until maturity in October 2010,
when the remaining unpaid principal balance of $1,338,000 is due. The Note is
collateralized by the property and equipment of the facility.
In April of 1997, the Company obtained a three-year $25,000,000 revolving
credit facility (the "Credit Facility") from a commercial bank. On August 28,
1997, the Company amended the Credit Facility to add three additional banks as
parties to the Credit Facility, extended the maturity to five years and made
certain additional amendments to the terms of the agreement. Borrowings under
this facility are collateralized by patient accounts receivable and certain
real estate. The assets which collateralize the Credit Facility also
collateralize the Company's obligation under the Leasing Facility. The Credit
Facility matures in September 2002 and provides for prime and LIBOR interest
rate options, which vary with the Company's leverage ratio (as defined). As of
December 31, 1997, the interest rate for amounts outstanding under this
facility was approximately 7.3%. The Credit Facility contains covenants which,
among other things, impose certain limitations or prohibitions on the
Company's ability to incur indebtedness, pay dividends, make investments or
dispose of assets. The Credit Facility requires the Company to maintain a debt
service coverage ratio (as defined) of at least 1.25 and a maximum leverage
ratio (as defined) of 5.0. As of December 31, 1997, $15,600,000 was
outstanding on the Credit Facility and $9,400,000 remained available. During
1997, the maximum balance borrowed under this facility was $15,600,000. A
commitment fee of 0.20% to 0.50% on unused availability is charged depending
on the Company's leverage ratio.
Interest expense charged to operations for the years ended December 31,
1995, 1996 and 1997 was $5,830,000, $5,576,000, and $6,681,000, respectively.
As of December 31, 1997, future long-term debt maturities associated with
the Company's debt are as follows:
1998.......................................................... $ 186,000
1999.......................................................... 205,000
2000.......................................................... 226,000
2001.......................................................... 248,000
2002.......................................................... 15,874,000
Thereafter.................................................... 16,903,000
-----------
$33,642,000
===========
Substantially all of the Company's assets are subject to liens under long-
term debt or operating lease agreements.
J. CAPITAL LEASE OBLIGATION:
On July 1, 1996, a subsidiary of the Company began leasing four long-term
care facilities in Ohio (the "Ohio Facilities"). This transaction is being
accounted for as a capital lease as a result of a
F-16
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
bargain purchase option exercisable at the end of the lease. The initial term
of the lease is five years and during the final six months of the initial
term, the Company may exercise an option to purchase the Ohio Facilities for a
total price of $57,125,000. If the Company exercises the purchase option but
is unable to obtain financing for the acquisition, the lease may be extended
for up to two additional years, during which time the Company must obtain
financing and complete the purchase of the facilities. The annual rent under
the agreement is $5,000,000 during the initial term and $5,500,000 during the
extension term. The Company is also responsible for facility expenses such as
taxes, maintenance and repairs. The Company agreed to pay $8,000,000 for the
option to purchase these facilities. Of this amount, $5,000,000 was paid prior
to the closing on July 1, 1996, and the remainder, $3,000,000, is due at the
end of the initial lease term whether or not the Company exercises its
purchase option. The following is a schedule of future minimum lease payments
required by this lease together with the present value of the minimum lease
payments:
1998........................................................ $ 5,000,000
1999........................................................ 5,000,000
2000........................................................ 5,000,000
2001........................................................ 57,625,000
------------
72,625,000
Less amount representing interest........................... (16,340,000)
------------
56,285,000
Less current portion........................................ (3,924,000)
------------
Long-term portion of capital lease obligation............... $ 52,361,000
============
K. RETIREMENT PLANS:
The Company maintains an employee 401(k) defined contribution plan. All
employees who have worked at least one thousand hours and have completed one
year of continuous service are eligible to participate in the plan. The plan
is subject to the provisions of the Employee Retirement Income Security Act of
1974. Employee contributions to this plan may be matched at the discretion of
the Company. The Company contributed $120,000, $180,000 and $365,000 to the
plan in 1995, 1996 and 1997, respectively.
During September 1995, the Company established a Supplemental Executive
Retirement Plan (the "SERP") to provide benefits to key employees.
Participants may defer up to 25% of their compensation which is matched by the
Company at a rate of 50% (up to 10% of base salary). Vesting in the matching
portion occurs in January of the second year following the plan year in which
contributions were made.
L. INCOME TAXES:
PRO FORMA INCOME TAXES (UNAUDITED)
The financial statements of the Company for the periods prior to the
Reorganization do not include a provision for income taxes because the
Predecessor Entities (primarily partnerships and subchapter S corporations)
were not directly subject to Federal or state taxation. For financial
reporting purposes, for the years ended December 31, 1995 and 1996, a pro
forma provision for income taxes has been reflected in the accompanying
statements of operations based on taxable income for financial statement
purposes and an estimated effective Federal and state income tax rate of 39%
which would have resulted if the Predecessor Entities had filed corporate
income tax returns during those years.
F-17
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective with the Reorganization described in Note B, the Company became
subject to Federal and state income taxes. The historical provision for income
taxes for the year ended December 31, 1996 reflects the recording of a one-
time Federal and state income tax benefit of $1,400,000 upon the change in the
tax status of the entity as required by SFAS No. 109, "Accounting for Income
Taxes."
Significant components of the Company's deferred tax assets as of December
31, 1996 and 1997 are as follows:
1996 1997
---------- ----------
Deferred tax assets:
Reserves................................................ $1,144,000 $1,755,000
Rental payments......................................... 358,000 79,000
Interest payments....................................... 376,000 376,000
Other................................................... 78,000 11,000
---------- ----------
Total deferred tax assets.............................. $1,956,000 $2,221,000
========== ==========
Significant components of the provision for income taxes for the years ended
December 31, 1996 and 1997 are as follows:
1996 1997
----------- ----------
Current:
Federal............................................... $ 2,229,000 $3,893,000
State................................................. 536,000 719,000
----------- ----------
Total current........................................ $ 2,765,000 $4,612,000
=========== ==========
Deferred:
Federal............................................... (1,648,000) (223,000)
State................................................. (308,000) (42,000)
----------- ----------
Total deferred....................................... (1,956,000) (265,000)
----------- ----------
Total income tax expense............................. $ 809,000 $4,347,000
=========== ==========
The reconciliation of income tax computed at statutory rates to income tax
expense for the years ended December 31, 1996 and 1997 are as follows:
1996 1997
------------------ ---------------
Statutory rate........................... $ 1,699,000 35.0% $3,903,000 35.0%
State income tax, net of federal
benefit................................. 148,000 3.1 440,000 3.9
Permanent differences.................... 100,000 2.1 4,000 0.1
Deferred tax asset resulting from change
in tax status........................... (1,256,000) (25.9) -- --
Other.................................... 118,000 2.4 -- --
----------- ----- ---------- ----
$ 809,000 16.7% $4,347,000 39.0%
=========== ===== ========== ====
M. CAPITAL STOCK:
COMMON STOCK
On June 14, 1996, the Company completed its initial public offering (the
"Offering"). Through the Offering the Company issued 3,600,000 shares at
$11.75 per share resulting in net proceeds to the Company (after deducting
underwriters' commissions and other offering expenses) of approximately
$37,160,000. A portion of the proceeds was used to repay some of the Company's
long-term debt (see Note I) and the remainder to fund acquisitions.
F-18
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's Board of Directors is authorized to issue up to 1,000,000
shares of Preferred Stock in one or more series with such dividend rates,
number of votes, conversion rights, preferences or such other terms or
conditions as are permitted under the laws of the State of Delaware.
SPECIAL COMPENSATION
The Predecessor Entities maintained an executive long-term incentive plan
(the "Executive Plan") which granted an economic interest in the appreciation
of the Predecessor Entities above a baseline valuation of $23,000,000 to
certain senior level management personnel upon the successful completion of an
initial public offering at a minimum retained equity valuation above
$43,000,000. A pool of three percent of the retained equity above $23,000,000
was reserved and allocated to the eligible recipients. In June, 1996,
subsequent to the Offering, payments totaling $861,000 were made to the
personnel who participated in the Executive Plan and that plan was terminated.
Additionally, the Company made a bonus payment in the form of common stock
valued at $225,000 to an officer of the Company in connection with his
employment agreement. These expenses are included in the Statement of
Operations for the year ended December 31, 1996, in the line "Special
Compensation and Other."
On December 31, 1995, certain of the Predecessor Entities (the "S
Corporations") issued a 6% equity interest in the S Corporations to the
president of the Company amounting to $438,000 and a 5% equity interest in the
S Corporations to the president of an affiliate amounting to $365,000. The
issuance amounts represented the fair market value of these interests at the
date of issuance based on an independent appraisal obtained by the Company.
Payment for the issuance of these shares was due within 90 days; and
accordingly, the amounts receivable from these individuals were reflected as a
contra-equity subscription receivable with no net increase to stockholders'
equity at December 31, 1995. Subsequent to year-end and in connection with the
execution of the 1996 employment agreement of the Company's president, the
Company granted a special bonus to the president equal to the cost of the
shares issued. This expense is included in the Statement of Operations for the
year ended December 31, 1996 in the line "Special Compensation and Other."
In February 1996, one of the Predecessor Entities, Harborside Healthcare
Limited Partnership ("HHLP"), granted an option to purchase a 1.36% limited
partnership interest in HHLP to each of two members of senior management. The
exercise price per percentage limited partnership interest under each such
option was $239,525 per percentage interest, which represented the fair market
value of a 1% limited partnership interest in HHLP at the date of grant based
on an independent appraisal obtained by the Company. The options vested in
equal one-third portions on each anniversary of the date of grant over a
three-year period and expired ten years from the date of grant. With the
completion of the Offering, the option grants in HHLP were converted on a pro
rata basis to options to acquire shares of the Company's common stock.
STOCK OPTION PLANS
During 1996, the Company established two stock option plans, the 1996 Stock
Option Plan for Non-employee Directors (the "Director Plan") and the 1996
Long-Term Stock Incentive Plan (the "Stock Plan"). Directors of the Company
who are not employees, or affiliates of the Company, are eligible to
participate in the Director Plan. On the date of the Offering, each of the
four non-employee directors was granted options to acquire 15,000 shares of
the Company's common stock at the Offering price. On January 1 of each year,
each non-employee director will receive an additional grant for 3,500 shares
at the fair market value on the date of grant. Options issued under the
Director Plan become exercisable on the first anniversary of the date of grant
and terminate upon the earlier of ten
F-19
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
years from date of grant or one year from date of termination as a director.
Through the Directors Retainer Fee Plan, non-employee directors of the Company
may also elect to receive all or a portion of their director fees in shares of
the Company's common stock. The Stock Plan is administered by the Stock Plan
Committee of the Board of Directors which is composed of outside directors who
are not eligible to participate in this plan. The Stock Plan authorizes the
issuance of non-qualified stock options, incentive stock options, stock
appreciation rights, restricted stock and other stock-based awards. Options
granted during the years ended December 31, 1996 and 1997, were granted with
exercise prices equal to or greater than the fair market value of the stock on
the date of grant. Options granted under the stock plan during 1996 and 1997
vest over a three-year period and have a maximum term of ten years. A maximum
of 800,000 shares of common stock have been reserved for issuance in
connection with these plans. Information with respect to options granted under
these stock option plans is as follows:
OPTIONS OUTSTANDING
WEIGHTED-
NUMBER OF EXERCISE PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
--------- -------------- --------------
Balance at December 31, 1995
Granted............................... 523,000 $ 8.15-11.75 $11.16
Cancelled............................. (24,000) $ 11.75 $11.75
------- ------------
Balance at December 31, 1996............ 499,000 $ 8.15-11.75 $11.14
Granted............................... 227,500 $11.69-18.69 $12.66
Exercised............................. (8,665) $ 11.75 $11.75
Cancelled............................. (52,334) $11.75-12.00 $11.80
------- ------------
Balance at December 31, 1997............ 665,501 $ 8.15-18.69 $11.59
======= ============
As of December 31, 1996 no options to purchase shares of the Company's
common stock were exercisable. As of December 31, 1997 there were 187,000
exercisable options at a weighted-average exercise price of $11.20.
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 requires that companies either recognize
compensation expense for grants of stock, stock options, and other equity
instruments based on fair value, or provide pro forma disclosure of net income
and earnings per share in the notes to the financial statements. The Company
has adopted the disclosure provisions of SFAS No. 123, and has applied
Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates as calculated in accordance with SFAS No. 123, the Company's
unaudited pro forma net income and pro forma net income per share for the
years ended December 31, 1996 and 1997, would have been reduced to the amounts
indicated below:
1996
1996 PRO FORMA 1997
PRO FORMA NET INCOME 1997 NET INCOME
NET INCOME PER SHARE DILUTED NET INCOME PER SHARE DILUTED
---------- ----------------- ---------- -----------------
As reported $2,712,000 $0.42 $6,803,000 $0.84
Pro forma $2,372,000 $0.37 $5,733,000 $0.70
F-20
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The weighted average fair value of options granted was $4.72 and $5.63
during 1996 and 1997, respectively. The fair value for each stock option is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions: an expected life of five
years, expected volatility of 40%, no dividend yield, and a risk-free interest
rate of 6.5% and 6.2% for 1996 and 1997, respectively.
The following table sets forth the computation of basic and diluted net
income per share for the year ended December 31, 1997:
Numerator:
Numerator for basic and diluted net income per share............... $6,803,000
Denominator:
Denominator for basic net income per share--weighted average
shares............................................................ 8,037,026
Effect of dilutive securities--employee stock options............... 101,767
Denominator for diluted net income per share--adjusted
weighted-average shares and assumed conversions.................... 8,138,793
Basic net income per common share................................... $ 0.85
Diluted net income per common share................................. $ 0.84
The denominator for basic net income per share includes 25,000, 19,093 and
34,574 shares for the years ended December 31, 1995, 1996 and 1997,
respectively, resulting from stock options issued within one year of the
Company's initial public offering. In addition to the dilutive securities
listed above, stock options for an additional 23,000 shares, that are anti-
dilutive at December 31, 1997, could potentially dilute earnings per share in
future periods.
N. CONTINGENCIES:
The Company is involved in legal actions and claims in the ordinary course
of its business. It is the opinion of management, based on the advice of legal
counsel, that such litigation and claims will be resolved without material
effect on the Company's consolidated financial position, results of operations
or liquidity.
Beginning in 1994, the Company self-insures for health benefits provided to
a majority of its employees. The Company maintains stop-loss insurance such
that the Company's liability for losses is limited. The Company recognizes an
expense for estimated health benefit claims incurred but not reported at the
end of each year.
Beginning in 1995, the Company self-insures for most workers' compensation
claims. The Company maintains stop-loss insurance such that the Company's
liability for losses is limited. The Company accrues for estimated workers'
compensation claims incurred but not reported at the end of each year.
O. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The methods and assumptions used to estimate the fair value of each class of
financial instruments, for those instruments for which it is practicable to
estimate that value, and the estimated fair values of the financial
instruments are as follows:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short effective
maturity of these instruments.
F-21
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE RECEIVABLE
The carrying value of the note receivable approximates its fair value at
December 31, 1997 based on the yield of the note and the present value of
expected cash flows.
LONG-TERM DEBT
The fair value of the Company's long-term debt is estimated based on the
current rates offered to the Company for similar debt. The carrying value of
the Company's long-term debt approximates its fair value as of December 31,
1996 and 1997.
P. GAIN ON SALE OF FACILITIES, NET:
As discussed in Note B, in December 1995, KYP sold seven facilities to
Meditrust (the "Sale") for $47,000,000. The Sale was effective December 31,
1995, and a net gain of $4,869,000 was recorded.
A portion of the proceeds of the Sale was used by KYP to repay the
outstanding balance of its Medium-Term Notes ($9,409,000), a related
prepayment penalty ($1,154,000) and transaction costs ($884,000). The original
principal amount of the Medium-Term Notes was $6,000,000 and interest on this
obligation accrued at 10.55% per annum through June 30, 1993. Commencing
December 31, 1993, KYP began making semiannual interest payments on the
original principal and the accrued interest. The principal and all deferred
interest were scheduled to be repaid in June 1998. As a result of the early
retirement of this debt, the Company recorded a loss of $1,502,000, which was
netted against the gain on the sale of the KYP facilities. The terms of the
KYP partnership agreement specified that one of the Predecessor Entities which
served as KYP's general partner would not share in the gain associated with
the sale of the facilities; as such, the entire amount of the net gain was
allocated to the Unitholders, and was included in the minority interest
reflected in the Statement of Operations for the year ended December 31, 1995.
The determination of the net gain included the recognition of an estimated
liability of approximately $3,000,000 to Medicare and certain states' Medicaid
programs. This amount is included with other estimated settlements due to/from
third-party payors as a component of accounts receivable. Under existing
regulations, KYP is required to repay these programs for certain depreciation
expense recorded by the KYP facilities and for which they received
reimbursement prior to the sale. Any payments assessed by these programs to
settle these obligations in excess of the funds withheld from the proceeds of
the sale of the facilities will be the responsibility of the Company without
any recourse to the Unitholders. However, if the ultimate settlement of these
obligations results in a net amount due to KYP, this amount would be
distributed to the Unitholders.
The Sale provided for the dissolution of KYP and the distribution of the net
proceeds of the Sale to the Unitholders, which occurred in March 1996. The
Company's balance sheet as of December 31, 1995 included the cash to be
distributed to the Unitholders as well as the related distribution payable of
$33,493,000.
Q. RELATED PARTY TRANSACTIONS:
An affiliate of the Company provides office space, legal, tax, data
processing and other administrative services to the Company in return for a
monthly fee. Total service charges under this arrangement were $700,000,
$700,000 and $708,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
F-22
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
R. RECENT ACQUISITIONS (UNAUDITED):
The following unaudited pro forma financial information gives effect to the
acquisition of the Ohio facilities, the Connecticut facilities, the Dayton
facilities, the Massachusetts facilities and a therapy services company, as if
they had occurred on 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 YEARS ENDED
DECEMBER 31,
-------------------------
1996 1997
------------ ------------
Total net revenues................................... $262,043,000 $285,061,000
Income before income taxes and extraordinary loss.... 5,132,000 11,971,000
Income before extraordinary loss..................... 4,215,000 7,304,000
Net income........................................... 2,897,000 7,304,000
Net income per common share using 6,396,142 and
8,138,793 common and common equivalent shares,
respectively........................................ $ 0.45 $ 0.90
F-23
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
S. SUMMARY QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
The Company's unaudited quarterly financial information follows:
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
Total net revenues............. $47,384,000 $50,292,000 $57,964,000 $66,137,000
Income from operations......... 3,822,000 4,069,000 4,455,000 4,846,000
Income before income taxes..... 2,461,000 2,613,000 2,773,000 3,303,000
Income taxes................... 959,000 1,020,000 1,081,000 1,287,000
Net income..................... 1,502,000 1,593,000 1,692,000 2,016,000
Net income per share
Basic......................... $ 0.19 $ 0.20 $ 0.21 $ 0.25
Diluted....................... 0.19 0.20 0.21 0.24
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
Total net revenues......... $34,931,000 $36,872,000 $45,903,000 $47,706,000
Income from operations..... 1,307,000 846,000 (1) 3,655,000 3,918,000
Income (loss) before income
taxes and extraordinary
loss...................... 205,000 (229,000) 2,312,000 2,541,000
Income taxes (benefit)..... -- (400,000) 902,000 307,000
Income before extraordinary
loss...................... 205,000 171,000 1,410,000 2,234,000
Extraordinary loss......... -- (1,318,000)(2) -- --
Net income (loss).......... 205,000 (1,147,000) 1,410,000 2,234,000
Net income per share--
diluted................... -- -- $ 0.18 $ 0.28
Pro forma income taxes
(benefit)................. 80,000 (489,000)
Pro forma income before
extraordinary loss........ 125,000 260,000
Pro forma net income
(loss).................... 125,000 (1,058,000)
Pro forma income before
extraordinary loss per
share--basic and diluted.. $ 0.03 $ 0.05
Pro forma net income (loss)
per share--basic and
diluted................... $ 0.03 $ (0.21)
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
Total net revenues........... $23,777,000 $26,737,000 $28,515,000 $30,396,000
Income from operations....... 1,290,000 1,671,000 2,123,000 2,895,000
Net income (loss)............ (240,000) 253,000 297,000 924,000
Pro forma income taxes
(benefit)................... (94,000) 99,000 116,000 360,000
Pro forma net income (loss).. (146,000) 154,000 181,000 564,000
Pro forma net income (loss)
per share--basic and
diluted..................... $ (0.03) $ 0.03 $ 0.04 $ 0.13
- --------
(1) Includes $1,716,000 of special compensation and other expenses incurred
primarily as a result of the Offering (see Note M).
(2) A portion of the proceeds of the Offering was used to repay long-term debt
in June 1996. The resulting loss on early retirement of debt is presented
as an extraordinary loss net of related tax benefit (see Note I).
F-24
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
T. PENDING ACQUISITIONS:
During 1997, the Company entered into separate agreements to acquire two
long-term care facilities in Ohio and two long-term care facilities in Rhode
Island. The aggregate purchase price of these two acquisitions is
approximately $33,700,000, and the Company expects to finance them through an
expansion of funds committed to its existing Leasing Facility (see Note H).
The Company is currently awaiting regulatory approval for each of these
acquisitions and expects each transaction to be completed during the second
quarter of 1998.
U. 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 Acquisition Limited Partnership IV, 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, 1996 and 1997 and the condensed consolidating
results of operations and cash flows for each of the fiscal years in the
three-year period ended December 31, 1997 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.
F-25
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1996
------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equiva-
lents................ $ 463 $ 2,482 $ 6,727 $ 50 $ 9,722
Receivables, net of
allowance............ -- 14,241 10,368 (1,625) 22,984
Intercompany receiv-
able................. 36,735 -- -- (36,735) --
Prepaid expenses and
other................ -- 2,308 1,185 77 3,570
Demand note payable... -- 1,369 -- -- 1,369
Deferred income tax-
es................... -- 837 743 -- 1,580
------- -------- ------- --------- ---------
Total current as-
sets............... 37,198 21,237 19,023 (38,233) 39,225
Restricted cash......... -- 786 2,967 (2) 3,751
Investment in limited
partnership............ 11,034 26,006 4,114 (40,898) 256
Property and equipment,
net.................... -- 78,375 16,812 -- 95,187
Intangible assets, net.. -- 982 2,078 (56) 3,004
Deferred income taxes... -- 199 177 -- 376
------- -------- ------- --------- ---------
Total assets........ $48,232 $127,585 $45,171 $ (79,189) $ 141,799
======= ======== ======= ========= =========
LIABILITIES
Current liabilities:
Current maturities of
long-term debt....... -- 22 157 (10) 169
Current portion of
capital lease
obligation........... -- 3,744 -- -- 3,744
Accounts payable...... 47 2,836 3,156 (28) 6,011
Intercompany payable.. -- 33,248 8,399 (41,647) --
Employee compensation
and benefits......... -- 4,994 3,657 (12) 8,639
Other accrued liabili-
ties................. -- 2,108 1,751 (1,682) 2,177
Accrued interest...... -- 19 -- -- 19
Current portion of
deferred income...... -- -- 368 -- 368
Income taxes payable.. -- 678 594 -- 1,272
------- -------- ------- --------- ---------
Total current lia-
bilities........... 47 47,649 18,082 (43,379) 22,399
Long-term portion of
deferred income........ -- -- 2,948 -- 2,948
Long-term debt.......... -- 1,576 16,453 10 18,039
Long-term portion of
capital lease
obligation............. -- 53,533 -- -- 53,533
------- -------- ------- --------- ---------
Total liabilities... 47 102,758 37,483 (43,369) 96,919
------- -------- ------- --------- ---------
STOCKHOLDERS' EQUITY
Common stock, $.01 par
value, 30,000,000
shares authorized,
8,000,000 shares issued
and outstanding........ 80 2,569 3,885 (6,454) 80
Additional paid-in capi-
tal.................... 48,112 -- -- 228 48,340
Retained earnings (defi-
cit)................... (7) (1,957) (3,271) 1,695 (3,540)
Partners' equity........ -- 24,215 7,074 (31,289) --
------- -------- ------- --------- ---------
Total stockholders'
equity............. 48,185 24,827 7,688 (35,820) 44,880
------- -------- ------- --------- ---------
Total liabilities &
stockholders'
equity............. $48,232 $127,585 $45,171 $ (79,189) $$141,799
======= ======== ======= ========= =========
F-26
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1997
------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equiva-
lents................ $ 698 $ 4,383 $ 3,666 $ -- $ 8,747
Receivables, net of
allowance............ -- 24,845 9,321 (1,750) 32,416
Intercompany receiv-
able................. 31,289 -- -- (31,289) --
Prepaid expenses and
other................ 4,875 4,604 1,761 (4,596) 6,644
Deferred income tax-
es................... -- 1,847 303 -- 2,150
------- -------- ------- --------- --------
Total current as-
sets............... 36,862 35,679 15,051 (37,635) 49,957
Restricted cash......... -- 2,374 3,001 170 5,545
Investment in limited
partnership............ 11,032 28,335 4,046 (43,346) 67
Property and equipment,
net.................... -- 79,529 17,343 -- 96,872
Intangible assets, net.. 271 6,409 1,883 -- 8,563
Note receivable......... -- 7,487 -- -- 7,487
Deferred income taxes... 71 -- -- -- 71
------- -------- ------- --------- --------
Total assets........ $48,236 $159,813 $41,324 $ (80,811) $168,562
======= ======== ======= ========= ========
LIABILITIES
Current liabilities:
Current maturities of
long-term debt....... -- 20 166 -- 186
Current portion of
capital lease
obligation........... -- 3,924 -- -- 3,924
Accounts payable...... -- 6,209 3,176 (2,110) 7,275
Intercompany payable.. -- 38,424 4,630 (43,054) --
Employee compensation
and benefits......... 280 7,075 3,386 -- 10,741
Other accrued liabili-
ties................. -- 2,216 2,024 177 4,417
Accrued interest...... -- 251 -- -- 251
Current portion of
deferred income...... -- 240 369 -- 609
------- -------- ------- --------- --------
Total current lia-
bilities........... 280 58,359 13,751 (44,987) 27,403
Long-term portion of de-
ferred income.......... -- 980 2,579 -- 3,559
Long-term debt.......... -- 17,162 16,294 -- 33,456
Long-term portion of
capital lease
obligation............. -- 52,353 8 -- 52,361
------- -------- ------- --------- --------
Total liabilities... 280 128,854 32,632 (44,987) 116,779
------- -------- ------- --------- --------
STOCKHOLDERS' EQUITY
Common stock, $.01 par
value, 30,000,000
shares authorized,
8,008,665 shares issued
and outstanding........ 80 2,569 3,885 (6,454) 80
Additional paid-in capi-
tal.................... 48,213 -- -- 227 48,440
Retained earnings (defi-
cit)................... (337) 4,175 (2,267) 1,692 3,263
Partners' equity........ -- 24,215 7,074 (31,289) --
------- -------- ------- --------- --------
Total stockholders'
equity............. 47,956 30,959 8,692 (35,824) 51,783
------- -------- ------- --------- --------
Total liabilities &
stockholders'
equity............. $48,236 $159,813 $41,324 $ (80,811) $168,562
======= ======== ======= ========= ========
F-27
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Total net revenues...... $-- $51,308 $68,706 $(10,589) $109,425
---- ------- ------- -------- --------
Expenses:
Facility operating.... -- 39,003 55,971 (5,596) 89,378
General and adminis-
trative.............. -- 3,590 1,486 -- 5,076
Service charges paid
to affiliate......... -- 700 -- -- 700
Depreciation and amor-
tization............. -- 1,084 3,301 -- 4,385
Facility rent......... -- 1,454 453 -- 1,907
Management fees to
paid affiliates...... -- 2,411 2,582 (4,993) --
---- ------- ------- -------- --------
Total expenses...... -- 48,242 63,793 (10,589) 101,446
---- ------- ------- -------- --------
Income from operations.. -- 3,066 4,913 -- 7,979
Other:
Interest expense,
net.................. -- (1,729) (3,329) (49) (5,107)
Loss on investment in
limited partnership.. -- 543 71 (728) (114)
Minority interest in
net income........... -- -- -- (6,393) (6,393)
Gain on sale of facil-
ities, net........... -- -- 4,869 -- 4,869
---- ------- ------- -------- --------
Income before income
taxes.................. -- 1,880 6,524 (7,170) 1,234
---- ------- ------- -------- --------
Income taxes............ -- -- -- -- --
---- ------- ------- -------- --------
Net income.............. $-- $ 1,880 $ 6,524 $ (7,170) $ 1,234
==== ======= ======= ======== ========
F-28
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Total net revenues...... $ -- $88,822 $96,664 $(20,074) $165,412
----- ------- ------- -------- --------
Expenses:
Facility operating.... -- 65,593 77,851 (11,237) 132,207
General and
administrative....... 123 7,665 23 -- 7,811
Service charges paid
to affiliate......... -- 700 -- -- 700
Special compensation
and other............ -- 1,716 -- -- 1,716
Depreciation and
amortization......... -- 1,784 1,245 -- 3,029
Facility rent......... -- 1,637 8,586 -- 10,223
Management fees to
paid affiliates...... -- 3,156 5,764 (8,920) --
----- ------- ------- -------- --------
Total expenses...... 123 82,251 93,469 (20,157) 155,686
----- ------- ------- -------- --------
Income (loss) from oper-
ations................. (123) 6,571 3,195 83 9,726
Other:
Interest expense,
net.................. 116 (3,558) (783) (409) (4,634)
Loss on investment in
limited
partnership.......... -- (263) -- -- (263)
----- ------- ------- -------- --------
Income (loss) before
income taxes and
extraordinary loss..... (7) 2,750 2,412 (326) 4,829
Income taxes............ 1 (461) (404) 55 (809)
----- ------- ------- -------- --------
Income before extraordi-
nary loss.............. (6) 2,289 2,008 (271) 4,020
Extraordinary loss,
net.................... -- (834) (1,227) 743 (1,318)
----- ------- ------- -------- --------
Net income (loss)....... $ (6) $ 1,455 $ 781 $ 472 $ 2,702
===== ======= ======= ======== ========
F-29
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Total net revenues...... $ -- $152,476 $101,480 $ (32,179) $221,777
------ -------- -------- --------- --------
Expenses:
Facility operating.... -- 113,686 83,595 (20,877) 176,404
General and adminis-
trative.............. 612 9,499 37 805 10,953
Service charges paid
to affiliate......... -- 708 -- -- 708
Depreciation and amor-
tization............. 70 2,599 1,405 -- 4,074
Facility rent......... -- 4,209 8,237 -- 12,446
Management fees to
paid affiliates...... -- 6,039 6,085 (12,124) --
------ -------- -------- --------- --------
Total expenses...... 682 136,740 99,359 (32,196) 204,585
------ -------- -------- --------- --------
Income (loss) from oper-
ations................. (682) 15,736 2,121 17 17,192
Other:
Interest expense,
net.................. 108 (5,488) (473) -- (5,853)
Loss on investment in
limited partnership.. -- (189) -- -- (189)
------ -------- -------- --------- --------
Income (loss) before in-
come taxes............. (574) 10,059 1,648 17 11,150
Income taxes............ 224 (3,927) (644) -- (4,347)
------ -------- -------- --------- --------
Net income (loss)....... $ (350) $ 6,132 $ 1,004 $ 17 $ 6,803
====== ======== ======== ========= ========
F-30
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Operating activities:
Net cash provided
(used) by operating
activities......... $ -- $(5,390) $ 3,359 $3,917 $ 1,886
----- ------- ------- ------ -------
Investing activities:
Additions to property
and equipment........ -- (1,122) (1,959) -- (3,081)
Additions to intangi-
bles................. -- (31) (1,171) -- (1,202)
Facility acquisition
deposits............. -- (3,000) -- -- (3,000)
Transfers to
restricted cash,
net.................. -- (815) 55 -- (760)
Payment of costs
related to sale of
facilities........... -- -- (884) -- (884)
Proceeds from sale of
facilities........... -- -- 47,000 -- 47,000
Issuance of demand
note from limited
partnership.......... -- (1,255) -- -- (1,255)
----- ------- ------- ------ -------
Net cash provided
(used) by investing
activities......... -- (6,223) 43,041 -- 36,818
----- ------- ------- ------ -------
Financing activities:
Partners' contribution
(distribution)....... -- 7,196 (3,279) (3,917) --
Payment of long-term
debt................. -- (223) (9,577) -- (9,800)
Debt prepayment penal-
ty................... -- -- (1,154) -- (1,154)
Note Payable to an af-
filiate.............. -- 2,000 -- -- 2,000
Distributions to
minority interest.... -- -- (3,636) -- (3,636)
Purchase of equity
interests and other
contributions........ -- 30 -- -- 30
----- ------- ------- ------ -------
Net cash provided
(used) by financing
activities......... -- 9,003 (17,646) (3,917) (12,560)
----- ------- ------- ------ -------
Net increase (decrease)
in cash and cash equiv-
alents................. -- (2,610) 28,754 -- 26,144
Cash and cash
equivalents, beginning
of year................ -- 7,543 6,470 -- 14,013
----- ------- ------- ------ -------
Cash and cash
equivalents, end of
year................... $ -- $ 4,933 $35,224 $ -- $40,157
===== ======= ======= ====== =======
Supplemental Disclosure:
Interest paid......... $ -- $ 2,122 $ 4,086 $ -- $ 6,208
F-31
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Operating activities:
Net cash provided
(used) by operating
activities......... $(47,503) $25,546 $12,758 $10,604 $ 1,405
-------- ------- ------- ------- -------
Investing activities:
Additions to property
and equipment........ -- (2,193) (2,911) -- (5,104)
Additions to intangi-
bles................. -- (400) (606) 56 (950)
Facility acquisition
deposits............. -- 3,000 -- -- 3,000
Transfers to
restricted cash,
net.................. -- 29 (1,027) 2 (996)
-------- ------- ------- ------- -------
Net cash provided
(used) by investing
activities......... -- 436 (4,544) 58 (4,050)
-------- ------- ------- ------- -------
Financing activities:
Purchase of equity in-
terests.............. 10,003 170 (33,288) 23,115 --
Payment of long-term
debt................. -- (19,771) (5,517) -- (25,288)
Principal payments of
capital lease
obligation........... -- (6,766) -- -- (6,766)
Debt prepayment penal-
ty................... -- (1,517) -- -- (1,517)
Note payable to an af-
filiate.............. -- (2,000) -- -- (2,000)
Receipt of cash in
connection with
lease................ -- 3,685 -- -- 3,685
Dividend distribu-
tion................. -- (140) -- -- (140)
Distributions to
minority interest.... -- -- -- (33,727) (33,727)
Purchase of equity
interests and other
contributions........ 803 -- -- -- 803
Proceeds from sale of
common stock......... 37,160 -- -- -- 37,160
-------- ------- ------- ------- -------
Net cash provided
(used) by financing
activities......... 47,966 (26,339) (38,805) (10,612) (27,790)
-------- ------- ------- ------- -------
Net increase (decrease)
in cash and cash
equivalents............ 463 (357) (30,591) 50 (30,435)
Cash and cash
equivalents, beginning
of year................ -- 4,960 35,197 -- 40,157
-------- ------- ------- ------- -------
Cash and cash
equivalents, end of
year................... $ 463 $ 4,603 $ 4,606 $ 50 $ 9,722
======== ======= ======= ======= =======
Supplemental Disclosure:
Interest paid........... $ -- $ 3,328 $ 732 $ -- $ 4,060
Income taxes paid....... $ 760 $ -- $ -- $ -- $ 760
Noncash investing and
financing activities:
Property and equipment
additions by capital
lease.................. $ -- $57,625 $ -- $ -- $57,625
Capital lease obligation
incurred............... $ -- $57,625 $ -- $ -- $57,625
F-32
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Operating activities:
Net cash provided
(used) by operating
activities......... $ 455 $ 6,102 $(1,135) $ 199 $ 5,621
------ -------- ------- ----- --------
Investing activities:
Additions to property
and equipment........ -- (3,543) (1,731) -- (5,274)
Additions to
intangibles.......... (341) (5,884) (20) (56) (6,301)
Receipt of note
receivable........... -- (7,487) -- -- (7,487)
Transfers to
restricted cash,
net.................. -- (1,588) (34) (172) (1,794)
Repayment of demand
note from limited
partnership.......... -- 1,369 -- -- 1,369
------ -------- ------- ----- --------
Net cash (used) by
investing
activities......... (341) (17,133) (1,785) (228) (19,487)
------ -------- ------- ----- --------
Financing activities:
Borrowings under the
revolving line of
credit............... -- 15,600 -- -- 15,600
Payment of long-term
debt................. -- (22) (144) -- (166)
Principal payments of
capital lease
obligation........... -- (3,952) 8 -- (3,944)
Receipt of cash in
connection with
lease................ -- 1,301 -- -- 1,301
Exercise of stock
options.............. 100 -- -- -- 100
Other................. 21 -- -- (21) --
------ -------- ------- ----- --------
Net cash provided
(used) by financing
activities......... 121 12,927 (136) (21) 12,891
------ -------- ------- ----- --------
Net increase (decrease)
in cash and cash
equivalents........... 235 1,896 (3,056) (50) (975)
Cash and cash
equivalents, beginning
of year............... 463 2,482 6,727 50 9,722
------ -------- ------- ----- --------
Cash and cash
equivalents, end of
year.................. $ 698 $ 4,378 $ 3,671 $ -- $ 8,747
====== ======== ======= ===== ========
Supplemental
Disclosure:
Interest paid......... $ -- $ 3,104 $ 267 $ -- $ 3,371
Income taxes paid..... $5,783 $ -- $ -- $ -- $ 5,783
F-33
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30,
1998
----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 3,028
Accounts receivable, net of allowances for doubtful accounts of
$2,455......................................................... 41,484
Prepaid expenses and other...................................... 8,466
Deferred income taxes........................................... 2,150
--------
Total current assets.......................................... 55,128
Restricted cash................................................... 7,116
Property and equipment, net....................................... 102,048
Intangible assets, net............................................ 9,673
Note receivable................................................... 7,487
Deferred income taxes............................................. 71
--------
Total assets.................................................. $181,523
========
LIABILITIES
Current liabilities:
Current maturities of long-term debt............................ $ 202
Current portion of capital lease obligation..................... 4,204
Accounts payable................................................ 7,963
Employee compensation and benefits.............................. 13,696
Other accrued liabilities....................................... 5,786
Accrued interest................................................ 199
Current portion of deferred income.............................. 803
--------
Total current liabilities..................................... 32,853
Long-term portion of deferred income.............................. 5,045
Long-term debt.................................................... 36,346
Long-term portion of capital lease obligation..................... 51,594
--------
Total liabilities............................................. 125,838
--------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 30,000,000 shares authorized,
8,011,164 shares issued and outstanding.......................... 80
Additional paid-in capital........................................ 48,469
Retained earnings................................................. 7,136
--------
Total stockholders' equity.................................... 55,685
--------
Total liabilities and stockholders' equity.................. $181,523
========
The accompanying notes are an integral part of the consolidated financial
statements.
F-34
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -------------------------
1997 1998 1997 1998
------------- ------------- ------------ ------------
Total net revenues...... $ 50,292 $ 76,186 $ 97,676 $ 148,640
------------- ------------- ------------ ------------
Expenses:
Facility operating.... 40,065 59,649 77,517 117,030
General and
administrative....... 2,334 4,110 4,723 7,475
Service charges paid
to affiliate......... 177 315 354 628
Depreciation and
amortization......... 960 1,178 1,882 2,263
Facility rent......... 2,687 6,065 5,309 11,621
------------- ------------- ------------ ------------
Total expenses...... 46,223 71,317 89,785 139,017
------------- ------------- ------------ ------------
Income from operations.. 4,069 4,869 7,891 9,623
Other:
Interest expense,
net.................. 1,364 1,552 2,756 3,202
Other expense......... 92 41 61 72
------------- ------------- ------------ ------------
Income before income
taxes.................. 2,613 3,276 5,074 6,349
Income taxes............ 1,020 1,278 1,979 2,476
------------- ------------- ------------ ------------
Net income.............. $ 1,593 $ 1,998 $ 3,095 $ 3,873
============= ============= ============ ============
Net income per share--
basic.................. $ 0.20 $ 0.25 $ 0.39 $ 0.48
============= ============= ============ ============
Net income per share--
diluted................ $ 0.20 $ 0.24 $ 0.39 $ 0.47
============= ============= ============ ============
Weighted average number
of common shares used
in per share
computations:
Basic................. 8,028,000 8,062,000 8,026,000 8,061,000
Diluted............... 8,057,000 8,351,000 8,043,000 8,328,000
The accompanying notes are an integral part of the consolidated financial
statements.
F-35
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN
STOCK CAPITAL RETAINED EARNINGS TOTAL
------ ---------- ----------------- -------
Stockholders' equity, December 31,
1997............................. $80 $48,440 $3,263 $51,783
Exercise of stock options......... -- 29 -- 29
Net income for the six months
ended June 30, 1998.............. -- -- 3,873 3,873
--- ------- ------ -------
Stockholders' equity, June 30,
1998............................. $80 $48,469 $7,136 $55,685
=== ======= ====== =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-36
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------
1997 1998
------------ ------------
Operating activities:
Net income........................................ $ 3,095 $ 3,873
Adjustments to reconcile net income
to net cash (used) by operating activities:
Depreciation of property and equipment............ 1,712 1,895
Amortization of intangible assets................. 170 368
Amortization of deferred income................... (184) (255)
Amortization of loan costs and fees............... 44 108
Accretion of interest on capital lease
obligation....................................... 1,419 1,532
Other............................................. 2 --
----------- ------------
6,258 7,521
Changes in operating assets and liabilities:
(Increase) in accounts receivable................. (4,577) (9,068)
(Increase) in prepaid expenses and other.......... (2,455) (1,755)
Increase in accounts payable...................... 317 688
Increase in employee compensation and benefits.... 1,578 2,955
Increase (decrease) in accrued interest........... 65 (52)
Increase in other accrued liabilities............. 1,116 1,369
(Decrease) in income taxes payable................ (705) --
----------- ------------
Net cash provided by operating activities......... 1,597 1,658
----------- ------------
Investing activities:
Additions to property and equipment............... (812) (7,071)
Additions to intangibles.......................... (1,357) (1,586)
Transfers to restricted cash, net................. (76) (1,571)
Repayment of demand note.......................... 1,369 --
----------- ------------
Net cash (used) by investing activities........... (876) (10,228)
----------- ------------
Financing activities:
Issuance of long-term debt........................ 2,175 3,000
Payment of long-term debt......................... (89) (94)
Principal payments of capital lease obligation.... (1,835) (2,019)
Receipt of lease inducement....................... -- 1,935
Exercise of stock options......................... -- 29
----------- ------------
Net cash provided by financing activities.......... 251 2,851
----------- ------------
Net increase (decrease) in cash and cash equiva-
lents............................................. 972 (5,719)
Cash and cash equivalents, beginning of period..... 9,722 8,747
----------- ------------
Cash and cash equivalents, end of period........... $ 10,694 $ 3,028
=========== ============
Supplemental Disclosure:
Interest paid..................................... $ 1,734 $ 2,128
=========== ============
Income taxes paid................................. $ 2,684 $ 2,923
=========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-37
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. General
The accompanying unaudited 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, 1997. 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, 1998, the results of its operations for the three-
month and six-month periods ended June 30, 1997 and 1998 and its cash flows
for the six-month periods ended June 30, 1997 and 1998. The results of
operations for the three-month and six-month periods ended June 30, 1997 and
1998 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. Significant Accounting Policies
Reclassifications have been made to conform prior years' data to the current
year presentation.
D. Earnings Per Share
The following table sets forth the computation of basic and diluted net
income per share for the period ended June 30, 1998:
Numerator:
Numerator for basic and diluted net income per share......... $3,873,000
==========
Denominator:
Denominator for basic net income per share weighted average
shares...................................................... 8,061,000
Effect of dilutive securities employee stock options......... 267,000
----------
Denominator for diluted net income per share--adjusted
weighted-average shares and assumed conversions............. 8,328,000
==========
Basic net income per common share............................. $ 0.48
Diluted net income per common share........................... $ 0.47
F-38
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The denominator for basic net income per share includes 26,000 and 50,000
shares for the periods ended June 30, 1997 and 1998, respectively, resulting
from stock options issued within one year of the Company's public offering.
E. Acquisitions
During the second quarter of 1998, the Company completed the acquisitions of
two long-term care facilities (248 licensed beds) in Toledo, Ohio and two
long-term care facilities (267 licensed beds) in Warwick, Rhode Island. The
aggregate purchase price of these two acquisitions was approximately
$33,700,000, and the Company financed them through an expansion of funds
committed to its existing synthetic leasing facility (the "Leasing Facility").
The Ohio acquisition was completed on April 1 and the Rhode Island acquisition
on May 8. In connection with these acquisitions, the Company increased funds
committed by a bank group through its Leasing Facility to $59,250,000. In May
1998, the Company also increased funds committed by the bank group through its
revolving credit facility to $40,000,000.
F. Subsequent Events
On April 15, 1998, the Company entered into a Merger Agreement with HH
Acquisition Corp. ("MergerCo"), an entity organized for the sole purpose of
effecting a merger on behalf of Investcorp S.A., certain of its affiliates and
certain other international investors (collectively, the "New Investors"). On
August 11, 1998, MergerCo merged with and into the Company, with the Company
as the surviving corporation. As a result of the merger, the New Investors
acquired approximately 91% of the post-merger common stock of the Company.
Certain pre-merger stockholders of the Company, including certain of the
Company's existing members of senior management, retained approximately
660,000 shares (or approximately 9%) of the Company's post-merger common
stock. Each other share of the Company's pre-merger common stock was converted
into $25 in cash, representing aggregate cash payments of approximately $184
million. Holders of outstanding stock options of the Company converted the
majority of their options into cash at $25 per underlying share less the
applicable option exercise price and withholding taxes, representing aggregate
cash payments of approximately $8 million.
In connection with the transaction and prior to the merger, the New
Investors made cash common equity contributions of $165 million to MergerCo,
and MergerCo obtained gross proceeds of $99.5 million through the issuance of
11% senior subordinated discount notes due 2008 and $40 million through the
issuance of 13.5% exchangeable preferred stock mandatorily redeemable 2010. In
connection with the merger, the Company also entered into a new $250 million
senior secured credit facility with a group of banks.
G. 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
F-39
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Rhode Island Limited Partnership, Harborside North Toledo Limited Partnership,
Harborside Healthcare Advisors Limited Partnership, Harborside Toledo Corp.,
KHI Corporation, Harborside Acquisition Limited Partnership IV, 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 June 30, 1997 and 1998 and the condensed consolidating results
of operations and cash flows for the three month and six-month periods ended
June 30, 1997 and 1998 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.
F-40
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 1997
------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents........... $ 698 $ 4,383 $ 3,666 $ -- $ 8,747
Receivables, net of allowance....... -- 24,845 9,321 (1,750) 32,416
Intercompany receivable ............ 31,289 -- -- (31,289) --
Prepaid expenses and other.......... 4,875 4,604 1,761 (4,596) 6,644
Deferred income taxes............... -- 1,847 303 -- 2,150
------- -------- ------- --------- --------
Total current assets.............. 36,862 35,679 15,051 (37,635) 49,957
------- -------- ------- --------- --------
Restricted cash....................... -- 2,374 3,001 170 5,545
Investment in limited partnership..... 11,032 28,335 4,046 (43,346) 67
Property and equipment, net........... -- 79,529 17,343 -- 96,872
Intangible assets, net................ 271 6,409 1,883 -- 8,563
Note receivable....................... -- 7,487 -- -- 7,487
Deferred income taxes................. 71 -- -- -- 71
------- -------- ------- --------- --------
Total assets...................... $48,236 $159,813 $41,324 $ (80,811) $168,562
======= ======== ======= ========= ========
LIABILITIES
Current liabilities:
Current maturities of long-term
debt............................... -- 20 166 -- 186
Current portion of capital lease
obligation......................... -- 3,924 -- -- 3,924
Accounts payable.................... -- 6,209 3,176 (2,110) 7,275
Intercompany payable................ -- 38,424 4,630 (43,054) --
Employee compensation and benefits.. 280 7,075 3,386 -- 10,741
Other accrued liabilities........... -- 2,216 2,024 177 4,417
Accrued interest.................... -- 251 -- -- 251
Current portion of deferred income.. -- 240 369 -- 609
------- -------- ------- --------- --------
Total current liabilities......... 280 58,359 13,751 (44,987) 27,403
------- -------- ------- --------- --------
Long-term portion of deferred income.. -- 980 2,579 -- 3,559
Long-term debt........................ -- 17,162 16,294 -- 33,456
Long-term portion of capital lease
obligation........................... -- 52,353 8 -- 52,361
------- -------- ------- --------- --------
Total liabilities................. 280 128,854 32,632 (44,987) 116,779
STOCKHOLDERS' EQUITY
Common stock, $.01 par value,
30,000,000 shares authorized,
8,008,665 shares issued and
outstanding.......................... 80 2,569 3,885 (6,454) 80
Additional paid-in capital............ 48,213 -- -- 227 48,440
Retained earnings (deficit)........... (337) 4,175 (2,267) 1,692 3,263
Partners' equity...................... -- 24,215 7,074 (31,289) --
------- -------- ------- --------- --------
Total stockholders' equity........ 47,956 30,959 8,692 (35,824) 51,783
------- -------- ------- --------- --------
Total liabilities and
stockholders' equity............. $48,236 $159,813 $41,324 $ (80,811) $168,562
======= ======== ======= ========= ========
F-41
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 1998
------------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash
equivalents........... $ 131 $ 5,369 $ 1,734 $ (4,206) $ 3,028
Receivables, net of
allowance............. -- 32,083 12,920 (3,519) 41,484
Intercompany
receivable............ 32,747 -- -- (32,747) --
Prepaid expenses and
other................. 3,608 4,756 1,739 (1,637) 8,466
Deferred income taxes.. -- 1,847 303 -- 2,150
------- -------- ------- --------- --------
Total current assets.. 36,486 44,055 16,696 (42,109) 55,128
------- -------- ------- --------- --------
Restricted cash......... -- 3,012 3,068 1,036 7,116
Investment in limited
partnership............ 11,034 27,489 4,044 (42,567) --
Property and equipment,
net.................... 5 84,583 17,460 -- 102,048
Intangible assets, net.. 285 6,700 1,849 839 9,673
Note receivable......... -- 7,487 -- -- 7,487
Deferred income taxes... 71 -- -- -- 71
------- -------- ------- --------- --------
Total assets.......... $47,881 $173,326 $43,117 $ (82,801) $181,523
======= ======== ======= ========= ========
LIABILITIES
Current liabilities:
Current maturities of
long-term debt........ -- 27 175 -- 202
Current portion of
capital lease
obligation............ -- 4,204 -- -- 4,204
Accounts payable....... -- 6,926 4,878 (3,841) 7,963
Intercompany payable... -- 36,850 4,918 (41,768) --
Employee compensation
and benefits.......... -- 10,496 3,771 (571) 13,696
Other accrued
liabilities........... 35 4,969 1,695 (913) 5,786
Accrued interest....... -- 275 -- (76) 199
Current portion of
deferred income....... -- -- -- 803 803
------- -------- ------- --------- --------
Total current
liabilities.......... 35 63,747 15,437 (46,366) 32,853
Long-term portion of
deferred income........ -- 2,891 2,764 (610) 5,045
Long-term debt.......... -- 20,141 16,205 -- 36,346
Long-term portion of
capital lease
obligation............. -- 51,590 4 -- 51,594
------- -------- ------- --------- --------
Total liabilities..... 35 138,369 34,410 (46,976) 125,838
------- -------- ------- --------- --------
STOCKHOLDERS' EQUITY
Common stock $.01 par
value, 30,000,000
shares authorized,
8,011,164 shares issued
and outstanding........ 80 2,569 3,885 (6,454) 80
Additional paid-in
capital................ 48,243 -- -- 226 48,469
Retained earnings
(deficit).............. (477) 8,173 (2,252) 1,692 7,136
Partners' equity........ -- 24,215 7,074 (31,289) --
------- -------- ------- --------- --------
Total stockholders'
equity............... 47,846 34,957 8,707 (35,825) 55,685
------- -------- ------- --------- --------
Total liabilities and
stockholders'
equity............... $47,881 $173,326 $43,117 $ (82,801) $181,523
======= ======== ======= ========= ========
F-42
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997
-----------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Total net revenues...... $ -- $32,332 $25,119 $(7,159) $50,292
----- ------- ------- ------- -------
Expenses:
Facility operating.... -- 26,278 21,144 (7,357) 40,065
General and
administrative....... 169 2,356 (191) -- 2,334
Service charges paid
to affiliate......... -- 177 -- -- 177
Depreciation and
amortization......... 2 626 332 -- 960
Facility rent......... -- 636 2,051 -- 2,687
Management fees paid
to affiliates........ -- (1,501) 1,501 -- --
----- ------- ------- ------- -------
Total expenses...... 171 28,572 24,837 (7,357) 46,223
----- ------- ------- ------- -------
Income (loss) from oper-
ations (171) 3,760 282 198 4,069
Other:
Interest expense,
net.................. (49) 1,359 76 (22) 1,364
Income on investment
in limited
partnership.......... -- 92 -- -- 92
----- ------- ------- ------- -------
Income (loss) before in-
come taxes............. (122) 2,309 206 220 2,613
Income taxes............ 47 (900) (80) (87) (1,020)
----- ------- ------- ------- -------
Net income (loss)....... $ (75) $ 1,409 $ 126 $ 133 $ 1,593
===== ======= ======= ======= =======
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998
-----------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
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 oper-
ations (115) 5,093 142 (251) 4,869
Other:
Interest expense,
net.................. -- 1,660 146 (254) 1,552
Income on investment
in limited
partnership.......... -- 72 -- (31) 41
----- ------- ------- ------- -------
Income (loss) before in-
come taxes............. (115) 3,361 (4) 34 3,276
Income taxes............ 45 (1,311) 2 (14) (1,278)
----- ------- ------- ------- -------
Net income (loss)....... $ (70) $ 2,050 $ (2) $ 20 $ 1,998
===== ======= ======= ======= =======
F-43
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
-----------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Total net revenues...... $ -- $59,937 $49,722 $(11,983) $97,676
----- ------- ------- -------- -------
Expenses:
Facility operating.... -- 48,460 41,040 (11,983) 77,517
General and
administrative....... 221 4,352 150 -- 4,723
Service charges paid
to affiliate......... -- 354 -- -- 354
Depreciation and
amortization......... 2 1,231 649 -- 1,882
Facility rent......... -- 1,113 4,196 -- 5,309
Management fees paid
to affiliates........ -- (2,962) 2,962 -- --
----- ------- ------- -------- -------
Total expenses...... 223 52,548 48,997 (11,983) 89,785
----- ------- ------- -------- -------
Income (loss) from oper-
ations................. (223) 7,389 725 -- 7,891
Other:
Interest expense,
net.................. (91) 2,586 261 -- 2,756
Loss on investment in
limited partnership.. -- 61 -- -- 61
----- ------- ------- -------- -------
Income (loss) before in-
come taxes............. (132) 4,742 464 -- 5,074
Income taxes............ 51 (1,849) (181) -- (1,979)
----- ------- ------- -------- -------
Net income (loss)....... $ (81) $ 2,893 $ 283 $ -- $ 3,095
===== ======= ======= ======== =======
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998
-----------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
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 oper-
ations................. (230) 9,536 317 -- 9,623
Other:
Interest expense,
net.................. -- 2,909 293 -- 3,202
Loss on investment in
limited partnership.. -- 72 -- -- 72
------ -------- ------- -------- --------
Income (loss) before in-
come taxes............. (230) 6,555 24 -- 6,349
Income taxes............ 90 (2,557) (9) -- (2,476)
------ -------- ------- -------- --------
Net income (loss)....... $ (140) $ 3,998 $ 15 $ -- $ 3,873
====== ======== ======= ======== ========
F-44
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
-----------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Operating activities:
Net cash provided
(used) by operating
activities........... $1,568 $ 870 $(1,417) $576 $ 1,597
------ ------- ------- ---- -------
Investing activities:
Additions to property
and equipment........ -- 330 (1,142) -- (812)
Additions to
intangibles.......... (107) (1,248) 148 (150) (1,357)
Transfers (to) from
restricted cash,
net.................. -- 899 (803) (172) (76)
Repayment (issuance)
of demand note....... -- 1,369 -- -- 1,369
------ ------- ------- ---- -------
Net cash provided
(used) by investing
activities......... (107) 1,350 (1,797) (322) (876)
------ ------- ------- ---- -------
Financing activities:
Issuance of long-term
debt................. -- 2,175 -- -- 2,175
Payments of long-term
debt................. -- (158) 69 -- (89)
Principal payments of
capital lease
obligation........... -- (1,835) -- -- (1,835)
------ ------- ------- ---- -------
Net cash provided
(used) by financing
activities......... -- 182 69 -- 251
------ ------- ------- ---- -------
Net increase (decrease)
in cash and cash
equivalents............ 1,461 2,402 (3,145) 254 972
Cash and cash
equivalents, beginning
of period.............. 463 2,482 6,727 50 9,722
------ ------- ------- ---- -------
Cash and cash
equivalents, end of
period................. $1,924 $ 4,884 $ 3,582 $304 $10,694
====== ======= ======= ==== =======
Supplemental Disclosure:
Interest paid......... $ -- $ 1,575 $ 159 $-- $ 1,734
Income taxes paid..... $ -- $ 2,445 $ 239 $-- $ 2,684
F-45
HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
-----------------------------------------------------------
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
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
intangibles.......... (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:
Borrowed on 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 lease
inducement........... -- 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
F-46
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Cushman Management Associates, Inc.
and Affiliates
Topsfield, Massachusetts
We have audited the accompanying combined balance sheets of Cushman
Management Associates, Inc. and Affiliates as of December 31, 1995 and 1996,
and the related combined statements of income and owners' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Cushman
Management Associates, Inc. and Affiliates as of December 31, 1995 and 1996,
and the combined results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ Landa & Altsher
Randolph, MA
October 22, 1997
F-47
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
COMBINED BALANCE SHEET AS OF DECEMBER 31,
(DOLLARS IN THOUSANDS)
1995 1996
------ ------
ASSETS
Current assets:
Cash......................................................... $1,026 $1,607
Accounts receivable--net of allowance for doubtful accounts
of $75...................................................... 2,189 2,004
Prepaid expenses and other................................... 107 159
------ ------
Total current assets....................................... 3,322 3,770
Property, plant and equipment, net............................. 3,732 3,490
Intangible assets, net......................................... 19 6
------ ------
Total assets................................................... $7,073 $7,266
====== ======
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Current maturities on long-term debt......................... $ 61 $ 61
Accounts payable............................................. 396 443
Employee compensation and benefits........................... 709 755
Other accrued liabilities.................................... 67 136
Accrued interest............................................. 49 72
Due to related parties....................................... 209 35
Income taxes payable......................................... 3 244
------ ------
Total current liabilities.................................. 1,494 1,746
Long-term debt, net of current maturities...................... 1,379 1,320
------ ------
Total liabilities.............................................. 2,873 3,066
------ ------
Owners' equity:
Common stock, 17,500 shares authorized without par value,
2,000 shares issued and 1,970 outstanding with 30 held in
treasury.................................................... 310 310
Additional paid-in capital................................... 172 172
Retained earnings and partners' capital...................... 3,738 3,738
------ ------
4,220 4,220
Less--treasury stock, at cost................................ (20) (20)
------ ------
Total owners' equity....................................... 4,200 4,200
------ ------
Total liabilities and owners' equity........................... $7,073 $7,266
====== ======
See accompanying notes to financial statements.
F-48
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
COMBINED STATEMENT OF OPERATIONS AND OWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
1995 1996
------- -------
Total net revenue............................................. $17,993 $19,368
------- -------
Expenses:
Facility operating.......................................... 14,100 14,313
General and administrative.................................. 2,111 2,250
Depreciation and amortization............................... 323 322
------- -------
Total expenses............................................ 16,534 16,885
------- -------
Income from operations........................................ 1,459 2,483
Other:
Interest expense, net....................................... 109 92
------- -------
Income before income taxes.................................... 1,350 2,391
Income taxes.................................................. -- 241
------- -------
Net income.................................................... 1,350 2,150
Owners' equity--beginning of year............................. 4,300 4,200
Less--distributions to owners................................. (1,450) (2,150)
------- -------
Owners' equity--end of year................................... $ 4,200 $ 4,200
======= =======
See accompanying notes to financial statements.
F-49
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
1995 1996
------- -------
Cash flows from operating activities:
Net income................................................. $ 1,350 $ 2,150
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation and amortization............................ 323 322
Provisions for losses on accounts receivable............. 47 116
Changes in assets and liabilities:
Accounts receivable...................................... (210) 69
Prepaid expenses and other............................... (13) (52)
Accounts payable and accrued liabilities................. (62) 185
Income taxes payable..................................... -- 241
------- -------
Net cash provided by operating activities.................... 1,435 3,031
------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment............... 8 --
Purchases of property and equipment........................ (94) (68)
------- -------
Net cash used by investing activities........................ (86) (68)
------- -------
Cash flows from financing activities:
Repayment of debt.......................................... (55) (59)
Distributions to owners.................................... (1,450) (2,150)
Repayment of related party debt............................ (192) (173)
------- -------
Net cash used by financing activities........................ (1,697) (2,382)
------- -------
Net increase (decrease) in cash.............................. (348) 581
Cash at beginning of year.................................... 1,374 1,026
------- -------
Cash at end of year.......................................... $ 1,026 $ 1,607
======= =======
Supplementary disclosure:
Interest paid.............................................. $ 121 $ 118
======= =======
See accompanying notes to financial statements.
F-50
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
The financial statements presented are the combined financial statements of
Cushman Management Associates, Inc. (the management company), Cedar Glen
Nursing Home, Danvers Twin Oaks Nursing Home, Inc., Saugus Nursing Home, Inc.,
d/b/a Louise Caroline Rehabilitation and Nursing Center, and Evtan Nursing
Home, Inc., d/b/a Maplewood Manor Nursing Home, (collectively, the
"Companies"). The majority stockholders of Cushman Management Associates, Inc.
own a majority interest in the above nursing homes. Cushman Management
Associates, Inc. is a Subchapter S Corporation and operates a management
company in Topsfield, Massachusetts. Cushman Management Associates, Inc.
provides various services to nursing homes including administration,
bookkeeping, and other patient related services. Danvers Twin Oaks Nursing
Home, Inc.; Saugus Nursing Home, Inc., and Evtan Nursing Home, Inc. are
Subchapter S Corporations and operate nursing homes of 101, 80 and 120 beds,
respectively. Cedar Glen Nursing Home is a limited partnership and operates a
100-bed nursing home.
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Companies' significant accounting policies follows:
a) BASIS ON COMBINATION: The combined financial statements include all
the accounts of the above-named entities. All significant intercompany
balances and transactions have been eliminated.
b) PATIENT SERVICE REVENUE: Private patient service revenue is reported
at the estimated net realizable amounts. Third-party payor revenues are
recorded as indicated in Note 2.
c) PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost.
Depreciation of building and improvements is calculated using the straight-
line and accelerated methods over the estimated useful lives that range
from five to forty years. Depreciation of equipment and motor vehicles is
calculated using the straight-line and accelerated methods over the
estimated useful lives that range from three to ten years. Depreciation
charged to operations amounted to $309 and $310 for 1995 and 1996,
respectively.
d) CASH AND CASH EQUIVALENTS: The Companies consider all short-term debt
securities purchased with an original maturity of three months or less to
be cash equivalents.
e) INCOME TAXES: Cushman Management Associates, Inc.; Danvers Twin Oaks
Nursing Home, Inc.; Saugus Nursing Home, Inc.; and Evtan Nursing Home,
Inc.; have elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, the Companies do not pay
federal income taxes on their taxable income. Instead, the stockholders are
liable for individual income taxes on their respective share of the
Companies' taxable income.
As a result of an audit by the Massachusetts Department of Revenue in
1996, the Companies are considered to be engaged in a unitary business and
have exceeded certain gross income limitations for state income tax
purposes. Consequently, the Companies are liable for state corporate income
taxes on its taxable income and were assessed additional state income taxes
for the years 1993 through 1995 which have been recorded in 1996.
No income taxes are payable by or provided for Cedar Glen Nursing Home, a
Limited Partnership. Partners are liable for individual federal and state
income taxes on their respective share of the Partnership's taxable income.
f) INTANGIBLE ASSETS: Intangible assets are stated on the basis of cost
and are amortized on a straight-line basis, over the estimated future
periods to be benefited ranging from 3 to 5 years. Amortization charged to
operations amounted to $14 and $12 for 1995 and 1996, respectively.
g) ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the reporting period. Actual costs could differ from those estimates.
F-51
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
h) PROMOTIONAL ADVERTISING: Promotional advertising costs are expensed as
incurred. Promotional advertising costs charged to operations amounted to
$104 and $72 for 1995 and 1996, respectively.
NOTE 2--PATIENT SERVICE REVENUES FROM THIRD PARTY PAYORS
SUMMARY OF THE PAYMENT ARRANGEMENTS WITH THIRD PARTY PAYORS
MEDICAID--PROSPECTIVE RATE SYSTEM--The Companies receive reimbursement from
the Commonwealth of Massachusetts under the prospective rate of payment system
for the care and services rendered to publicly-aided patients in long-term
care facilities pursuant to regulations promulgated by the Division of Health
Care Finance and Policy (the Division). Under the regulations, the current
year rates are calculated utilizing base year costs adjusted for inflation.
The base year costs are subject to audit which could result in a retroactive
rate adjustment for the current year.
As a result of the audit of prior years' cost reports by the Division, the
Companies have received amended prospective rates for the years 1991 and 1992.
The amended rates resulted in a retroactive adjustment due the Companies of
$133 and $150 for 1991 and 1992, respectively. These settlements have been
received in 1996 and such settlements have been reflected under the caption
"Total Net Revenue" on Exhibit B to the extent not previously reflected.
Management estimates that the Companies have underspent the OBRA component
of the prospective rate during 1991, 1992 and 1993, resulting in a retroactive
adjustment due the Commonwealth of $15, $11 and $14 for 1991, 1992 and 1993,
respectively. These retroactive adjustments have been settled in 1996 and such
settlements have been reflected under the caption "Total Net Revenue" on
Exhibit B to the extent not previously recorded.
MEDICARE--The Companies receive reimbursement for patient care under the
federally sponsored Medicare program through an insurance intermediary. During
the year, an interim rate is assigned based upon the cost experience of a
prior year modified by its current regulations, and the facilities are paid at
this rate during the year. A cost report is filed with, and audited by, the
insurance intermediary. A final rate which may be subject to cost limitations
is then established and final settlement of the difference is called for under
the regulations.
Final settlements have been received through 1994 and such settlements have
been included in the caption "Total Net Revenue" on Exhibit B, to the extent
that they had not been reflected in prior years.
In as much as the final settlement rates for 1995 and 1996 cannot be
determined with sufficient accuracy for proper recording in these financial
statements, the income for these years has been recorded at the interim rate
of payment. The actual amounts will be accrued in the year of settlement.
F-52
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
NOTE 3--ACCOUNTS RECEIVABLE
BALANCE AT DECEMBER 31,
------------------------
1995 1996
----------- -----------
Private patients...................................... $ 133 $ 103
Prepaid room and board................................ (12) (11)
Medicare patients..................................... 304 334
Publicly aided patients............................... 1,834 1,648
Managed facilities.................................... 34 5
Allowance for uncollectibles.......................... (104) (75)
----------- -----------
Accounts receivable, net.............................. $ 2,189 $ 2,004
=========== ===========
Bad debts expense charged to operations amounted to $47 and $116 for 1995
and 1996, respectively.
NOTE 4--RELATED PARTY TRANSACTIONS
The Companies have entered into the following transactions with related
parties:
(a) MANAGEMENT FEES--Danvers Twin Oaks Nursing Home, Inc. recorded
management fees of $47 to an officer and stockholder of Cushman Management
Associates, Inc. for 1996.
(b) Related party loans which have no fixed repayment terms, are as
follows:
BALANCE AT
DECEMBER 31,
INTEREST -------------
RATE 1995 1996
---------- ------ ------
Due from related parties:
Federal
Officers and stockholders.......................... Funds Rate $ 108 $124
------ ------
Due to related parties:
Officers and stockholders........................ 9% 141 88
Partners......................................... 9% 81 27
Other related parties............................ 9% 95 44
------ ------
Total due to related parties................... 317 159
------ ------
Net due to related parties......................... $ 209 $ 35
====== ======
Net interest expense incurred on the above related party loans amounted to
$36 and $21 for 1995 and 1996, respectively.
F-53
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
NOTE 5--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following at December 31,
1995 and 1996:
1995 1996
------ ------
Land............................................................ $ 195 $ 195
Building and improvements....................................... 5,490 5,528
Equipment....................................................... 2,658 2,688
Motor vehicles.................................................. 39 39
Construction in process......................................... 5 5
------ ------
8,387 8,455
Less: Accumulated Depreciation.................................. (4,655) (4,965)
------ ------
Property, plant and equipment, net.............................. $3,732 $3,490
====== ======
The Companies have incurred and capitalized $5 of engineering costs related
to the replacement of two HVAC systems. As of December 31, 1996, no date has
been set for the start of the work on the HVAC systems.
NOTE 6--LONG-TERM DEBT
The Companies are obligated under long-term debt at December 31, 1995 and
1996 as follows:
1995 1996
------ ------
9% first mortgage to Salem Five, secured by real estate and
guaranteed by a majority of the shareholders, payable in
monthly payments of $8, including interest with a balloon
payment of all unpaid principal and interest due on October 8,
1999........................................................... $ 811 $ 791
9% 3-year mortgage to Salem Five, due November 17, 1999, secured
by real estate and guaranteed by a majority of the
shareholders, payable in monthly installments of $6 including
interest with a balloon payment due November 17, 1999.......... 387 352
9% 25-year first mortgage to Ipswich Savings Bank, due October
1, 2017, secured by land and buildings of Cushman Management
Associates, Inc., payable in monthly installments of $2
including interest............................................. 242 238
------ ------
Total........................................................... 1,440 1,381
Current maturities.............................................. 61 61
------ ------
Long-term debt, net............................................. $1,379 $1,320
====== ======
Interest incurred on the above long-term debt amounted to $121 and $119 for
1995 and 1996, respectively.
Following are maturities of long-term debt for each of the next five years:
AMOUNT
------
1997..................................................................... $ 61
1998..................................................................... 69
1999..................................................................... 1,027
2000..................................................................... 5
2001..................................................................... 6
F-54
CUSHMAN MANAGEMENT ASSOCIATES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
NOTE 7--CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Companies to
concentrations of credit risk consist principally of the following:
a.) CASH: The Companies maintain cash balances in several federally
insured financial institutions in the same geographic area. The cash
exceeding federally insured limits totaled $995 at December 31, 1996. There
may be times during the year when uninsured cash is significantly higher.
b.) ACCOUNTS RECEIVABLE: The Companies extend unsecured credit to their
private patients and patients covered under third-party payor arrangements.
Accounts receivable from private patients and third-party payors totaled
$2,015 at December 31, 1996. See Note (2) and Note (3) for details of
third-party payor arrangements and receivable balances, respectively.
d.) DUE FROM RELATED PARTIES: The Companies extend unsecured credit to
their affiliates and owners. The balance due from related parties totaled
$124 at December 31, 1996. See Note (4) for further details.
NOTE 8--COMMITMENTS AND CONTINGENCIES
a) Pursuant to the Commonwealth of Massachusetts Medical Assistance Program
regulations, the Companies are members of a group of related nursing homes
(the Group) which are considered to be under common ownership. Consequently,
all members of the Group are contingently liable for the recoupments of
liabilities of other members of the Group.
b) A significant portion of the Companies' revenues are derived from
services reimbursable under the Medicaid program, (See Note 2). The base year
costs utilized in calculating the Medicaid prospective rates are subject to
audit which could result in a retroactive rate adjustment for all years in
which that base year's costs are utilized in calculating the prospective rate.
It is not possible at this time to determine whether the Companies will be
audited or if a retroactive rate adjustment would result.
c.) A portion of the Companies' revenues are derived from services under the
Medicare program, (see Note 2). Under this program all cost report years are
subject to audit which could result in a retroactive rate adjustment. It is
not possible at this time to determine whether the Companies will be audited
or if a retroactive rate adjustment will result.
If the Companies' Medicare Fiscal Intermediary were to issue prudent buyer
adjustments for 1996 using the same methodology as applied to 1995, as
detailed in Note 9 (b), this would result in a payable to the Medicare program
of approximately $280. The Companies would vigorously contest any adjustments
made by the fiscal intermediary. In addition, the Companies contract with
outside suppliers of therapy services provides for indemnification to the
Companies in the event that Medicare limits reimbursement to less then cost.
Consequently, no provision has been made to the accompanying financial
statements.
NOTE 9--SUBSEQUENT EVENTS
a.) SALE OF THE NURSING HOMES: In August 1997, the Companies sold their
nursing home property, equipment and operating licenses for $16,450 resulting
in a gain of $11,447. The nursing home companies retained all assets, other
than property and equipment, and all liabilities. In addition, the Management
Companies sold for $100 its contracts with outside nursing facilities.
F-55
NOTE 9--SUBSEQUENT EVENTS (CONTINUED)
b.) MEDICARE SETTLEMENTS: In 1997, the Companies' Medicare Fiscal
Intermediary issued settlements for 1995, which include a limitation of the
ancillary therapy services to less than cost. These settlements result in a
payable to the Medicare program of approximately $130. The Companies strongly
disagree with these settlements and will vigorously contest these settlements
through the appeal process.
The Companies contract with outside suppliers of therapy services provides
for indemnification to the Companies in the event that Medicare limits
reimbursement to less than the providers cost, consequently, no provision has
been made in the accompanying financial statement for this retroactive
adjustment.
F-56
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Canterbury Care Center, Inc. and Related Companies
We have audited the accompanying combined balance sheets of Canterbury Care
Center, Inc. and Related Companies (all Ohio corporations) as of December 31,
1995 and 1996, and the related combined statements of operations and
accumulated deficit, and cash flows for the years then ended. These combined
financial statements are the responsibility of management. Our responsibility
is to express an opinion on these combined financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
combined financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Canterbury Care
Center, Inc. and Related Companies at December 31, 1995 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/S/ Cummins, Krasik & Hohl Co.
Columbus, Ohio
February 13, 1997
F-57
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
COMBINED BALANCE SHEETS
DECEMBER 31,
1995 1996
----------- -----------
ASSETS
CURRENT ASSETS
Assets whose use is limited (note C)................. $ 147,499 $ 153,989
Accounts receivable, less allowance for doubtful
accounts
(notes B2 and B3)................................... 1,137,395 1,180,625
Cost settlements (note I)............................ 21,158 208,371
Inventories (note B4)................................ 13,303 13,303
Prepaid expenses..................................... 74,888 70,397
----------- -----------
Total current assets............................... 1,394,243 1,626,685
----------- -----------
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization (notes B5, D, F, and G).............. 12,696,087 12,279,304
OTHER ASSETS
Related-party receivable (note H).................... -- 78,661
Deferred costs, less accumulated amortization of
$168,999 in 1995 and $286,290 in 1996 (note B6)..... 417,327 300,036
Deposits............................................. 3,115 3,115
----------- -----------
420,442 381,812
----------- -----------
$14,510,772 $14,287,801
=========== ===========
See accompanying notes and independent auditors' report.
F-58
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
COMBINED BALANCE SHEETS
DECEMBER 31,
1995 1996
----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Note payable--bank (note F).......................... $ 4,678,426 $ 2,145,466
Current portion of long-term debt.................... 415,000 415,000
Cash overdraft (notes B1 and G)...................... 1,774,669 118,411
Accounts payable
Trade.............................................. 231,987 238,993
Other (note K)..................................... 531,853 531,853
Accrued liabilities (note E)......................... 990,858 948,503
Resident deposits (note C)........................... 30,334 34,894
Note payable--shareholder (note H)................... 42,923 --
Unearned rentals..................................... 8,564 83,733
----------- -----------
Total current liabilities........................ 8,704,614 4,516,853
----------- -----------
LONG-TERM OBLIGATIONS--net of current portion
Related-party advances (note H)...................... 963,581 3,763,581
Related-party loan (note H).......................... -- 1,200,000
Long-term debt (note G).............................. 5,134,819 4,719,800
Resident security deposits........................... 92,868 97,891
----------- -----------
6,191,268 9,781,272
----------- -----------
CONTINGENCIES (notes I and K)........................ -- --
DEFICIT IN STOCKHOLDERS' EQUITY
Common stock, authorized, 2,250 shares without par
value; issued and outstanding, 300 shares......... 1,500 1,500
Additional paid-in capital......................... 528,290 528,290
Accumulated deficit................................ (914,900) (540,114)
----------- -----------
(385,110) (10,324)
----------- -----------
$14,510,772 $14,287,801
=========== ===========
See accompanying notes and independent auditors' report.
F-59
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEARS ENDED DECEMBER 31,
1995 1996
----------- -----------
REVENUES (notes B2 and I)
Resident services (including ancillaries)............
Private............................................. $ 1,083,014 $ 1,370,475
Medicaid............................................ 4,398,685 6,346,204
Medicare............................................ 3,534,951 4,147,267
Assisted living..................................... 1,664,044 2,859,949
Veterans............................................ 26,447 60,856
Hospice............................................. 2,190 99,864
Rentals..............................................
Commercial.......................................... 101,565 90,392
Other services...................................... 70,112 85,795
----------- -----------
10,881,008 15,060,802
Provision for contractual adjustments................ (1,963,054) (2,319,988)
----------- -----------
8,917,954 12,740,814
----------- -----------
COSTS AND EXPENSES
Routine services
Nursing and habilitation............................ 4,011,176 5,605,053
Resident services................................... 581,052 877,698
Dietary............................................. 1,035,811 1,414,273
Property and bed taxes.............................. 158,582 172,503
Utilities........................................... 343,463 380,477
General and administrative........................... 1,881,814 2,418,086
Depreciation and amortization (notes B5 and B6)...... 678,190 677,574
Interest............................................. 957,901 862,739
----------- -----------
9,647,989 12,408,403
----------- -----------
(Loss) earnings from operations..................... (730,035) 332,411
NON-OPERATING REVENUES................................ 32,132 42,375
----------- -----------
NET (LOSS) EARNINGS................................. (697,903) 374,786
ACCUMULATED DEFICIT
Beginning of year.................................... (216,997) (914,900)
----------- -----------
End of year.......................................... $ (914,900) $ (540,114)
=========== ===========
See accompanying notes and independent auditors' report.
F-60
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
1995 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from:
Residents and third-party payors.................... $ 6,373,809 $ 9,736,885
Rentals........................................... 1,702,540 2,762,860
Other............................................. 102,244 125,903
----------- -----------
8,178,593 12,625,648
Cash paid for:
Salaries.......................................... 2,916,108 5,324,584
Payroll taxes and fringe benefits................. 665,018 984,344
Property and income taxes......................... 44,073 197,230
Interest expense.................................. 989,501 824,278
Operating expenses................................ 4,075,998 4,501,384
----------- -----------
8,690,698 11,831,820
----------- -----------
Net cash (used) provided by operating activities.. (512,105) 793,828
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment additions.................... (253,485) (143,498)
Assets whose use is limited......................... -- (3,170)
----------- -----------
Net cash used by investing activities............. (253,485) (146,668)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of note payable--bank..................... (231,111) (2,532,960)
Repayment of long-term debt......................... (391,521) (415,019)
Repayment of related-party loan..................... -- (42,923)
Proceeds from related-party loan.................... 8,093 4,000,000
----------- -----------
Net cash (used) provided by financing activities.. (614,539) 1,009,098
----------- -----------
(DECREASE) INCREASE IN CASH.................... (1,380,129) 1,656,258
CASH OVERDRAFT
Beginning of year................................... (394,540) (1,774,669)
----------- -----------
End of year......................................... $(1,774,669) $ (118,411)
=========== ===========
RECONCILIATION OF NET (LOSS) EARNINGS TO NET CASH
(USED) PROVIDED BY OPERATIONS
Net (loss) earnings................................. $ (697,903) $ 374,786
Adjustments to reconcile net (loss) earnings to net
cash (used) provided by operating activities
Depreciation and amortization..................... 678,190 677,574
(Increase) decrease in operating assets
Assets whose use is limited..................... (51,572) (2,979)
Accounts receivable............................. (765,573) (43,230)
Cost settlements................................ 15,067 (187,213)
Prepaid expenses................................ (28,662) 4,150
Related-party receivable........................ (10,146) (78,661)
Increase (decrease) in operating liabilities
Accounts payable--trade.......................... 39,500 7,004
Accrued liabilities.............................. 238,844 (42,355)
Unearned rentals................................. (20,987) 75,169
Resident deposits................................ 91,137 9,583
----------- -----------
$ (512,105) $ 793,828
=========== ===========
See accompanying notes and independent auditors' report.
F-61
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
NOTE A--DESCRIPTION OF BUSINESS
The combined financial statements present the financial position, results of
operations, and cash flows of Canterbury Care Center, and Related Companies
(the Company). The combined financial statements include the accounts of the
following:
1. Canterbury Care Center Inc. (Canterbury), an Ohio S Corporation, acquired
in 1993 and began operating a licensed 100-bed nursing facility (NF).
Canterbury acquired and began operating 20 additional NF beds in 1995, as
well as a 6-bed assisted living unit.
2. GNWT III, Inc., DBA Forest View Nursing Center (Forest View), an Ohio S
Corporation, acquired and renovated an existing building in 1993. Operating
rights for 100 NF beds were acquired and relocated. Operations began in
1994.
3. GNWT, Inc. II, DBA The Laurelwood (Laurelwood), an Ohio S Corporation,
acquired real property in 1992 to develop and operate a 115-unit assisted
living facility. The building also contains 5,016 square feet of commercial
rental space.
Canterbury and Forest View provide services to private residents and have
provider agreements with the Health Care Financing Administration (HCFA) and
the Ohio Department of Human Services (ODHS), to provide care for Medicare and
Medicaid residents, respectively.
All significant intercompany balances and transactions have been eliminated.
The financial statements have been prepared on a combined basis since the
entities are commonly owned and managed.
NOTE B--SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
preparation of the accompanying financial statements follows:
1. Cash
For purposes of the statements of cash flows, cash includes all of the
Company's checking and savings accounts. Bank accounts are insured by the
Federal Deposit Insurance Corporation up to $100,000. Cash balances
periodically exceed the insured limit.
2. Resident Accounts Receivable and Revenues
Resident accounts receivable and revenues are recorded when services are
provided. The Company provides services to certain of its residents under
contractual arrangements with the Medicare and Medicaid programs. Amounts paid
under these contractual arrangements are subject to review and final
determination by the appropriate government authority or its agent. In the
opinion of management, adequate provision has been made in the combined
financial statements for any adjustments resulting from the respective
government authority's review (see note I).
F-62
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
Contractual adjustments for the Medicare and Medicaid programs are
recognized when the related revenues are reported in the financial statements.
These contractual adjustments represent the difference between established
rates and the amounts estimated to be reimbursable by Medicare and Medicaid.
Differences between these estimates and amounts subsequently determined are
recorded as additions to or deductions from contractual adjustments in the
period such determination is made. Accounts receivable are unsecured.
3. Allowance for Doubtful Accounts
Bad debts are provided for on the reserve method based on management's
evaluation of accounts receivable at year end. Following is a summary of the
allowance for doubtful accounts at December 31:
1995 1996
------- -------
Canterbury................................................... $40,000 $60,000
Forest View.................................................. 12,000 30,000
Laurelwood................................................... -- --
------- -------
$52,000 $90,000
======= =======
4. Inventories
Inventories are stated at lower of cost (determined by the first-in, first-
out method) or market. Inventories consist of nonperishable food and kitchen
supplies, nursing supplies, a base stock of linens, and other miscellaneous
supplies.
5. Property and equipment
Property and equipment is stated at cost. Depreciation is provided for using
the straight-line and the double-declining balance methods over the estimated
useful lives of the assets as follows:
Building.......................................................... 40 years
Furniture and equipment........................................... 7-10 years
Land improvements................................................. 15 years
Capitalized interest.............................................. 28 years
Motor vehicle..................................................... 3 years
6. Deferred costs and expenses
Costs of obtaining long-term financing are deferred and amortized over the
term of the related debt on the straight-line method.
7. Income taxes
The federal and state taxable income of Canterbury, Forest View, and
Laurelwood, all of which are S Corporations, is includable in the
shareholders' income tax returns. Accordingly, no provision for income taxes
has been reflected in the combined financial statements.
8. Use of Management's Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets
F-63
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
and liabilities, disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenue and expense
during the reporting period. Actual results could differ from these estimates.
9. Reclassification
Certain 1995 amounts have been reclassified to conform to the 1996
presentation.
NOTE C--ASSETS WHOSE USE IS LIMITED
Assets whose use is limited consists of cash held in debt service funds
established under terms of financing agreements (see note G). Canterbury and
Forest View also maintain checking accounts for the purpose of holding patient
fund deposits. Canterbury and Forest View are restricted from using this cash
for operations. A corresponding liability is recorded in current liabilities.
NOTE D--PROPERTY AND EQUIPMENT
Following is a summary of property and equipment--at cost, less accumulated
depreciation and amortization at December 31:
1995 1996
----------- -----------
Land and improvements............................. $ 946,813 $ 946,813
Building and improvements......................... 10,949,532 10,961,056
Capitalized interest.............................. 254,381 254,381
Furniture and equipment........................... 1,347,265 1,479,238
Motor vehicle..................................... 15,750 15,750
----------- -----------
13,513,741 13,657,238
Less: accumulated depreciation and amortization... (817,654) (1,377,934)
----------- -----------
$12,696,087 $12,279,304
=========== ===========
NOTE E--ACCRUED LIABILITIES
Following is a summary of accrued liabilities at December 31:
1995 1996
-------- --------
Salaries and wages........................................ $294,432 $355,714
Management fees (note G).................................. 250,620 46,350
Payroll taxes and fringes................................. 149,524 189,037
Property taxes............................................ 220,267 199,123
Other..................................................... 76,015 158,279
-------- --------
$990,858 $948,503
======== ========
NOTE F--NOTE PAYABLE--BANK
Note payable--bank consists of a construction note, payable in monthly
installments of $15,000, plus interest at 8.70% through December 1997. The
note is secured by an Open-End Mortgage, Assignments of Leases and Rents, and
a security interest in all assets of Laurelwood and Forest View (see note G).
F-64
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
NOTE G--LONG-TERM DEBT
Long-term debt consists of the following at December 31:
1995 1996
---------- ----------
CANTERBURY
Variable Rate Taxable Demand Notes, Series 1993.... $3,030,019 $2,795,000
FOREST VIEW
Variable Rate Taxable Demand Notes, Series 1994.... 2,519,800 2,339,800
---------- ----------
5,549,819 5,134,800
Less: current portion................................ (415,000) (415,000)
---------- ----------
$5,134,819 $4,719,800
========== ==========
Following are the principal maturities of long-term debt at December 31,
1996:
1997........................................................... $ 415,000
1998........................................................... 415,000
1999........................................................... 415,000
2000........................................................... 415,000
2001........................................................... 415,000
Thereafter..................................................... 3,059,800
----------
$5,134,800
==========
The Variable Rate Taxable Demand Notes, Series 1993 (the Canterbury notes)
and the Variable Rate Taxable Demand Notes, Series 1994 (the Forest View
notes) are secured by irrevocable letters-of-credit from a bank. To obtain the
letters-of-credit, Canterbury and Forest View each granted the bank Open-End
Mortgages, Assignments of Leases and Rents, and security interests in their
personal property. In addition, Centurion Management Group, Inc. pledged its
accounts receivable and equipment. The shareholders of Canterbury and Forest
View are personal guarantors of the letters-of-credit and have pledged their
stock as additional collateral.
The notes are subject to annual redemptions pursuant to mandatory sinking
fund provisions. In addition, the notes are subject to early redemption at the
option of Canterbury or Forest View. Certain of the early redemption options
require payment of redemption premiums over and above the face values of the
notes.
The Canterbury and Forest View letters-of-credit expire on September 30,
1998, and November 30, 1999, respectively. The notes are subject to mandatory
redemption, at face value, if an extension or alternative letters-of-credit
are not in place at that time.
The notes bear interest initially at a variable rate based on the fair
market value of similar issues as determined by the remarketing agent. The
notes can be converted to a fixed rate at the option of Canterbury or Forest
View. The interest rates on the Canterbury notes were 6.10% and 6.03%, and on
the Forest View notes were 6.10% and 6.00%, at December 31, 1995 and 1996,
respectively. Additionally, Canterbury and Forest View pay the bank annual
line-of-credit fees in the amount of 1.5% and 1.25%, respectively.
The letter-of-credit agreements relating to these notes contain various
covenants pertaining to tangible net worth, cash flow coverage, and fixed
charge coverage ratios. Canterbury and Forest View were in compliance with
these covenants at December 31, 1996.
F-65
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
NOTE H--RELATED-PARTY TRANSACTIONS
The following summarizes related-party transactions as of December 31, 1995
and 1996:
1. Certain of the Company's operating cash accounts are combined with the
cash of other related companies in a cash concentration account. The
purpose of the concentration account is to invest the combined excess
cash in overnight repurchase agreements with a bank. Following is a
summary of the reconciled balances (overdrafts) of the participating
companies and in total at December 31:
1995 1996
--------- -----------
GNWT, Inc., DBA Wood Glen Care Center............. $ 314,667 $(1,527,164)
Laurelwood........................................ (299,450) 168,097
Forest View....................................... (761,984) 484,625
Centurion Management Group, Inc................... (297,583) 269,723
Health Care Strategies, Inc., DBA The Riverside... 818,896 2,044,228
Nursing Professionals, Inc........................ 316,588 369,222
GAN Enterprises................................... (209,387) (264,349)
Centurion Medical Supplies, Inc................... 196,762 199,655
Canterbury........................................ (755,119) (822,911)
Four Winds........................................ -- 140,513
GNWT Enterprises.................................. -- (91)
The Colonnades.................................... -- (1,104,306)
--------- -----------
$(676,610) $ (42,758)
========= ===========
The participating companies receive or pay interest on their share of
the concentration account balance. Canterbury, Forest View, and
Laurelwood have other cash accounts as follows at December 31:
1995 1996
------- -------
Canterbury................................................. $ 1,591 $11,000
Forest View................................................ 39,393 40,278
Laurelwood................................................. 900 500
------- -------
$41,884 $51,778
======= =======
The combined balance sheets reflect the totals of the concentration
account and other cash account balances.
2. The Company is managed by Centurion Management Group (Centurion). The
principal shareholder of the Company is the principal shareholder of
Centurion. Management fees were $448,009 and $643,024, for 1995 and
1996, respectively.
3. The Company leases employees from Nursing Professionals, Inc. (NPI). The
principal shareholder of the Company owns NPI. There is no intercompany
or related-party profit as a result of this arrangement. Total leased
employee expense for 1995 and 1996, was $1,471,689 and $2,033,127,
respectively.
4. Canterbury purchases enteral and urological supplies from Centurion
Medical Supplies, Inc. (CMS), which is wholly-owned by the Company's
principal shareholder. Enteral and urological supplies purchased from
CMS for 1995 and 1996, were $4,256 and $0, respectively. At December 31,
1996, Canterbury had a long-term receivable from CMS of $78,661.
F-66
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
5. Note payable--shareholder represents the cost incurred personally by one
of the shareholders to obtain the operating rights for Forest View. The
note was repaid in 1996. The note had no stated interest rate and none
was paid and charged to operations.
6. Related-party advances totaling $963,581 and $3,763,581, at December 31,
1995 and 1996, respectively, represent amounts advanced by GNWT, Inc.,
DBA Wood Glen Nursing Center (Wood Glen) to Forest View and Laurelwood.
These advances are related to the cost of financing and constructing
each of the facilities plus ongoing working capital needs. These
advances have no repayment terms and management does not anticipate any
repayment within the next year. When repayment begins, Laurelwood will
pay interest at 8.7%.
7. Wood Glen also loaned Forest View $1,200,000 in 1996 to be used to fund
operating activities. Terms of the loan included monthly payments of
interest only at 8.7%. No principal payments were made in 1996 and none
are anticipated within the next year.
NOTE I--THIRD-PARTY REIMBURSEMENT
1. Medicare
Under the Medicare program, Canterbury and Forest View (beginning in 1994)
are entitled to reimbursement which approximates the lower of cost (as
defined by the program) or charges for caring for its Medicare residents.
Following is a summary by year of Canterbury's and Forest View's Medicare
reimbursement settlement status:
a. 1993
Canterbury received a 1993 Notice of Provider Reimbursement (NPR) and
corresponding audit report from the fiscal intermediary (FI) in 1995. The
NPR reflected a final settlement amount due to the Medicare program of
$7,103 which the FI recovered in 1995. Management contested the final
settlement amount and recorded $7,103 as a cost settlement receivable at
December 31, 1995. During 1996, management was precluded from pursuing
this issue by Medicare rules. The $7,103 is included in the 1996 provision
for contractual adjustments.
b. 1994
Canterbury's 1994 Medicare Cost Report reflected a balance due from the
program of $38,901. A tentative settlement of $33,000 was received in
1995. Management estimated an additional $1,000 was due from the program
and was recorded as a cost settlement receivable at December 31, 1995. The
tentative settlement plus the estimated receivable (totaling $34,000) was
included in the 1995 provision for contractual adjustments. During 1996,
the FI issued a 1995 NPR with a final settlement amount of $2,754 due to
the Medicare program. The total settlement impact of $3,754 is included in
the 1996 provision for contractual adjustments.
Forest View filed a 1994 Medicare Cost Report during 1995. There was no
material amount due to or from the program.
F-67
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
c. 1995
For Canterbury, management estimated that $5,900 was due from the program
and was recorded as a cost settlement receivable at December 31, 1995.
During 1996, the FI issued a 1995 NPR which indicated a final settlement
amount of $15,894 due to the program. Management filed a Routine Cost
Limitation (RCL) Exception Request in 1996. Management anticipates
approval of the RCL Exception Request in 1997, and estimates that $76,825
is due from the program. A cost settlement receivable of $60,931, the net
of the $15,894 due to the program, and the $76,825 due from the program is
recorded at December 31, 1996, and included in the 1996 provision for
contractual adjustments.
For Forest View, management estimated that $7,482 was due from the program
at December 31, 1995, and was recorded as a cost settlement receivable and
included in the 1995 provision for contractual adjustments. Before the
cost report was filed, Forest View received payments for 1995 Medicare
days at a higher per diem rate which reduced the cost settlement to zero.
Forest View filed a 1995 Medicare Cost Report which reflected an amount
due to the Medicare program of $39,426. This amount was repaid during 1996
and is included in the 1996 provision for contractual adjustments.
Management estimates no material amount due to or from the Medicare
program at final settlement for this period.
d. 1996
Canterbury will file a 1996 Medicare Cost Report in 1997. Management
anticipates filing an RCL Exception Request in 1997, and estimates that
the Medicare program owes Canterbury $138,461. This amount is recorded as
a cost settlement receivable at December 31, 1996, and is included in the
1996 provision for contractual adjustments.
Forest View will file a 1996 Medicare Cost Report in 1997. Management
estimates that $34,049 is due from the Medicare program. This amount is
recorded as a cost settlement receivable at December 31, 1996, and is
included in the 1996 provision for contractual adjustments.
The FI has the opportunity to audit the 1996 cost report and propose
adjustments to the amount of reimbursable cost. Management believes that there
will not be a significant impact on the financial statements as a result of
the intermediary's audit of the 1996 Medicare Cost Reports.
2. Medicaid
Since July 1, 1993, Medicaid payments are calculated and paid under a
prospective reimbursement system. Payment rates are based on actual cost
limited by certain ceilings, adjusted by a resident acuity factor, and
updated for inflation. While interim rates are subject to reconsideration and
appeal, once this process is completed, they are not subject to subsequent
retroactive adjustment. The direct care portion of the rate can be adjusted
prospectively for changes in acuity. Accordingly, there are no cost
settlements for rate adjustments under this system.
a. Fiscal Year 1994
In 1996, The Ohio Department of Human Services (ODHS) issued a fiscal year
1994 (FY94) Rate Recalculation final settlement for Canterbury which
reflected no amount due to or from the Medicaid program. Management
executed a waiver and this period was adjudicated by the ODHS.
F-68
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
b. Fiscal Year 1995
In 1996, the ODHS issued a fiscal year 1995 (FY95) Rate Recalculation
final settlement for Canterbury which reflected no amount due to or from
the Medicaid program. Management executed a waiver and this period was
adjudicated by the ODHS.
Forest View began participating in the Ohio Medicaid program in December
1994. Payments covering this date through June 30, 1995, were used in the
final settlement rate calculation issued in December 1996. The final
settlement reflected no amount due to or from the Medicaid program.
Management executed a waiver and this period was adjudicated by the ODHS.
c. Fiscal Year 1996
In 1996, the ODHS paid Forest View for an individual who was no longer a
resident at the facility. At December 31, 1996, Forest View recorded a
liability to the ODHS of $25,070.
Following is a summary of the net cost settlement receivables at December
31:
RECEIVABLE (PAYABLE)
---------------------
1995 1996
---------- ----------
Medicare
1993............................................. $ 7,103 $ --
1994............................................. 1,000 --
1995............................................. 13,382 60,931
1996............................................. -- 172,510
--------- ----------
Total Medicare................................. 21,485 233,441
Medicaid
FY97............................................. -- (25,070)
Prior 1995....................................... (327) --
--------- ----------
Total Medicaid................................. (327) (25,070)
--------- ----------
Total cost settlements......................... $ 21,158 $ 208,371
========= ==========
NOTE J--RETIREMENT PLAN
The Company sponsors a defined contribution pension plan under Section
401(k) of the Internal Revenue Code. The plan covers all employees who meet
certain eligibility requirements. Matching contributions are established each
year and are allocated based on employee contributions. During 1995 and 1996,
contributions of $6,000 and $23,841 respectively, were charged to operations.
NOTE K--LOSS CONTINGENCY
Laurelwood filed a lawsuit against Wilcon Corporation (Wilcon) and certain
of its principals in connection with construction of the facility. The suit
alleges breach of contract and various other torts and seeks damages in excess
of $1,000,000.
Wilcon has countersued and is seeking $1,000,000 in compensatory damages and
a claim for punitive damages. Laurelwood has withheld payment of certain
construction draws pending outcome
F-69
CANTERBURY CARE CENTER, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
of the litigation. In addition, the bank has postponed conversion of the
construction financing to a permanent note until the litigation is resolved.
The amount recorded is management's estimate of the amount due Wilcon.
NOTE L--EVENT SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT AUDITORS
On August 1, 1997, the Company's assets were sold to an unrelated entity.
There was no loss incurred on these sales.
F-70
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ALL TENDERED OLD SECURITIES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RE-
LATED DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND RE-
QUESTS FOR ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, THE
LETTER OF TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE
EXCHANGE AGENT AS FOLLOWS:
BY FACSIMILE:
(212) 780-0592
Attention: Customer Service
Confirm by telephone: (800) 548-6565
(Originals of all documents submitted by facsimile
should be sent promptly by hand,
overnight courier, or registered or certified mail)
BY MAIL:
United States Trust Company of New York
P.O. Box 843
Cooper Station
New York, New York 10276
Attention: Corporate Trust Services
BY HAND BEFORE 4:30 P.M.:
United States Trust Company of New York
111 Broadway
New York, New York 10006
Attention: Lower Level Corporate Trust Window
BY OVERNIGHT COURIER AND BY HAND AFTER 4:30 P.M. ON THE EXPIRATION DATE ONLY:
United States Trust Company of New York
770 Broadway, 13th Floor
New York, New York 10003
NO BROKER, DEALER OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFER
MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CON-
TAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESEN-
TATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY NOR DOES IT CON-
STITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECU-
RITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CRE-
ATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 19 , ALL DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER
A PROSPECTUS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LOGO OF HARBORSIDE HEALTHCARE CORP.]
OFFER FOR OUTSTANDING
11% SENIOR SUBORDINATED
DISCOUNT NOTES DUE 2008
IN EXCHANGE FOR
11% SERIES A SENIOR SUBORDINATED
DISCOUNT NOTES DUE 2008
AND FOR OUTSTANDING
13 1/2% EXCHANGEABLE PREFERRED STOCK
MANDATORILY REDEEMABLE 2010
IN EXCHANGE FOR
13 1/2% SERIES A EXCHANGEABLE
PREFERRED STOCK
MANDATORILY REDEEMABLE 2010
---------------
PROSPECTUS
---------------
, 1998
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL")
permits a provision in the certificate of incorporation of each corporation
organized thereunder, eliminating or limiting, with certain exceptions, the
personal liability of a director to the corporation or its stockholders for
monetary damages for certain breaches of fiduciary duty as a director. The
Certificate of Incorporation of the registrant eliminates the personal
liability of directors to the fullest extent permitted by the DGCL.
Section 145 of the DGCL ("Section 145"), in summary, empowers a Delaware
corporation, within certain limitations, to indemnify its officers, directors,
employees and agents against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement, actually and reasonably incurred by them
in connection with any suit or proceeding other than by or on behalf of the
corporation, if they acted in good faith and in a manner reasonably believed
to be in or not opposed to the best interest of the corporation, and, with
respect to a criminal action or proceeding, had no reasonable cause to believe
their conduct was unlawful.
With respect to actions by or on behalf of the corporation, Section 145
permits a corporation to indemnify its officers, directors, employees and
agents against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit,
provided such person meets the standard of conduct described in the preceding
paragraph, except that no indemnification is permitted in respect of any claim
where such person has been found liable to the corporation, unless the Court
of Chancery or the court in which such action or suit was brought approves
such indemnification and determines that such person is fairly and reasonably
entitled to be indemnified.
Article VII of the Restated Certificate of Incorporation of the registrant
provides for the indemnification of officers and directors and certain other
parties (the "Indemnitees") of the registrant to the fullest extent permitted
under the DGCL.
The registrant maintains officers' and directors' insurance covering certain
liabilities that may be incurred by officers and directors in the performance
of their duties. Pursuant to the Merger Agreement, the Issuer has agreed that
for six years after the Effective Time it will indemnify all current and
former directors, officers, employees and agents of the registrant and will,
subject to certain limitations, maintain for six years a directors' and
officers' insurance and indemnification policy containing terms and conditions
that are not less advantageous than the policy in effect on the date of the
Merger Agreement.
Each of the employment agreements described in the Prospectus under the
caption "Management--Employment Agreements" contains provisions entitling the
executive to indemnification for losses incurred in the course of service to
the Issuer or its subsidiaries, under certain circumstances.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
See the Exhibit Index included immediately preceding the exhibits to this
Registration Statement.
ITEM 22. UNDERTAKINGS.
(a) The Issuer undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement (i) to include any
prospectus required by Section
II-1
10(a)(3) of the Securities Act of 1933, as amended; (ii) to reflect in the
prospectus any facts or events arising after the effective date of the
Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment will be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time will be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The Issuer undertakes to supply by means of a post-effective amendment
all information concerning a transaction, and the company being acquired
involved therein, that was not the subject of and included in the Registration
Statement when it became effective.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(d) (1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of
a prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
Harborside Healthcare Corporation
/s/ Stephen L. Guillard
By _________________________________
Stephen L. Guillard
Chairman of the Board,
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Savio W. Tung Director
- --------------------------------------
Savio W. Tung
/s/ Christopher J. O'Brien Director
- --------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- --------------------------------------
Charles J. Philippin
Director
- --------------------------------------
Christopher J. Stadler
/s/ Stephen L. Guillard Chairman of the Board, President,
- -------------------------------------- Chief Executive Officer and Director
Stephen L. Guillard (Principal Executive Officer)
/s/ Damian N. Dell'Anno Executive Vice President of
- -------------------------------------- Operations and Director
Damian N. Dell'Anno
/s/ William H. Stephan Senior Vice President, Chief
- -------------------------------------- Financial Officer and Director
William H. Stephan (Principal Financial and Accounting
Officer)
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE HEALTHCARE LIMITED
PARTNERSHIP
By: KHI CORP., as General Partner
/s/ Stephen L. Guillard
By: ________________________________
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- --------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- --------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- -------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- -------------------------------------- Accounting Officer)
William H. Stephan
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE HEALTHCARE ADVISORS
LIMITED PARTNERSHIP
By: KHI CORP., as General Partner
/s/ Stephen L. Guillard
By: ________________________________
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- --------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- --------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- -------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- -------------------------------------- Accounting Officer)
William H. Stephan
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE HOMECARE LIMITED
PARTNERSHIP
By: KHI CORP., as General Partner
/s/ Stephen L. Guillard
By: ________________________________
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- --------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- --------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- -------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- -------------------------------------- Accounting Officer)
William H. Stephan
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
RIVERSIDE RETIREMENT LIMITED
PARTNERSHIP
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
/s/ Stephen L. Guillard
By: ________________________________
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- --------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- --------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- -------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- -------------------------------------- Accounting Officer)
William H. Stephan
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE CONNECTICUT LIMITED
PARTNERSHIP
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
/s/ Stephen L. Guillard
By: ________________________________
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- --------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- --------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- -------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- -------------------------------------- Accounting Officer)
William H. Stephan
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE OF FLORIDA LIMITED
PARTNERSHIP
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
/s/ Stephen L. Guillard
By: ________________________________
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- --------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- --------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- -------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- -------------------------------------- Accounting Officer)
William H. Stephan
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE OF OHIO LIMITED
PARTNERSHIP
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
/s/ Stephen L. Guillard
By: ________________________________
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- --------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- --------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- -------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- -------------------------------------- Accounting Officer)
William H. Stephan
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE HEALTHCARE BALTIMORE
LIMITED PARTNERSHIP
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
/s/ Stephen L. Guillard
By: ________________________________
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- --------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- --------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- -------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- -------------------------------------- Accounting Officer)
William H. Stephan
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE OF CLEVELAND LIMITED
PARTNERSHIP
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
/s/ Stephen L. Guillard
By: ________________________________
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- --------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- --------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- -------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- -------------------------------------- Accounting Officer)
William H. Stephan
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE OF DAYTON LIMITED
PARTNERSHIP
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
/s/ Stephen L. Guillard
By: ________________________________
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- --------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- --------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- -------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- -------------------------------------- Accounting Officer)
William H. Stephan
II-13
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE MASSACHUSETTS LIMITED
PARTNERSHIP
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
/s/ Stephen L. Guillard
By: ________________________________
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- --------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- --------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- -------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- -------------------------------------- Accounting Officer)
William H. Stephan
II-14
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE RHODE ISLAND LIMITED
PARTNERSHIP
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
/s/ Stephen L. Guillard
By: ________________________________
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- --------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- --------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- -------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- -------------------------------------- Accounting Officer)
William H. Stephan
II-15
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE NORTH TOLEDO LIMITED
PARTNERSHIP
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
/s/ Stephen L. Guillard
By: ________________________________
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- --------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- --------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- -------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- -------------------------------------- Accounting Officer)
William H. Stephan
II-16
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP IV
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
/s/ Stephen L. Guillard
By: ________________________________
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- --------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- --------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- -------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- -------------------------------------- Accounting Officer)
William H. Stephan
II-17
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP V
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
/s/ Stephen L. Guillard
By: ________________________________
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- --------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- --------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- -------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- -------------------------------------- Accounting Officer)
William H. Stephan
II-18
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP VI
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
/s/ Stephen L. Guillard
By: ________________________________
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- --------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- --------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- -------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- -------------------------------------- Accounting Officer)
William H. Stephan
II-19
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP VII
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
By: /s/ Stephen L. Guillard
----------------------------------
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- -------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- -------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- ------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- ------------------------------------- Accounting Officer)
William H. Stephan
II-20
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP VIII
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
By: /s/ Stephen L. Guillard
----------------------------------
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- -------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- -------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- ------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- ------------------------------------- Accounting Officer)
William H. Stephan
II-21
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP IX
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
By: /s/ Stephen L. Guillard
----------------------------------
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- -------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- -------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- ------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- ------------------------------------- Accounting Officer)
William H. Stephan
II-22
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE ACQUISITION LIMITED
PARTNERSHIP X
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
By: /s/ Stephen L. Guillard
----------------------------------
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- -------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- -------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- ------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- ------------------------------------- Accounting Officer)
William H. Stephan
II-23
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE REHABILITATION LIMITED
PARTNERSHIP
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
By: /s/ Stephen L. Guillard
----------------------------------
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- -------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- -------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- ------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- ------------------------------------- Accounting Officer)
William H. Stephan
II-24
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE HEALTHCARE NETWORK
LIMITED PARTNERSHIP
By: HARBORSIDE HEALTH I CORPORATION,
as General Partner
By: /s/ Stephen L. Guillard
----------------------------------
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- -------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- -------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- ------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- ------------------------------------- Accounting Officer)
William H. Stephan
II-25
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
BRIDGEWATER ASSISTED LIVING
LIMITED PARTNERSHIP
By: NEW JERSEY HARBORSIDE CORP.,
as General Partner
By: /s/ Stephen L. Guillard
----------------------------------
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- -------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- -------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- ------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- ------------------------------------- Accounting Officer)
William H. Stephan
II-26
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE TOLEDO LIMITED
PARTNERSHIP
By: HARBORSIDE TOLEDO CORP.,
as General Partner
By: /s/ Stephen L. Guillard
----------------------------------
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- -------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- -------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- ------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- ------------------------------------- Accounting Officer)
William H. Stephan
II-27
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
ORCHARD RIDGE NURSING CENTER
CORPORATION
By: /s/ Stephen L. Guillard
----------------------------------
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- -------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- -------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- ------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- ------------------------------------- Accounting Officer)
William H. Stephan
II-28
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
OAKHURST MANOR NURSING CENTER
CORPORATION
By: /s/ Stephen L. Guillard
----------------------------------
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- -------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- -------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- ------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- ------------------------------------- Accounting Officer)
William H. Stephan
II-29
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE TOLEDO CORPORATION
By: /s/ Stephen L. Guillard
----------------------------------
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- -------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- -------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- ------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- ------------------------------------- Accounting Officer)
William H. Stephan
II-30
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
KHI CORPORATION
By: /s/ Stephen L. Guillard
----------------------------------
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- -------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- -------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- ------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- ------------------------------------- Accounting Officer)
William H. Stephan
II-31
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
SAILORS, INC.
By: /s/ Stephen L. Guillard
----------------------------------
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- -------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- -------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- ------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- ------------------------------------- Accounting Officer)
William H. Stephan
II-32
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
NEW JERSEY HARBORSIDE CORPORATION
By: /s/ Stephen L. Guillard
----------------------------------
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- -------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- -------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- ------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- ------------------------------------- Accounting Officer)
William H. Stephan
II-33
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
MARYLAND HARBORSIDE CORPORATION
By: /s/ Stephen L. Guillard
----------------------------------
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- -------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- -------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- ------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- ------------------------------------- Accounting Officer)
William H. Stephan
II-34
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
HARBORSIDE HEALTH I CORPORATION
By: /s/ Stephen L. Guillard
----------------------------------
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- -------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- -------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- ------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- ------------------------------------- Accounting Officer)
William H. Stephan
II-35
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on September , 1998.
BELMONT NURSING CENTER CORPORATION
By: /s/ Stephen L. Guillard
----------------------------------
Stephen L. Guillard
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen L. Guillard and William H. Stephan, and
each of them, with full power to act without the other, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said attorney-
in-fact and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September , 1998.
SIGNATURE TITLE
/s/ Christopher J. O'Brien Director
- -------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director
- -------------------------------------
Charles J. Philippin
/s/ Stephen L. Guillard President and Director (Principal
- ------------------------------------- Executive Officer)
Stephen L. Guillard
/s/ William H. Stephan Treasurer (Principal Financial and
- ------------------------------------- Accounting Officer)
William H. Stephan
II-36
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
1.1 Placement Agreement, dated July 29, 1998, between the Issuer (as
successor to MergerCo) and the Placement Agents
1.2 Registration Rights Agreement, dated July 31, 1998, between the
Issuer (as successor to MergerCo) and the Placement Agents, relating
to the Old Notes
1.3 Registration Rights Agreement, dated July 31, 1998, between the
Issuer (as successor to MergerCo) and the Placement Agents, relating
to the Old Preferred Stock
1.4+ Form of Letter of Transmittal
2.1** Agreement and Plan of Merger dated as of April 15, 1998
2.2** Stockholder Agreement dated as of April 15, 1998
3.1.1** Amended and Restated Certificate of Incorporation of the Issuer
3.1.2 Certificate of Designation of the Issuer with respect to the
Exchangeable Preferred Stock
3.1.3** Amended and Restated By-laws of the Issuer
3.2.1+ Form of Certificate of Incorporation of other registrants
3.2.2+ Form of By-laws of other registrants
4.1 Indenture between MergerCo and the Trustee, dated as of July 31,
1998, with respect to the Notes
4.2 Supplemental Indenture between the Issuer, the Guarantors and the
Trustee, dated as of August 11, 1998
4.3 Form of New Note (included as Exhibit A to Exhibit 4.2)
4.4 Registration Rights Agreement, dated July 31, 1998, between the
Issuer (as successor to MergerCo) and the Placement Agents, relating
to the Old Notes (filed as Exhibit 1.2)
4.5 Certificate of Designation of the Issuer with respect to the
Exchangeable Preferred Stock (filed as Exhibit 3.1.2)
4.6+ Form of Stock Certificate representing New Preferred Stock
4.7 Registration Rights Agreement, dated July 31, 1998, between the
Issuer (as successor to MergerCo) and the Placement Agents, relating
to the Old Preferred Stock (filed as Exhibit 1.3)
4.8 Form of Letter of Transmittal (filed as Exhibit 1.4)
5.1+ Opinion of Gibson, Dunn & Crutcher LLP as to legality of shares
10.1(a)* Facility lease Agreement, dated as of December 31, 1995 between
Meditrust Tri-States, Inc. and HHCI Limited Partnership (New Haven
Facility)
10.1(b)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust Tri-States, Inc. and HHCI Limited Partnership (Indianapolis
Facility)
10.1(c)* Facility Lease Agreement, dated as of December 31, 1995 between
Meditrust of Ohio, Inc. and HHCI Limited Partnership (Troy Facility)
10.1(d)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust of Florida, Inc. and HHCI Limited Partnership (Sarasota
Facility)
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.1(e)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust of Florida, Inc. and HHCI Limited Partnership (Pinebrook
Facility)
10.1(f)* Facility Lease Agreement, dated as of December 31, 1995 between
Meditrust of Florida, Inc. and HHCI Limited Partnership (Naples
Facility)
10.1(g)* Facility Lease Agreement, dated as of December 31, 1995 between
Meditrust of New Jersey, Inc. and HHCI Limited Partnership (Woods
Edge Facility)
10.1(h)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust Tri-States, Inc. and HHCI Limited
Partnership (New Haven Facility)
10.1(i)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust Tri-States, Inc. and HHCI Limited
Partnership (Indianapolis Facility)
10.1(j)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of Ohio, Inc. and HHCI Limited
Partnership (Troy Facility)
10.1(k)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of Florida, Inc. and HHCI Limited
Partnership (Sarasota Facility)
10.1(l)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of Florida, Inc. and HHCI Limited
Partnership (Pinbrook Facility)
10.1(m)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of Florida, Inc. and HHCI Limited
Partnership (Naples Facility)
10.1(n)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Jersey, Inc. and HHCI Limited
Partnership (Woods Edge Facility)
10.2(a)* Loan Agreement among Meditrust Mortgage Investments, Inc. and Bay
Tree Nursing Center Corporation, Belmont Nursing Center Corporation,
Countryside Care Center Corporation, Oakhurst Manor Nursing Center
Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point
Nursing Center Corporation, Weset Bay Nursing Center Corporation and
Harborside Healthcare Limited Partnership, dated October 13, 1994
10.2(b)* Guaranty, dated October 14, 1994 to Meditrust Mortgage Investments,
Inc. from Harborside Healthcare Limited Partnership
10.2(c)* Environmental Indemnity Agreement, dated October 13, 1994, by and
among Bay Tree Nursing Center Corporation, Belmont Nursing Center
Corporation, Countryside Care Center Corporation, Oakhurst Manor
Nursing Center Corporation, orchard Ridge Nursing Center Corporation,
Sunset Point Nursing Center Corporation, West Bay Nursing Center
Corporation and Harborside Healthcare Limited Partnership and
Meditrust Mortgage Investments, Inc.
10.2(d)* Consolidated and Renewal Promissory Noted, dated October 13, 1994,
from Bay Tree Nursing Center Corporation, Belmont Nursing Center
Corporation, Countryside Care Center Corporation, Oakhurst Manor
Nursing Center Corporation, orchard Ridge Nursing Center Corporation,
Sunset Point Nursing Center Corporation, West Bay Nursing Center
Corporation and Harborside Healthcare Limited Partnership and
Meditrust Mortgage Investments, Inc.
10.2(e)* Negative Pledge Agreement, dated October 13, 1994, by and among
Douglas Krupp, George Krupp, Bay Tree Nursing Center Corporation,
Belmont Nursing Center Corporation, Countryside Care Center
Corporation, Oakhurst Manor Nursing Center Corporation, orchard Ridge
Nursing Center Corporation, Sunset Point Nursing Center Corporation,
West Bay Nursing Center Corporation and Harborside Healthcare Limited
Partnership and Meditrust Mortgage Investments, Inc.
2
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.2(f)* Affiliated Party Subordination Agreement, dated October 13, 1994,
by and among Bay Tree Nursing Center Corporation, Belmont Nursing
Center Corporation, Countryside Care Center Corporation, Oakhurst
Manor Nursing Center Corporation, orchard Ridge Nursing Center
Corporation, Sunset Point Nursing Center Corporation, West Bay
Nursing Center Corporation and Harborside Healthcare Limited
Partnership and Meditrust Mortgage Investments, Inc.
10.2(g)* First Amendment to Loan Agreement, dated May 17, 1996 by and among
Meditrust Mortgage Investments, Inc. and Bay Tree Nursing Center
Corporation, Belmont Nursing Center Corporation, Countryside Care
Center Corporation, Oakhurst Manor Nursing Center Corporation,
orchard Ridge Nursing Center Corporation, Sunset Point Nursing
Center Corporation, West Bay Nursing Center Corporation and
Harborside Healthcare Limited Partnership
10.2(h)* Credit Agreement, dated as of April 14, 1997, among Harborside
Healthcare Corporation and the other Borrowers specified therein,
the Lenders party thereto and the Chase Manhattan Bank, as
Administrative Agent
10.2(i)*** First Amendment to Revolving Credit Agreement among Harborside
Healthcare and other borrowers specified therein, the Lenders party
thereto and Chase Manhattan Bank, Administrative Agent, dated as of
August 1, 1997
10.2(j)*** Second Amendment to Revolving Credit Agreement among Harborside
Healthcare and other borrowers specified therein, the Lenders party
thereto and Chase Manhattan Bank, Administrative Agent, dated as of
August 28, 1997
10.3(a)* Facility Lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire Inc. and Harborside New Hampshire
Limited Partnership (Westwood Facility)
10.3(b)* Facility Lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire Inc. and Harborside New Hampshire
Limited Partnership (Pheasant Wood Facility)
10.3(c)* Facility Lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire Inc. and Harborside New Hampshire
Limited Partnership (Crestwood Facility)
10.3(d)* Facility Lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire Inc. and Harborside New Hampshire
Limited Partnership (Milford Facility)
10.3(e)* Facility Lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire Inc. and Harborside New Hampshire
Limited Partnership (Applewood Facility)
10.3(f)* Facility Lease Agreement, dated as of December 31, 1996 between
Meditrust of New Hampshire Inc. and Harborside New Hampshire
Limited Partnership (Northwood Facility)
10.3(g)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and
Harborside New Hampshire Limited Partnership (Westwood Facility)
10.3(h)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and
Harborside New Hampshire Limited Partnership (Pheasant Wood
Facility)
10.3(i)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and
Harborside New Hampshire Limited Partnership (Crestwood Facility)
3
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.3(j)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and Harborside
New Hampshire Limited Partnership (Milford Facility)
10.3(k)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and Harborside
New Hampshire Limited Partnership (Applewood Facility)
10.3(l)* First Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of New Hampshire, Inc. and Harborside
New Hampshire Limited Partnership (Northwood Facility)
10.4(a)* Facility Lease Agreement, dated as of March 31, 1995 between
Meditrust of Ohio, Inc. and Harborside of Toledo Limited Partnership
(Swanton Facility)
10.4(b)* First Amendment of Facility Lease Agreement, dated as of December 31,
1995, by and between Harborside Toledo Limited Partnership and
Meditrust of Ohio, Inc. (Swanton Facility)
10.4(c)* Second Amendment to Facility Lease Agreement, dated as of May 17,
1996, by and between Meditrust of Ohio, Inc. and Harborside Toledo
Limited Partnership (Swanton Facility)
10.5* Amended and Restated Agreement of Limited Partnership of Bowie Center
Limited Partnership, dated April 7, 1993
10.6* Agreement of Lease, dated March 16, 1993, between Bryan Nursing Home,
Inc. and Harborside of Ohio Limited Partnership (Defiance and
Northwestern Ohio Facilities)
10.7* First Amendment to Agreement of Lease, dated June 1, 1993, by and
between Bryan Nursing Home, Inc. and Harborside Ohio Limited
Partnership
10.8* Option to purchase Agreement, dated March 16, 1993, by and between
Bryan Nursing Home, Inc. and Harborside Ohio Limited Partnership
10.9(a)* Lease, dated September 30, 1994, between Rockledge T. Limited
Partnership and Harborside of Florida Limited Partnership (Brevard
Facility)
10.9(b)* Lease Guaranty, dated September 30, 1994, between Rockledge T.
Limited Partnership from Harborside Healthcare Limited Partnership
10.9(c)* Indemnity Agreement, dated September 30, 1994, between Rockledge T.
Limited Partnership, Harborside of Florida Limited Partnership,
Harborside Healthcare Limited Partnership and Southtrust Bank of
Alabama
10.9(d)* Assignment and Security Agreement, dated September 30, 1994, between
Rockledge T. Limited Partnership, Harborside of Florida Limited
Partnership and Southtrust Bank of Alabama
10.9(e)* Subordination Agreement (Lease), dated September 30, 1994, between
Rockledge T. Limited Partnership, Harborside of Florida Limited
Partnership and Southtrust Bank of Alabama
10.9(f)* Subordination Agreement (Management), dated September 30, 1994, by
and among Rockledge T. Limited Partnership, Harborside of Florida
Limited Partnership, Harborside Healthcare Limited Partnership and
Southtrust Bank of Alabama
10.10(a) Employment Agreement, dated as of August 11, 1998, between the Issuer
and Stephen L. Guillard
4
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.10(b) Employment Agreement, dated as of August 11, 1998, between the
Issuer and Damian Dell'Anno
10.10(c) Employment Agreement, dated as of August 11, 1998, between the
Issuer and Bruce Beardsley
10.10(d) Employment Agreement, dated as of August 11, 1998, between the
Issuer and William Stephan
10.10(e) Employment Agreement, dated as of August 11, 1998, between the
Issuer and Steven Raso
10.11(a) Management Stock Incentive Plan, established by the Issuer as of
August 11, 1998
10.11(b) Form of Stock Option Agreement pursuant to Management Stock
Incentive Plan
10.12(a)* 1996 Long-Term Stock Incentive Plan
10.12(b)* Form of Nonqualified Stock Option Agreement pursuant to the 1996
Long-Term Stock Incentive Plan
10.13 Form of Put/Call Agreement dated August 11, 1998 between the Issuer
and each of Messrs. Guillard, Dell'Anno, Beardsley, Stephan and Raso
10.14* Supplemental Executive Retirement Plan of the Issuer
10.15* Administrative Services Agreement dated April 15, 1988 between the
Issuer and The Berkshire Companies Limited Partnership ("BCLP")
10.16* Agreement to Lease, dated as of May 3, 1996 among Westbay Manor
Company, Westbay Manor II Development Company, royal View Manor
Development Company, Beachwood Care Center Limited Partnership,
Royalview Manor Company, Harborside Health I Corporation and
Harborside Healthcare Limited Partnership
10.17* Guaranty by Harborside in favor of Westbay Manor Company, Westbay
Manor II Development Company, Royalview Manor Development Company
and Beachwood Care Center Limited Partnership
10.18+ Master Rights Agreement, dated as of August 11, 1998, by and among
the Issuer, BCLP, certain affiliates of BCLP and the New Investors
10.19 Credit Agreement, dated as of August 11, 1998, among the Issuer,
Chase Securities, Inc., as Arranger, Morgan Stanley Senior Funding,
Inc. and BT Alex. Brown Incorporated, as Co-Arrangers, Bankers Trust
Company, as Documentation Agent, Morgan Stanley Senior Funding,
Inc., as Syndication Agent, The Chase Manhattan Bank, as
Administrative Agent, and the lenders party thereto (the "Lenders")
10.20 Collateral Agreement, dated as of August 11, 1998, in favor of The
Chase Manhattan Bank, as administrative agent, together with the
Lenders
10.21 HHC 1998-1 Trust Credit Agreement, $238,125,000 Credit Facility,
dated as of August 11, 1998, among the Issuer, Chase Securities
Inc., as Arranger, Morgan Stanley Senior Funding, Inc. and BT Alex.
Brown Incorporated, as Co-Arrangers, Bankers Trust Company, as
Documentation Agent, Morgan Stanley Senior Funding, Inc., as
Syndication Agent, The Chase Manhattan Bank, as Administrative
Agent, and the lenders party thereto
10.22 Participation Agreement, dated as of August 11, 1998, among
Harborside of Dayton Limited Partnership, as Lessee, HHC 1998-1
Trust, as Lessor, Wilmington Trust Company, BTD Harborside Inc.,
Morgan Stanley Senior Funding, Inc. and CSL Leasing, Inc., as
Investors, The Chase Manhattan Bank, as Agent, and the lenders party
thereto
5
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.23+ Lease, dated August 11, 1998, between HHC 1998-1 Trust, as Lessor,
and Harborside of Dayton Limited Partnership, as Lessee
10.24+ Accounts Receivable Intercreditor Agreement (Leased Facilities),
dated as of August 11, 1998, among (i) The Chase Manhattan Bank, as
administrative agent, (ii) HHC 1998-1 Trust, (iii) CSL Leasing,
Inc., BTD Harborside, Inc. and Morgan Stanley Senior Funding, Inc.
and (iv) Meditrust Company LLC
10.25+ Accounts Receivable Intercreditor Agreement (Mortgaged Facilities),
dated as of August 11, 1998, among (i) The Chase Manhattan Bank, as
administrative agent, (ii) HHC 1998-1 Trust, (iii) CSL Leasing,
Inc., BTD Harborside, Inc. and Morgan Stanley Senior Funding, Inc.
and (iv) Meditrust Mortgage Investments, Inc.
10.26 Financing Advisory Agreement, dated August 11, 1998, between the
Issuer (as successor to MergerCo) and III
10.27 Agreement for Management Advisory, Strategic Planning and Consulting
Services, dated August 11, 1998, between the Issuer (as successor to
MergerCo) and III
10.28+ Stand-by Commitment Letter of Invifin S.A.
12 Statement re: Computation of Ratio of Earnings to Fixed Charges
21.1**** Subsidiaries of the Issuer
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Cummins, Krasik & Hohl Co.
23.3 Consent of Landa & Altsher, P.C.
23.4 Consent of Gibson, Dunn & Crutcher LLP (contained in Exhibit 5.1)
24.1 Powers of Attorney (included on signature pages of Registration
Statement)
25+ Statement of Eligibility of Trustee
- --------
* Incorporated by reference to the Issuer's Registration Statement on Form S-
1 (Registration No. 333-3096)
** Incorporated by reference to the Issuer's Registration Statement on Form S-
4 (Registration No. 333-51633)
*** Incorporated by reference to the Issuer's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 (File No. 01-14538)
**** Incorporated by reference to the Issuer's Annual Report on Form 10-K for
the year ended December 31, 1997 (File No. 01-14358)
+ To be filed by amendment
6