<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For The Quarter Ended September 30, 1997
--------------------------------
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For The Transition Period from ______to______
Commission File Number 0-22261
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LEXINGTON HEALTHCARE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1468252
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
35 Park Place, New Britain, CT 06052
- ------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 860-223-6902
------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __ No X
--
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: November 12, 1997 4,125,000
Common Shares outstanding
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC.
SEPTEMBER 30, 1997 FORM 10-Q
INDEX
<TABLE>
<CAPTION>
<S> <C>
Part I -- Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- September 30, 1997 and
June 30, 1997........................................................ Pg. 3.
Condensed Consolidated Statements of Operations -- Three months
ended September 30, 1997 and 1996................................... Pg. 4.
Condensed Consolidated Statements of Cash Flows -- Three months
ended September 30, 1997 and 1996................................... Pg. 5.
Notes to Condensed Consolidated Financial Statements................ Pg. 6-8.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... Pg. 9-12.
Part II -- Other Information.
Item 1. Legal Proceedings................................................... Pg. 13.
Item 2. Changes in Securities............................................... Pg. 13.
Item 3. Defaults Upon Senior Securities..................................... Pg. 13.
Item 4. Submission of Matters to a Vote of Security Holders................. Pg. 13.
Item 5. Other Information................................................... Pg. 13.
Item 6. Exhibits and Reports on Form 8-K.................................... Pg. 13.
Signatures................................................................... Pg. 13.
</TABLE>
2
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
(UNAUDITED)
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<S> <C> <C>
<CAPTION>
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents...................................................... $ 1,080,000 $ 1,000,000
Accounts and note receivable, net.............................................. 8,021,000 6,541,000
Estimated third-party payor settlements-Medicaid............................... -- 278,000
Inventories.................................................................... 448,000 403,000
Bed licenses held for sale..................................................... 1,500,000 --
Prepaid expenses and other current assets...................................... 619,000 418,000
------------- -------------
Total current assets....................................................... 11,668,000 8,640,000
LAND, BUILDINGS, EQUIPMENT & LEASEHOLD
IMPROVEMENTS, net.................................................................. 2,461,000 814,000
OTHER ASSETS
Goodwill, net.................................................................. 3,234,000 3,275,000
Security deposits.............................................................. 2,346,000 2,282,000
Bed licenses, net.............................................................. 1,487,000 --
Operating subsidy receivable (less current portion)............................ 755,000 --
Other assets, net.............................................................. 284,000 260,000
Residents' funds............................................................... 245,000 161,000
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8,351,000 5,978,000
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$ 22,480,000 $ 15,432,000
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<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses.......................................... $ 7,152,000 $ 7,737,000
Estimated third-party payor settlements-Medicare & Medicaid.................... 729,000 323,000
Notes and capital leases payable (current portion)............................. 139,000 89,000
Income taxes payable........................................................... 217,000 204,000
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Total current liabilities.................................................. 8,237,000 8,353,000
OTHER LIABILITIES
Mortgage note payable (less current portion)................................... 6,782,000 --
Deferred rent.................................................................. 403,000 416,000
Residents' funds payable....................................................... 245,000 161,000
Notes and capital leases payable (less current portion)........................ 97,000 107,000
Deferred taxes................................................................. 42,000 --
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7,569,000 684,000
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Total liabilities.......................................................... 15,806,000 9,037,000
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STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share, authorized 15,000,000 shares, issued
and outstanding 4,125,000 shares............................................. 41,000 41,000
Additional paid-in capital..................................................... 6,168,000 6,168,000
Retained earnings.............................................................. 465,000 186,000
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Total stockholders' equity................................................. 6,674,000 6,395,000
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$ 22,480,000 $ 15,432,000
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------------- -------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
(UNAUDITED) (UNAUDITED)
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<S> <C> <C>
REVENUES
Net patient service revenue...................................................... $ 13,815,000 $ 8,563,000
Other revenue.................................................................... 116,000 56,000
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Total revenues............................................................... 13,931,000 8,619,000
EXPENSES
Facility operating expenses:
Salaries and benefits.......................................................... 10,161,000 6,445,000
Food, medical and other supplies............................................... 1,158,000 739,000
Other operating expenses....................................................... 1,445,000 1,340,000
Corporate, general and administrative expenses................................... 503,000 106,000
Interest expense................................................................. 180,000 26,000
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Total expenses............................................................... 13,447,000 8,656,000
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Income (loss) before income taxes................................................ 484,000 (37,000)
INCOME TAXES......................................................................... 205,000 --
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Net income (loss)................................................................ $ 279,000 $ (37,000)
------------- ------------
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Net income (loss) per common share............................................... $ 0.07 $ (0.01)
Weighted average number of common shares outstanding............................. 4,125,000 2,592,000
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
(UNAUDITED) (UNAUDITED)
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................................... $ 279,000 $ (37,000)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities........................................................................ 142,000 (58,000)
Changes in operating assets and liabilities......................................... (169,000) 1,315,000
------------ -----------
Net cash provided by operating activities....................................... 252,000 1,220,000
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in security deposits....................................................... (64,000) --
Acquisition of fixed assets......................................................... (67,000) --
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Net cash used in investing activities........................................... (131,000) --
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of note payable............................................................ -- 500,000
Repayments of notes payable......................................................... (34,000) (1,466,000)
Repayments of capital lease obligations............................................. (7,000) (5,000)
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Net cash used by financing activities........................................... (41,000) (971,000)
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NET INCREASE IN CASH AND CASH EQUIVALENTS............................................. 80,000 249,000
CASH AND CASH EQUIVALENTS, beginning of year.......................................... 1,000,000 212,000
------------ -----------
CASH AND CASH EQUIVALENTS, end of year................................................ $ 1,080,000 $ 461,000
------------ -----------
------------ -----------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Certain assets acquired through assumption of mortgage note payable................. $ 6,863,000 $ --
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
5
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to September 30, 1997 and
for the three months ended September 30, 1997 and 1996 is unaudited)
NOTE A - THE COMPANY
The consolidated financial statements include the accounts of Lexington
Healthcare Group, Inc. and all of its wholly-owned subsidiaries: Balz Medical
Services, Inc. ("BALZ"), Professional Relief Nurses, Inc. ("PRN" ), LEV Rehab
Services, Inc. ("LEV"), and Lexington Highgreen Holding, Inc. (collectively, the
"Company"). All material intercompany balances and transactions have been
eliminated in consolidation.
The Company is a long-term and subacute care provider which operates six nursing
home facilities at September 30, 1997 with 853 beds licensed by the State of
Connecticut. BALZ provides medical supplies and durable medical equipment to
nursing homes ; PRN provides health care services in the homes of its patients.
(NOTE B) - BASIS OF PRESENTATION
The financial information included herein is unaudited and presented on a
condensed basis; however, the information reflects all adjustments (consisting
solely of normal recurring adjustments) that are, in the opinion of management,
necessary to present fairly the financial position, results of operations, and
cash flows for the interim periods presented although the results shown for the
interim periods presented herein are not necessarily indicative of the results
to be obtained for a full fiscal year. The condensed balance sheet data as of
June 30, 1997 is derived from audited financial statements; certain line items
have been combined or condensed in their presentation herein.
Inventories consisting of food, chemicals and supplies are valued at the lower
of cost or market, with cost determined on a first-in, first-out (FIFO) basis.
NOTE C - REORGANIZATION, PUBLIC STOCK OFFERING AND ACQUISITIONS
Lexington Healthcare Group, Inc. was incorporated in 1996. It completed an
initial public offering of its common stock in May, 1997 during which 1,125,000
shares of common stock at $5 per share and 1,940,625 common stock warrants at
$.10 per warrant were issued resulting in net proceeds to the Company of $4.1
million. Upon completion of this offering, the Company became the successor to
Lexington Health Care Group, LLC, a limited liability company ("LLC"). The
business combination was accounted for as a reorganization of entities under
common control, in a manner similar to a pooling of interests, using LLC's
historical cost basis.
6
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to September 30, 1997 and
for the three months ended September 30, 1997 and 1996 is unaudited)
NOTE C - REORGANIZATION, PUBLIC STOCK OFFERING AND ACQUISITIONS (Continued)
Accordingly, the accompanying condensed consolidated financial statements for
the period prior to the reorganization reflect the accounts and operations of
LLC and adjustment has been made to give effect to the reorganization resulting
in the restatement of certain stockholders' equity accounts.
The Company acquired in May 1997, simultaneously with the closing of the public
offering, all of the common stock of BALZ and PRN. On the basis of a pro forma
consolidation of the results of operations as if these acquisitions had taken
place at the beginning of fiscal year 1997, consolidated total revenues would
have been $10.0 million for the three months ended September 30, 1996.
Nursing Home Acquisitions
On July 1, 1997, Lexington Highgreen Holding, Inc. (a wholly-owned subsidiary of
Lexington Healthcare Group, Inc.) purchased substantially all of the assets of
two skilled nursing facilities in Connecticut, Greenwood Health Center and
Highland Acres Extend-a-Care Center from Beverly Enterprises, Inc. ("Beverly").
Before the sale of the two nursing facilities, Beverly had operated 315 licensed
beds at these two facilities. The Company will operate 225 beds; it has an
agreement with an unrelated party to sell 50 beds for approximately $1,500,000
and has returned 40 beds to the State of Connecticut.
The entire transaction was financed by a $6.8 million mortgage. Beverly has
agreed to pay a $2.5 million operating subsidy to the Company over five years,
bringing the net cost of the transaction to the Company to $4.3 million.
On the basis of a pro forma consolidation of the results of operations as if the
acquisitions had taken place at the beginning of fiscal year 1997, consolidated
net revenues would have been $11,943,000 for the first three months of fiscal
1997. Consolidated pro forma net loss would have been $(521,000) in the first
three months of fiscal 1997, and pro forma net loss per share would have been
$(.20) for the first three months of fiscal 1997. Such pro forma amounts reflect
the operating results produced by Beverly and are not necessarily indicative of
what the actual consolidated results of operations might have been had the
acquisitions been effective at the beginning of fiscal 1997.
7
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to September 30, 1997 and
for the three months ended September 30, 1997 and 1996 is unaudited)
NOTE D - RECENTLY ISSUED ACCOUNTING STANDARDS; EARNINGS PER SHARE
The Company has not yet adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share". The objective of SFAS No. 128 is to
simplify the standards for computing earnings per share (EPS) and make them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. SFAS No. 128 is effective for
periods ending after December 15, 1997, including interim periods; earlier
application is not permitted. The Company does not expect implementation of SFAS
No. 128 to have any impact on its calculation of EPS.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
In May 1997, the Company reorganized its capital structure and completed an
initial public stock offering (the "Offering") which raised net proceeds of
approximately $4.1 million. In connection with the Offering, the Company
acquired two healthcare businesses - a medical supplies company and a home
health agency. In the quarter ended September 30, 1997, the Company expanded its
nursing home operations with two additional facilities, which were acquired on
July 1, 1997.
The Company believes that the demand for long-term care and specialty medical
services will increase substantially over the next decade due primarily to
favorable demographic trends, advances in medical technology and emphasis on
healthcare cost containment. At the same time, government restrictions and high
construction and start-up costs are expected to limit the supply of long-term
care facilities. In addition, the Company anticipates that recent trends toward
industry consolidation will continue and will provide future acquisition
opportunities.
The Company's operating strategy is to increase Facility profitability levels,
through aggressive marketing and by offering rehabilitation therapies and other
specialized services; adhering to strict cost standards at the Facility level
while providing effective patient care and containing corporate overhead
expenses; and becoming a fully integrated health network whereby the Company
will market medical products and supplies, rehabilitative services,
institutional pharmaceutical services and nursing services to affiliated and
non-affiliated nursing homes and hospitals, as well as patients at home.
By concentrating its facilities and ancillary service operations within a
selected geographic region, the Company's strategy is to achieve operating
efficiencies through economies of scale, reduced corporate overhead, more
effective management supervision and financial controls. In addition, the
Company believes that geographic concentration also enhances the Company's
ability to establish more effective relationships with referral sources and
regulatory authorities in the states where the Company operates. The Company's
strategy is to gradually expand services into additional states including
Massachusetts and New Jersey.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three months ended September 30, 1997 ("1997 period") vs. three months ended
September 30, 1996 ("1996 period")
For the three months ended September 30, 1997, the Company had total revenues
of $13,931,000 and total expenses of $13,447,000. For the three months ended
September 30, 1996, the Company had total revenues of $8,619,000 and total
expenses of $8,656,000
The Company had net income of $279,000 or $.07 per share for the three months
ended September 30, 1997 after providing for income taxes of $205,000. The
Company had a net loss of ($37,000) or ($.01) per share for the three months
ended September 30, 1996.
For the three months ended September 30, 1997 expenses consisted of salaries and
benefits of $10,161,000, food, medical and other supplies of $1,158,000, other
operating expenses (including rent of $635,000) of $1,445,000, corporate,
general and administrative expenses of $503,000 and interest expense of
$180,000.
Revenues in the 1997 period increased over the 1996 period by $5,312,000 or 62%,
largely as a result of the acquisitions during May 1997 and July 1997. Of the
total increase, $4,637,000 pertained to the nursing homes and healthcare
businesses acquired and $675,000 was from increased rates, mix changes and
higher occupancy (4% increase) in the existing nursing facilities including
$60,000 in other income.
Operating expenses in the 1997 period increased over the 1996 period by
$4,791,000 or 55%, largely as a result of the acquisitions noted above. Of the
total cost increase, $4,303,000 pertained to the nursing homes and healthcare
businesses acquired and $488,000 was from increased existing-facility and
corporate, general and administrative costs. The increase in existing nursing
home costs was attributable to higher salaries and benefits including additional
nursing, dietary, and housekeeping staffing (as a result of higher occupancy and
wage increases), higher therapy costs and occupancy-driven higher operating
expenses. Interest increased by $154,000 mostly as a result of the new mortgage
on the facilities acquired in July.
Income taxes were provided in the 1997 period on pre-tax income of $484,000; the
combined federal and state effective tax rate was 42%. No income taxes were
provided in the 1996 period since there was a loss and the Company was operated
as an LLC at that time.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Since its formation in 1995, the Company has primarily financed its operations
through operating revenues, borrowings from the prior operator of the Facilities
and other private lenders (including stockholders), by financing its accounts
receivable, and through a public offering of its common stock which raised net
proceeds of approximately $4.1 million.
In July 1997, the Company borrowed $6.8 million in connection with the
acquisition of land, buildings, bed licenses and operating assets of the two
nursing homes acquired. Interest is payable at 10% over the 20 year term of the
mortgage. In connection with the acquisitions, the Company also received an
operating subsidy of $2.5 million payable over five years.
In August 1997, the Company obtained a $2,000,000 revolving line of credit (at
prime plus .50%) from a bank, which is secured by its accounts receivable and
other assets. Through September 30, 1997 this line of credit had not been
utilized, but it has subsequently been utilized in November, 1997 with a
borrowing of $1,000,000 for working capital purposes.
During the three months ended September 30, 1997, the Company expended
approximately $67,000 in capital improvements at its leased Facilities. Any
capital improvements made to the Facilities belong to the landlord. However, any
amounts expended for capital improvements are generally recouped in their
entirety through the reimbursement system.
At September 30, 1997, the Company had cash and cash equivalents of $1,080,000,
receivables of $8,021,000, inventories of $448,000 and prepaid expenses and
other current assets of $619,000. At September 30,1997 the Company had $1.5
million in acquisition costs associated with bed licenses which are under
contract for sale in November, 1997. Accounts receivable increased by $1,202,000
since June 30, 1997 due mostly to the nursing homes acquired in July.
Working capital at September 30, 1997 was $3,431,000 as compared with working
capital of $287,000 at June 30, 1997. The principal reasons for the increase are
profitable operations in the first quarter of the year, the bed license to be
sold, and the operating subsidy receivable obtained in connection with the
nursing home acquisitions. Current liabilities at September 30, 1997 consist
principally of trade accounts payable, estimated third-party settlements due
Medicare and Medicaid, notes and capital leases payable, accrued payroll and
related taxes, income taxes, and other accrued expenses.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This quarterly report contains certain forward-looking statements regarding the
Company, its business prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements.
Factors that may affect such forward-looking statements include, without
limitations: the Company's ability to successfully and timely develop and
finance new projects, the impact of competition on the Company's revenues, and
changes in reimbursement rates, patient mix, and demand for the Company's
services.
When used, words such as "believes," "anticipates," "expects," "intends" and
similar expressions are intended to identify forward-looking statements, but are
not the exclusive means of identifying forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. The Company undertakes no obligation
to revise any forward-looking statements in order to reflect events or
circumstances that may subsequently arise.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report, news releases, and other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
NONE
Item 2. Change in Securities
--------------------
NONE
Item 3. Defaults Upon Senior Securities
-------------------------------
NONE
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
NONE
Item 5. Other Information
-----------------
NONE
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
The following reports were filed during the quarter ended September 30, 1997:
July 15, 1997 Acquisition of Greenwood and Highland nursing facilities
August 29, 1997 Change in Accountants
September 24, 1997 Change in Accountants, Response of Prior Accounting Firm
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Harry Dermer
--------------------------
(Harry Dermer, President)
(Duly Authorized Officer)
Date November 13, 1997 /s/ Thomas E. Dybick
--------------------------
(Thomas E. Dybick, Chief Financial Officer)
(Principal Financial Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
company's September 30, 1997 condensed consolidated balance sheets, condensed
consolidated summary of operations and condensed consolidated statement of
cash flows of Lexington Health Group, Inc.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,080
<SECURITIES> 0
<RECEIVABLES> 8,021
<ALLOWANCES> 0
<INVENTORY> 448
<CURRENT-ASSETS> 11,668
<PP&E> 2,461
<DEPRECIATION> 0
<TOTAL-ASSETS> 22,480
<CURRENT-LIABILITIES> 8,237
<BONDS> 0
0
0
<COMMON> 41
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,480
<SALES> 13,931
<TOTAL-REVENUES> 13,931
<CGS> 0
<TOTAL-COSTS> 13,447
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 484
<INCOME-TAX> 205
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 279
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
