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 December 31, 1998
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
LEXINGTON HEALTHCARE GROUP, INC.
--------------------------------
(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: February 15, 1999 4,125,000 Shares of
Common Stock outstanding
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC.
DECEMBER 31, 1998 FORM 10-Q
INDEX
Part I -- Financial Information
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets -- December 31, 1998 and
June 30, 1998.................................................Pg. 3.
Condensed Consolidated Statements of Operations -- Six months
and three months ended December 31, 1998 and 1997.............Pg. 4.
Condensed Consolidated Statements of Cash Flows -- Six months
ended December 31, 1998 and 1997..............................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. 9-14.
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. 15.
Item 5. Other Information............................................Pg. 15.
Item 6. Exhibits and Reports on Form 8-K.............................Pg. 15.
Signatures...............................................................Pg. 16.
Page 2.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
(Unaudited)
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,842,000 $ 831,000
Accounts receivable, net 13,397,000 10,848,000
Note receivable - related party 641,000 595,000
Estimated third-party payor settlements - Medicare 230,000 197,000
Inventories 776,000 777,000
Prepaid expenses and other current assets 397,000 533,000
----------- -----------
Total current assets 18,283,000 13,781,000
PROPERTY, EQUIPMENT & LEASEHOLD
IMPROVEMENTS, net 3,917,000 3,370,000
OTHER ASSETS
Goodwill, net 3,097,000 3,181,000
Security deposits - related parties 2,337,000 2,337,000
Bed licenses, net 1,568,000 1,626,000
Operating subsidy receivable (less current portion) 628,000 701,000
Other assets, net 941,000 411,000
Residents' funds 250,000 206,000
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8,821,000 8,462,000
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$31,021,000 $25,613,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 9,889,000 $ 8,532,000
Due to SunRise Healthcare Group - purchased receivables 3,043,000 --
Estimated third-party payor settlements - Medicaid 760,000 1,686,000
Notes and capital leases payable (current portion) 1,460,000 398,000
Income taxes payable 194,000 91,000
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Total current liabilities 15,346,000 10,707,000
OTHER LIABILITIES
Notes and capital leases payable (less current portion) 7,705,000 7,424,000
Deferred rent 338,000 364,000
Residents' funds payable 250,000 206,000
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8,293,000 7,994,000
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Total liabilities 23,639,000 18,701,000
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MINORITY INTERESTS 816,000 529,000
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 6,126,000 6,126,000
Retained earnings 399,000 216,000
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Total stockholders' equity 6,566,000 6,383,000
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$31,021,000 $25,613,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
Page 3.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended Three months ended
December 31, December 31,
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1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Net patient service revenue $ 30,248,000 $ 27,859,000 $ 14,694,000 $ 14,044,000
Management fee revenue 4,596,000 122,000 4,544,000 52,000
Other revenue 169,000 208,000 77,000 162,000
------------ ------------ ------------ ------------
Total revenues 35,013,000 28,189,000 19,315,000 14,258,000
EXPENSES
Operating expenses:
Salaries and benefits 25,012,000 20,639,000 14,251,000 10,478,000
Food, medical and other supplies 3,693,000 2,247,000 1,866,000 1,089,000
Other operating expenses 3,800,000 3,381,000 1,946,000 1,936,000
Corporate, general and administrative expenses 1,434,000 982,000 719,000 479,000
Interest expense 481,000 433,000 248,000 253,000
------------ ------------ ------------ ------------
Total expenses 34,420,000 27,682,000 19,030,000 14,235,000
------------ ------------ ------------ ------------
Income from operations 593,000 507,000 285,000 23,000
OTHER INCOME
Gain on sale of bed licenses -- 280,000 -- 280,000
------------ ------------ ------------ ------------
Income before income taxes and minority interest 593,000 787,000 285,000 303,000
INCOME TAXES 123,000 270,000 80,000 65,000
MINORITY INTEREST IN INCOME OF CONSOLIDATED
JOINT VENTURES (287,000) (28,000) (126,000) (28,000)
------------ ------------ ------------ ------------
Net income $ 183,000 $ 489,000 $ 79,000 $ 210,000
============ ============ ============ ============
Basic earnings per common share $ 0.04 $ 0.12 $ 0.02 $ 0.05
==== ==== ==== ====
Weighted average number of common shares outstanding 4,125,000 4,125,000 4,125,000 4,125,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
Page 4.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 183,000 $ 489,000
Adjustments to reconcile net income to net cash
provided by operating activities 333,000 (10,000)
Minority interest in income of consolidated joint ventures 287,000 28,000
Increase in accounts receivable (2,549,000) (2,583,000)
Increase (decrease) in accounts payable and accrued expenses 1,357,000 (503,000)
Due to SunRise Healthcare Group - purchased receivables 3,043,000 --
Changes in other operating assets and liabilities (1,188,000) 2,078,000
----------- -----------
Net cash provided by (used in) operating activities 1,466,000 (501,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Note receivable - related party (76,000) (757,000)
Repayments of note receivable - related party 30,000 457,000
Increase in security deposits -- (124,000)
Acquisition of fixed assets (326,000) (138,000)
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Net cash used in investing activities (372,000) (562,000)
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CASH FLOWS FROM FINANCING ACTIVITIES
Stock registration costs -- (42,000)
Proceeds from sale of bed licenses -- 1,550,000
Proceeds from line of credit, net 1,042,000 264,000
Minority interest investment in consolidated joint ventures -- 117,000
Repayments of notes payable and capital lease obligations (125,000) (90,000)
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Net cash provided by financing activities 917,000 1,799,000
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NET INCREASE IN CASH AND CASH EQUIVALENTS 2,011,000 736,000
CASH AND CASH EQUIVALENTS, beginning of period 831,000 1,000,000
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CASH AND CASH EQUIVALENTS, end of period $ 2,842,000 $ 1,736,000
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Certain assets acquired through assumption of mortgage note payable $ 315,000 $ 6,863,000
Equipment and leasehold improvements acquired through assumption
of notes payable and capital leases 110,000 220,000
</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 December 31, 1998 and for the three months
and six months ended December 31, 1998 and 1997 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"), and Lexington
Highgreen Holding, Inc. (collectively, the "Company"), as well as the accounts
of the following joint ventures controlled by the Company: LexiCore Rehab
Services, LLC and Lexicon Pharmacy Services, LLC. 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
ten nursing home facilities at December 31, 1998 with 1,302 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, 1998 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.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to December 31, 1998 and for the three months
and six months ended December 31, 1998 and 1997 is unaudited)
New Businesses
On October 15, 1997 Lexicore Rehab Services, LLC began operations as a 50% owned
joint venture with Core Rehab Management, LLC. 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 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 SunRise Healthcare Corporation, 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 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.
As a result of this agreement, the Company earned management fees of $4,493,000
and incurred costs and expenses of $3,992,000 during the period ended December
31, 1998. Under the terms of the agreement SunRise also retained responsibility
for all building lease costs.
On November 12, 1998 the Company completed agreements under which it will
formally purchase and/or lease these four facilities along with an additional
Connecticut nursing facility from SunRise. The purchase or lease transactions
are expected to close during the first six months of 1999. In total, the Company
will acquire the license to approximately 600 skilled nursing beds.
Page 7.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to December 31, 1998 and for the three months
and six months ended December 31, 1998 and 1997 is unaudited)
NOTE D - NOTE RECEIVABLE--RELATED PARTY
During September 1998, the Company converted an existing note receivable from
and additional advances to an entity in which an officer and director of the
Company has a controlling ownership interest into an 8% interest-bearing
promissory note in the amount of $649,000 due from the officer. This note
provides for $15,000 monthly installment payments and a balloon payment of the
remaining balance due May 31, 1999. As security for the note, the officer has
pledged 600,000 of his shares of the common stock of the Company, with the
certificate representing such shares being held in escrow by the Company's legal
counsel. As a result, the entire balance of this note was $641,000 at December
31, 1998 (as reduced by principal payments of $30,000, together with accumulated
interest of $21,000); it is classified as a current asset in the accompanying
condensed consolidated balance sheet.
NOTE E - CONTINGENCIES
On July 31, 1998, the former President of PRN, the Company's home care
subsidiary, initiated a lawsuit against Lexington Healthcare Group, Inc., PRN,
and the Company's Chairman and CEO, in connection with her termination as
President of PRN. The suit alleges breach of contract and wrongful discharge
against the Company. The Company will vigorously defend the suit; it believes
that the plaintiff breached the contract, failed to perform in good faith and
was therefore terminated. At this time, it is not possible to estimate the final
cost to the Company to resolve this matter.
The Company is also 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.
Effective in its current fiscal year, the Company will receive its nursing home
Medicare reimbursement under a new per diem system known as the prospective
payment system. This new system will entirely change 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.
NOTE F - NEW FINANCING ARRANGEMENTS
In December 1998, the Company entered into a financing agreement with a
healthcare lender for up to $4.5 million, which is secured by its accounts
receivable and other assets. As of December 31, 1998, $1,243,000 was borrowed
under this agreement.
Page 8.
<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 five additional nursing homes.
Under a Management Agreement effective November 1, 1998, the Company began
providing management services to four of the five skilled nursing facilities
which it had earlier agreed to acquire. Growth also continued in its
joint-venture ancillary businesses.
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 nursing home profitability
levels, through aggressive marketing and by offering rehabilitation therapies
and other specialized services; adhere to strict cost standards at the Facility
level while providing effective patient care and containing corporate overhead
expenses; and become 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.
Page 9.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year 2000 Disclosure
The Company is working to resolve the potential impact of the year 2000 on the
ability of the Company's 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.
The Company has not completed its assessment, but 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.
Results of Operations
Three months ended December 31, 1998 ("1998 period") vs. three months ended
December 31, 1997 ("1997 period")
For the three months ended December 31, 1998, the Company had total revenues of
$19,315,000 and total operating expenses of $19,030,000. For the three months
ended December 31, 1997, the Company had total revenues of $14,258,000 and total
operating expenses of $14,235,000. The Company had net income of $79,000 or $.02
per share for the three months ended December 31, 1998, after providing for
income taxes of $80,000. The Company had net income of $210,000 or $.05 per
share for the three months ended December 31, 1997, after providing for income
taxes of $65,000. 1997 net income included a one-time gain of $280,000 recorded
on the bed license sale.
For the three months ended December 31, 1998, operating expenses consisted of
salaries and benefits of $14,251,000, food, medical and other supplies of
$1,866,000, other operating expenses (including rent of $701,000) of $1,946,000,
and corporate, general and administrative expenses of $719,000. In addition,
income from operations was reduced by interest expense of $248,000 and net
income was reduced by minority interest of $126,000.
Revenues in the 1998 period increased over the 1997 period by $5,057,000 or 35%,
largely as a result of the management agreement effective November 1, 1998 and
the full-period effect of the two joint ventures started in 1997. Of this net
increase, $4,493,000 pertained to the new management agreement, $1,184,000
pertained to the joint ventures and growth in ancillary businesses acquired in
1997; there was a $620,000 net revenue decrease in the nursing facilities due to
lower occupancy.
Page 10.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating expenses in the 1998 period increased over the 1997 period by
$4,795,000 or 34% largely as a result of the management agreement and joint
ventures noted above and the increased volume in the ancillary businesses. Net
nursing home costs decreased somewhat as a result of lower occupancy offset by
higher employee benefit costs. Administrative and general expenses increased by
$240,000 due to the new businesses and acquisitions, higher rent, legal and
other administrative costs.
Income taxes were provided in the 1998 period on pre-tax income of $159,000; the
combined federal and state effective tax rate was 50% (including year to date
adjustments made in this quarter). Income taxes were provided in the 1997 period
on pre-tax income of $275,000; the combined federal and state effective rate was
24%.
Results of Operations
Six months ended December 31, 1998 ("1998 period") vs.
six months ended December 31, 1997 ("1997 period")
For the six months ended December 31, 1998, the Company had total revenues of
$35,013,000 and total operating expenses of $34,420,000. For the six months
ended December 31, 1997, the Company had total revenues of $28,189,000 and total
operating expenses of $27,682,000. The Company had net income of $183,000 or
$.04 per share for the six months ended December 31, 1998, after providing for
income taxes of $123,000. The Company had net income of $489,000 or $.12 per
share for the six months ended December 31, 1997, after providing for income
taxes of $270,000. 1997 net income included a one-time gain of $280,000 recorded
on the bed license sale.
For the six months ended December 31, 1998, operating expenses consisted of
salaries and benefits of $25,012,000, food, medical and other supplies of
$3,693,000, other operating expenses (including rent of $1,368,000) of
$3,800,000, and corporate, general and administrative expenses of $1,434,000. In
addition, income from operations was reduced by interest expense of $481,000 and
net income was reduced by minority interest of $287,000.
Revenues in the 1998 period increased over the 1997 period by $6,824,000 or 24%,
largely as a result of the management agreement effective November 1, 1998 and
the full-period effect of the two joint ventures started in 1997. Of this net
increase, $4,493,000 pertained to the new management agreement, $3,199,000
pertained to the joint ventures and growth in ancillary businesses acquired in
1997; there was a $868,000 net revenue decrease in the nursing facilities due to
lower occupancy.
Page 11.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating expenses in the 1998 period increased over the 1997 period by
$6,738,000 or 24% largely as a result of the management agreement effective
November 1, 1998 and the full-period effect of the two new joint ventures noted
above and the increased volume in the ancillary businesses. Net nursing home
costs decreased somewhat as a result of lower occupancy offset by higher benefit
costs. Administrative and general expenses increased by $452,000 due to the new
businesses and acquisitions, higher rent, legal and other administrative costs.
Interest expense increased by $48,000 as a result of additional borrowings.
Income taxes were provided in the 1998 period on pre-tax income of $306,000; the
combined federal and state effective tax rate was 40%. Income taxes were
provided in the 1997 period on pre-tax income of $759,000; the combined federal
and state effective rate was 36%.
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, 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.
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 obtained 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 and his wife at that time. 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 June 30, 1997, Lexington House, Inc. was
indebted to the Company in the amount of $290,000.
During the year ended June 30, 1998, $23,000 was charged for management fees and
costs, interest of $26,000 accumulated, and an additional $286,000 was advanced;
$30,000 was repaid; the balance due at June 30, 1998 was $595,000. In July 1998
an additional $50,000 was advanced. During September 1998, the balance of
$649,000 was formalized into an 8% interest bearing promissory note from Jack
Friedler with $15,000 monthly installments and a balloon payment of the
remaining balance due May 31, 1999.
Page 12.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (Continued)
As security for the note, Mr. Friedler has pledged 600,000 of his shares of the
common stock of the Company. As a result, the entire balance of this note was
$641,000 at December 31, 1998 (as reduced by principal payments of $30,000,
together with accumulated interest of $21,000); it is classified as a current
asset in the accompanying condensed consolidated balance sheet.
In August 1997, the Company obtained a $2,000,000 revolving line of credit (at
prime plus .50%) 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 December 31,
1998, approximately $1,243,000 was borrowed against this agreement.
During the six months ended December 31, 1998, the Company expended
approximately $280,000 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 six months ended December
31, 1998 the Company expended $312,000 for capital improvements at its owned
facilities which was funded by the mortgagor under the terms of the mortgage.
At December 31, 1998, the Company had cash and cash equivalents of $2,842,000,
receivables of $13,627,000, inventories of $776,000, prepaid expenses and other
current assets of $397,000, and a note receivable including interest from a
related party of $641,000. In October 1998, the Company secured a $700,000
discharge-of-attachment Surety Bond with a $350,000 payment as collateral. This
collateral is included in Other Assets, Net (non-current classification in the
accompanying balance sheet), which reduced working capital.
Working capital at December 31, 1998 was $2,937,000 as compared with working
capital of $3,074,000 at June 30, 1998. Current liabilities at December 31, 1998
consist of trade accounts payable, amounts due SunRise Healthcare for accounts
receivable purchased, estimated third-party payor settlements due Medicare and
Medicaid, current portion of notes and capital leases payable, accrued payroll
and related taxes, income taxes, and other accrued expenses.
Page 13.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company has been notified by the New England Healthcare Employees Union,
District 1199 that, unless there is an agreement reached by the expiration of
the current contracts at midnight February 23, 1999, effective February 24, 1999
there will be a three-day state-wide strike to gain attention from the public
and the Connecticut legislature in order to prompt the State to revise upward
its nursing home reimbursement. This job action involves approximately 6,000
dietary, housekeeping, nursing and other employees in 52 nursing homes in
Connecticut.
This threatened action would affect eight of the ten nursing homes which the
Company operates or manages. The Company has made contingency plans to deal with
the impact of the threatened strike including hiring replacement staffing to
continue to provide safe, secure, quality care during the job action.
At this time it is not known whether the threatened strike would have a material
effect on the Company's 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.
Page 14.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On July 31, 1998, Suzanne Nettleton, the former President and Administrator of
Professional Relief Nurses, Inc., the Company's home care subsidiary, initiated
a lawsuit against Lexington Healthcare Group, Inc., Professional Relief Nurses,
Inc. (PRN), and Jack Friedler, the Company's Chairman and CEO, in connection
with her termination as President of PRN. The suit alleges breach of contract
and wrongful discharge against the Company. The Company will vigorously defend
the suit on behalf of itself, PRN and Mr. Friedler; it believes that Ms.
Nettleton breached the contract, failed to perform in good faith and was
therefore terminated. At this time, it is not possible to estimate the final
cost to the Company to resolve this matter.
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 NONE
Item 3. Defaults Upon Senior Securities NONE
Item 4. Submission of Matters to a Vote of Security Holders
Annual Meeting held on December 23, 1998. The proposed slate of Directors was
elected to the Board of Directors. The appointment of DiSanto Bertoline &
Company, P.C. as the Company's independent certified public accountants was
ratified. No other business came before the Shareholders for vote.
Item 5. Other Information NONE.
Item 6. Exhibits and Reports on Form 8-K
Form 8-K dated February 2, 1999 and entitled Entering Into Management Agreement
is incorporated herein by reference.
Page 15.
<PAGE>
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 February 16, 1999 /s/ Thomas E. Dybick
------------------------- -------------------------------------------
(Thomas E. Dybick, Chief Financial Officer)
(Principal Financial Officer)
Page 16.
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