SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For The Transition Period from ______to______
Commission File Number 0-22261
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LEXINGTON HEALTHCARE GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1468252
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
1577 New Britain Avenue, Farmington, CT 06032
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 860-674-2700
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
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, 1999 3,525,000 Shares of
Common Stock outstanding
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC.
SEPTEMBER 30, 1999 FORM 10-Q
INDEX
Part I -- Financial Information
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets -- September 30, 1999
and June 30, 1999..............................................Pg.3.
Condensed Consolidated Statements of Operations -- Three months
ended September 30, 1999 and 1998..............................Pg.4.
Condensed Consolidated Statements of Cash Flows -- Three months
ended September 30, 1999 and 1998..............................Pg.5.
Notes to Condensed Consolidated Financial Statements.........Pg.6-9.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................Pg.10-14.
Part II -- Other Information.
Item 1. Legal Proceedings.............................................Pg.15.
Item 2. Changes in Securities.........................................Pg.15.
Item 3. Defaults Upon Senior Securities...............................Pg.15.
Item 4. Submission of Matters to a Vote of Security Holders...........Pg.16.
Item 5. Other Information.............................................Pg.16.
Item 6. Exhibits and Reports on Form 8-K..............................Pg.16.
Signatures................................................................Pg.16.
Page 2.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
(Unaudited)
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,454,000 $ 3,675,000
Accounts receivable, net of allowance for doubtful
accounts of $868,000 and $848,000, respectively 13,533,000 16,092,000
Inventories 1,141,000 1,058,000
Prepaid expenses and other current assets 1,041,000 1,031,000
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Total current assets 17,169,000 21,856,000
PROPERTY, EQUIPMENT & LEASEHOLD
IMPROVEMENTS, net 4,363,000 4,147,000
OTHER ASSETS
Goodwill, net 2,971,000 3,013,000
Security deposits - related parties 2,337,000 2,337,000
Security deposits - other 945,000 371,000
Bed licenses, net 1,481,000 1,510,000
Operating subsidy receivable (less current portion) 518,000 555,000
Other assets, net 85,000 91,000
Residents' funds 481,000 403,000
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8,818,000 8,280,000
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$ 30,350,000 $ 34,283,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 10,561,000 $ 13,473,000
Due to SunBridge - purchased receivables 2,582,000 2,582,000
Estimated third-party payor settlements 678,000 939,000
Notes and capital leases payable (current portion) 2,908,000 3,867,000
Income taxes payable 40,000 40,000
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Total current liabilities 16,769,000 20,901,000
OTHER LIABILITIES
Notes and capital leases payable (less current portion) 7,817,000 7,768,000
Deferred rent 299,000 314,000
Residents' funds payable 481,000 403,000
Other liabilities 120,000 120,000
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8,717,000 8,605,000
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Total liabilities 25,486,000 29,506,000
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MINORITY INTEREST 602,000 545,000
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share, authorized
15,000,000 shares, issued 4,125,000 shares 41,000 41,000
Additional paid-in capital 6,126,000 6,126,000
Note receivable - related party -- (574,000)
Treasury stock, at cost, 600,000 shares (576,000) --
Deficit (1,329,000) (1,361,000)
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Total stockholders' equity 4,262,000 4,232,000
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$ 30,350,000 $ 34,283,000
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3.
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LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
REVENUES
Net patient service revenue $ 16,738,000 $ 15,554,000
Management fee revenue 4,522,000 52,000
Other revenue 80,000 92,000
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Total revenues 21,340,000 15,698,000
EXPENSES
Operating expenses:
Salaries and benefits 15,972,000 10,761,000
Food, medical and other supplies 2,152,000 1,827,000
Other operating expenses 2,108,000 1,854,000
Corporate, general and administrative expenses 721,000 715,000
Interest expense 288,000 233,000
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Total expenses 21,241,000 15,390,000
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Income before income taxes and minority interest 99,000 308,000
INCOME TAXES 10,000 43,000
MINORITY INTEREST IN INCOME OF CONSOLIDATED
JOINT VENTURES (57,000) (161,000)
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Net income $ 32,000 $ 104,000
============ ============
Basic earnings per common share $ 0.01 $ 0.03
============ ============
Weighted average number of common shares outstanding 3,695,000 4,125,000
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4.
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LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 32,000 $ 104,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities 197,000 176,000
Minority interest in income of consolidated joint ventures 57,000 161,000
Decrease in accounts receivable 2,559,000 557,000
(Decrease) increase in accounts payable and accrued expenses (2,912,000) 25,000
Changes in other operating assets and liabilities (332,000) (886,000)
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Net cash provided by (used in) operating activities (399,000) 137,000
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CASH FLOWS FROM INVESTING ACTIVITIES
Note receivable - related party (2,000) (63,000)
Increase in security deposits - other (574,000) --
Acquisition of fixed assets (209,000) (199,000)
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Net cash used in investing activities (785,000) (262,000)
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CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of line of credit - net (963,000) --
Repayments of notes payable and capital lease obligations (74,000) (66,000)
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Net cash used in financing activities (1,037,000) (66,000)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (2,221,000) (191,000)
CASH AND CASH EQUIVALENTS, beginning of period 3,675,000 831,000
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CASH AND CASH EQUIVALENTS, end of period $ 1,454,000 $ 640,000
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Certain assets acquired through assumption of mortgage note
payable $ 94,000 $ 86,000
Equipment and leasehold improvements acquired through assumption
of notes payable and capital leases 33,000 72,000
Receipt of treasury stock in satisfaction of note receivable -
related party 576,000 --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to September 30, 1999 and for the
three months ended September 30, 1999 and 1998 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"), Lexington
Highgreen Holding, Inc., and LexiCore Rehab Services, LLC ("Lexicore"),
collectively, the "Company", as well as the accounts of Lexicon Pharmacy
Services, LLC ("Lexicon"), a 70% owned joint venture controlled by 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 or manages
eight nursing home facilities at September 30, 1999 with 1,063 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. Lexicore and Lexicon provide rehab and pharmacy services
respectively to patients in the Company's and other nursing homes.
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, 1999 is derived from audited financial statements; certain line items
have been combined or condensed in their presentation herein.
Inventories consisting of food, chemicals and medical and other 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, ACQUISITIONS AND NEW BUSINESSES
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 such 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.
Page 6.
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LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to September 30, 1999 and for the
three months ended September 30, 1999 and 1998 is unaudited)
NOTE C - REORGANIZATION, PUBLIC STOCK OFFERING, ACQUISITIONS AND NEW BUSINESSES
(Continued)
On October 15, 1997 Lexicore Rehab Services, LLC began operations as a 50% owned
joint venture with Core Rehab Management, LLC. The results of its operations
from inception are included in the Company's condensed consolidated financial
statements with appropriate recognition of minority interest. As of January 1,
1999, the Company acquired the remaining 50% membership interest for a nominal
amount plus $120,000 of residual payments which are payable based on the
occurrence of certain future events. Henceforth the Company accounted for
Lexicore's operations as a wholly-owned subsidiary; minority interest has been
adjusted accordingly.
On December 1, 1997 Lexicon Pharmacy Services, LLC began operations as a 70%
owned joint venture with Pharmacy Corporation of America. The joint venture is
controlled by the Company and the results of its operations from inception are
included in the Company's condensed consolidated financial statements with
appropriate recognition of minority interest.
On November 1, 1998 the Company began providing management services for four
skilled nursing facilities in Connecticut under an interim Management Agreement
with SunBridge Healthcare Corporation ("SunBridge"), a New Mexico corporation
and nation-wide healthcare provider.
As consideration for the services provided under this Management Agreement, the
Company is entitled to retain the excess of any revenues earned in the delivery
of patient services over the expenses incurred during the term and will be
responsible for any excess of expenses incurred over revenues earned in the
operation of the facilities during the term. Under the terms of the agreement
SunBridge retained responsibility for all building lease costs. In addition, the
Company purchased substantially all of SunBridge's accounts receivable for these
facilities. As of September 30, 1999, the balance owed is presented as "Due to
SunBridge - purchased receivables" in the accompanying consolidated balance
sheet.
Effective September 1, 1999, the Company agreed to acquire the operations of two
of the managed facilities, Adams House and Heritage Heights. Initially the
buildings will be leased with an option to purchase. These facilities have a
total of 240 skilled nursing beds. Management contracts covering the two other
SunBridge facilities with a total of 239 skilled nursing beds were terminated as
of August 31, 1999 and the operations of those facilities were returned to
SunBridge.
In connection with the management agreement and operation of these facilities,
the Company earned management fees and patient service revenue of $5,501,000 and
incurred costs and expenses of $5,508,000 during the three months ended
September 30, 1999.
Page 7.
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LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to September 30, 1999 and for the
three months ended September 30, 1999 and 1998 is unaudited)
NOTE D - NOTE RECEIVABLE-RELATED PARTY AND TREASURY STOCK
In July 1999, the Company, pursuant to Board of Director's approval, defaulted
an 8% interest-bearing promissory note due from an officer and director of the
Company and seized the collateral of 600,000 shares of the Company's common
stock in satisfaction of the note and interest due. The shares received have
been put into the Company's treasury.
The 600,000 shares had a market bid price of $731,000 at the time of their
surrender and the note and accumulated interest had a carrying value of
$576,000. The Company's Board of Directors considers the difference between the
market price and carrying value of the note receivable of $155,000 to be a
reasonable and fair discount for the shares received.
NOTE E - CONTINGENCIES
In October 1999, the Company announced that certain employees of the Company
were served with a subpoena by the Office of the U.S. Attorney to testify before
a grand jury in the U.S. District Court, District of Connecticut. The Company
and certain members of senior management have been named as targets of the
government's investigation. In addition, the Company has provided certain
documents to the government.
The Company has established an independent committee of the Board of Directors
to supervise its own investigation. The Company is cooperating fully with the
inquiry and is confident that the Company has not committed any wrongdoings. The
ultimate outcome of this uncertainty cannot presently be determined.
Accordingly, no provision for any liability that may result has been made in the
accompanying consolidated financial statements.
The Company is involved in other legal proceedings and is subject to certain
lawsuits and claims in the ordinary course of its business. Although the
ultimate effect of these matters is often difficult to predict, management
believes that their resolution will not have a material adverse effect on the
Company's condensed consolidated financial statements.
Page 8.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to September 30, 1999 and for the
three months ended September 30, 1999 and 1998 is unaudited)
NOTE F - RISKS AND UNCERTAINTIES
The Company receives its nursing home Medicare reimbursement under a new per
diem system known as the prospective payment system. This new system entirely
changed the way the Company is paid for Medicare Part A services. The Company's
success under this acuity-based system is largely dependent on managing patient
utilization of clinical resources. The Company's ability to maintain its current
level of Medicare reimbursement is uncertain.
Page 9.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the consolidated financial statements and
notes thereto.
Overview
In the fiscal year ended June 30, 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, Balz Medical Services,
Inc. and Professional Relief Nurses, Inc.
During the fiscal year ended June 30, 1998, the Company expanded its nursing
home operations with the acquisition of two additional facilities, formed and
began operating two healthcare joint venture companies, and initiated plans to
acquire additional nursing homes.
Under a Management Agreement with SunBridge Healthcare Corporation, effective
November 1, 1998, the Company began providing management services to four
skilled nursing facilities. Growth also continued in its joint-venture ancillary
businesses.
Effective September 1, 1999, the Company agreed to acquire the operations of two
of the managed facilities, Adams House and Heritage Heights. Initially the
buildings will be leased with an option to purchase. These facilities have a
total of 240 skilled nursing beds.
Management contracts covering the two other SunBridge facilities with a total of
239 skilled nursing beds were terminated as of August 31, 1999 and the
operations of those facilities were returned to SunBridge.
As of January 1, 1999, the Company acquired the remaining 50% membership
interest in one of the above-noted joint ventures, Lexicore Rehab Services,
L.L.C., for a nominal amount plus $120,000 of residual payments. Henceforth the
Company accounted for Lexicore's operations as a wholly-owned subsidiary;
minority interest has been adjusted accordingly.
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.
Page 10.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's operating strategy is to increase nursing home profitability
levels, through aggressive marketing and by offering rehabilitation therapies
and other specialized services; by adhering to strict cost standards at the
Facility level while providing effective patient care and containing corporate
overhead expenses; and by becoming a fully integrated health network whereby the
Company will increase marketing of 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.
YEAR 2000
The Company is continuing work on resolving the potential impact of the year
2000 on the ability of its computerized information systems to accurately
process information that may be date-sensitive. Any of the Company's programs
that recognize a date using "00" as the year 1900 rather than the year 2000
could result in errors or system failures.
The Company utilizes a number of computer programs across its entire operation,
however it primarily uses licensed software products, with a significant portion
of processes and transactions centralized in only a few third party vendor
packages. Certain of those packages were acquired in recent years and are Year
2000 compliant. Management has made plans to complete the conversion of
remaining programs before the end of the calendar year.
The Company currently believes that costs of addressing this issue will not have
a material adverse impact on the Company's financial position. However, if the
Company and third parties upon which it relies are unable to address this issue
in a timely manner, it could result in a material financial risk to the Company.
In order to assure that this does not occur, the Company plans to devote all
resources required to resolve any significant Year 2000 issues in a timely
manner.
Page 11.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three months ended September 30, 1999 ("1999 period") vs. three months ended
September 30, 1998 ("1998 period")
For the three months ended September 30, 1999, the Company had total revenues of
$21,340,000 and total expenses of $21,241,000. For the three months ended
September 30, 1998, the Company had total revenues of $15,698,000 and total
expenses of $15,390,000. The Company had net income of $32,000 or $.01 per share
for the three months ended September 30, 1999 after providing income taxes of
$10,000. The Company had net income of $104,000 or $.03 per share for the three
months ended September 30, 1998, after providing for income taxes of $43,000.
For the three months ended September 30, 1999, operating expenses consisted of
salaries and benefits of $15,972,000, food, medical and other supplies of
$2,152,000, and other operating expenses (including rent of $703,000) of
$2,108,000. Also, the Company had corporate, general and administrative expenses
of $721,000 and interest expense of $288,000.
Revenues in the 1999 period increased over the 1998 period by $5,642,000 or 36%,
largely as a result of the management agreement effective November 1, 1998. Of
this net increase, $5,501,000 pertained to the new management agreement and
$345,000 pertained to the nursing facilities due to payer mix and rate changes;
there was a $204,000 net revenue decrease in the joint ventures and the
ancillary businesses acquired in 1997.
Operating expenses in the 1999 period increased over the 1998 period by
$5,790,000 or 40% largely as a result of the management agreement and joint
ventures noted above and the increased volume in the ancillary businesses. Of
this net increase, $5,508,000 pertained to the management agreement effective
November 1, 1998. In addition, net nursing home costs increased by $378,000
mostly for higher wage and benefit costs resulting from state-funded Medicaid
rate increases. There was a $96,000 expense decrease in joint ventures and the
ancillary businesses acquired in 1997. Administrative and general expenses
increased by $6,000. Interest costs increased by $55,000 as a result of
additional borrowings.
Income taxes were provided in the 1999 period on pre-tax income of $42,000; the
combined federal and state effective rate was 24%. Income taxes were provided in
the 1998 period on pre-tax income of $147,000; the combined federal and state
effective rate was 29%.
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 certain of the
Facilities and other private lenders (including stockholders), by financing its
accounts receivable, through a public offering of its common stock which raised
net proceeds of approximately $4.1 million and through the sale of a portion of
certain bed licenses acquired in 1997.
Page 12.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (Continued)
In July 1997, the Company borrowed $6.8 million in connection with the
acquisition of land, buildings, bed licenses and operating assets of two nursing
homes. Interest is payable at 10% over the 20 year term of the mortgage. In
connection with the acquisitions, the Company also obtained from the seller an
operating subsidy of $2.5 million to be received over five years. As noted
above, some of the bed licenses acquired were sold for $1,550,000 in November
1997.
In July 1995, the Company entered into an agreement to manage the day-to-day
business affairs of Lexington House, Inc., a nursing home with 67 licensed beds;
Lexington House was owned by Jack Friedler, the Company's Chairman and CEO and
his wife.
The Company made certain expenditures on behalf of Lexington House in
anticipation that it would acquire Lexington House. Subsequently, the
negotiations for the sale were terminated because the Company determined that
such facility required too many capital improvements. As of September 30, 1998,
Lexington House, Inc. was indebted to the Company for $649,000 which amount was
formalized into an 8% interest bearing promissory note from Mr. Friedler.
In July 1999, the Company, pursuant to Board of Director's approval, defaulted
the note and seized the collateral of 600,000 shares of the Company's common
stock in satisfaction of the note and interest due. The shares received have
been put into the Company's treasury.
The 600,000 shares had a market bid price of $731,000 at the time of their
surrender and the note and accumulated interest had a carrying value of
$576,000. The Company's Board of Directors considers the difference between the
market price and carrying value of the note receivable of $155,000 to be a
reasonable and fair discount for the shares received.
In August 1997, the Company obtained a $2,000,000 revolving line of credit from
a bank, which was secured by its accounts receivable and other assets.
In December 1998, the Company refinanced this revolving line of credit with a
$4.5 million financing agreement from a healthcare lender; the new financing is
secured by certain accounts receivable and other assets. As of September 30,
1999, approximately $2,668,000 was borrowed under this line of credit.
During the three months ended September 30, 1999, the Company expended
approximately $138,000 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. During the three months ended
September 30, 1999 the Company expended $66,000 for capital improvements at its
owned facilities which was funded by the mortgagor under the terms of the
mortgage.
Page 13.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Working capital at September 30, 1999 was $400,000 as compared with working
capital of $955,000 at June 30, 1999. During the three months ended September
30, 1999 the Company had made lease deposits in the amount of $574,000 and paid
change of ownership capital expenses of $120,000 at its newly-leased facilities.
At September 30, 1999 the Company had cash and cash equivalents of $1,454,000,
receivables of $13,533,000, inventories of $1,141,000, prepaid expenses and
other current assets of $1,041,000. Current liabilities at September 30, 1999
consist of trade accounts payable, amounts due SunBridge Healthcare for accounts
receivable purchased, estimated third-party payor settlements, current portion
of notes and capital leases payable, accrued payroll and related taxes, income
taxes, and other accrued expenses.
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.
Page 14.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In October 1999, the Company announced that certain employees of the Company
were served with a subpoena by the Office of the U.S. Attorney to testify before
a grand jury in the U.S. District Court, District of Connecticut. The Company
and certain members of senior management have been named as targets of the
government's investigation. In addition, the Company has provided certain
documents to the government.
The Company has established an independent committee of the Board of Directors
to supervise its own investigation. The Company is cooperating fully with the
inquiry and is confident that the Company has not committed any wrongdoings. The
ultimate outcome of this uncertainty cannot presently be determined.
Accordingly, no provision for any liability that may result has been made in the
accompanying consolidated financial statements.
The Company had previously disclosed the existence of a lawsuit initiated by the
former President and Administrator of Professional Relief Nurses, Inc. (PRN),
the Company's home care subsidiary, against Lexington Healthcare Group, Inc.,
PRN, and Jack Friedler, the Company's Chairman and CEO, in connection with her
termination in July 1998. In September 1999 the Company settled this suit to
avoid the expenses of protracted litigation. The Company had recorded a
provision for lawsuit settlement of $539,000 in the consolidated statement of
operations during the year ended June 30, 1999. In October 1999, the Company
paid the settlement in full utilizing a previously-posted $350,000 cash bond.
The Company is involved in other legal proceedings and is subject to certain
lawsuits and claims in the ordinary course of its business. Although the
ultimate effect of these matters is often difficult to predict, management
believes that their resolution will not have a material adverse effect on the
Company.
Item 2. Change in Securities
In July 1999, the Company, pursuant to Board of Director's approval, defaulted
an 8% interest-bearing promissory note due from an officer and director of the
Company and seized the collateral of 600,000 shares of the Company's common
stock in satisfaction of the note and interest due. The shares received have
been put into the Company's treasury. The 600,000 shares had a market bid price
of $731,000 at the time of their surrender and the note and accumulated interest
had a carrying value of $576,000. The Company's Board of Directors considers the
difference between the market price and carrying value of the note receivable of
$155,000 to be a reasonable and fair discount for the shares received.
Item 3. Defaults Upon Senior Securities
NONE
Page 15.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
NONE
Item 5. Other Information
On October 1, 1999, the Registrant was notified by The Nasdaq - Amex Market
Group that, based on their review of the Form 10-K for the year ended June 30,
1999, the Registrant was not in compliance with the net tangible asset criteria
for continued listing on the Nasdaq SmallCap Market and as a result Nasdaq was
reviewing the Company's eligibility for continued listing.
The Company responded with the plan for achieving compliance with the criteria.
Nasdaq has not notified the Company that it has commenced the delisting process.
In the event that Nasdaq does notify the Company that they intend to commence a
delisting procedure, the Company intends to submit a Formal Plan for compliance.
There can be no assurance that the Company will be successful in its efforts to
remain listed on Nasdaq.
Item 6. Exhibits and Reports on Form 8-K
NONE.
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/ Jack Friedler
--------------------------------------
(Jack Friedler, Chief Executive Officer)
(Duly Authorized Officer)
/s/ Harry Dermer
--------------------------------------
(Harry Dermer, President)
(Duly Authorized Officer)
Date November 15, 1999 /s/ Thomas E. Dybick
------------------ --------------------------------------
(Thomas E. Dybick, Chief Financial Officer)
(Principal Financial Officer)
Page 16.
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