SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
(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, 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: February 11, 2000 3,525,000 Shares of
Common Stock outstanding
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC.
December 31, 1999 FORM 10-Q/A
INDEX
Part I -- Financial Information
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets -- December 31, 1999
and June 30, 1999................................................Pg. 3.
Condensed Consolidated Statements of Operations -- Six
months and three months ended December 31, 1999 and 1998.........Pg. 4.
Condensed Consolidated Statements of Cash Flows -- Six
months and three months ended December 31, 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. 10-15.
Part II -- Other Information.
Item 1. Legal Proceedings...............................................Pg. 16.
Item 2. Changes in Securities...........................................Pg. 16.
Item 3. Defaults Upon Senior Securities.................................Pg. 16.
Item 4. Submission of Matters to a Vote of Security Holders.............Pg. 17.
Item 5. Other Information...............................................Pg. 17.
Item 6. Exhibits and Reports on Form 8-K................................Pg. 17.
Signatures...............................................................Pg. 17.
Page 2.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
(Unaudited)
----------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,917,000 $ 3,675,000
Accounts receivable, net of allowance for doubtful
accounts of $799,000 and $848,000, respectively 14,004,000 16,092,000
Inventories 1,022,000 1,058,000
Prepaid expenses and other current assets 694,000 1,031,000
----------------- ---------------
Total current assets 17,637,000 21,856,000
PROPERTY, EQUIPMENT & LEASEHOLD
IMPROVEMENTS, net 4,336,000 4,147,000
OTHER ASSETS
Goodwill, net 2,929,000 3,013,000
Security deposits - related parties 2,337,000 2,337,000
Security deposits - other 968,000 371,000
Bed licenses, net 1,452,000 1,510,000
Operating subsidy receivable (less current portion) 482,000 555,000
Other assets, net 163,000 91,000
Residents' funds 376,000 403,000
----------------- ---------------
8,707,000 8,280,000
----------------- ---------------
$ 30,680,000 $ 34,283,000
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 10,723,000 $ 13,473,000
Due to SunBridge - purchased receivables 2,582,000 2,582,000
Estimated third-party payor settlements 448,000 939,000
Notes and capital leases payable (current portion) 3,099,000 3,867,000
Income taxes payable 32,000 40,000
----------------- ---------------
Total current liabilities 16,884,000 20,901,000
OTHER LIABILITIES
Notes and capital leases payable (less current portion) 7,790,000 7,768,000
Deferred rent 629,000 314,000
Residents' funds payable 376,000 403,000
Other liabilities 120,000 120,000
----------------- ---------------
8,915,000 8,605,000
----------------- ---------------
Total liabilities 25,799,000 29,506,000
----------------- ---------------
MINORITY INTEREST 646,000 545,000
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 (1,356,000) (1,361,000)
----------------- ---------------
Total stockholders' equity 4,235,000 4,232,000
----------------- ---------------
$ 30,680,000 $ 34,283,000
================= ===============
</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,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Net patient service revenue $ 36,150,000 $ 30,248,000 $ 19,412,000 $14,694,000
Management fee revenue 4,565,000 4,596,000 43,000 4,544,000
Other revenue 136,000 169,000 56,000 77,000
-------------- -------------- ------------- ------------
Total revenues 40,851,000 35,013,000 19,511,000 19,315,000
EXPENSES
Operating expenses:
Salaries and benefits 29,719,000 25,012,000 13,747,000 14,251,000
Food, medical and other supplies 4,201,000 3,693,000 2,049,000 1,866,000
Other operating expenses 4,562,000 3,800,000 2,454,000 1,946,000
Corporate, general and administrative expenses 1,681,000 1,434,000 960,000 719,000
Interest expense 580,000 481,000 292,000 248,000
-------------- -------------- ------------- ------------
Total expenses 40,743,000 34,420,000 19,502,000 19,030,000
-------------- -------------- ------------- ------------
Income before income taxes and minority interest 108,000 593,000 9,000 285,000
INCOME TAXES 2,000 123,000 (8,000) 80,000
MINORITY INTEREST IN INCOME OF CONSOLIDATED
JOINT VENTURES (101,000) (287,000) (44,000) (126,000)
-------------- -------------- ------------- ------------
Net income $ 5,000 $ 183,000 $ (27,000) $ 79,000
============== ============== ============= ============
Basic earnings per common share $ 0.00 $ 0.04 $ (0.01) $ 0.02
============== ============== ============= ============
Weighted average number of common shares outstanding 3,610,000 4,125,000 3,525,000 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 SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,000 $ 183,000
Adjustments to reconcile net income to net cash
provided by operating activities 393,000 333,000
Minority interest in income of consolidated joint ventures 101,000 287,000
Decrease (increase) in accounts receivable 2,088,000 (2,549,000)
(Decrease) increase in accounts payable and accrued expenses (2,750,000) 1,357,000
Due to SunRise Healthcare Group - purchased receivables -- 3,043,000
Changes in other operating assets and liabilities 178,000 (1,188,000)
----------------- -----------------
Net cash provided by operating activities 15,000 1,466,000
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Note receivable - related party (2,000) (76,000)
Repayments of note receivable - related party -- 30,000
Increase in security deposits - other (597,000) --
Acquisition of fixed assets (269,000) (326,000)
----------------- -----------------
Net cash used in investing activities (868,000) (372,000)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayments of) proceeds from line of credit - net (769,000) 1,042,000
Repayments of notes payable and capital lease obligations (136,000) (125,000)
----------------- -----------------
Net (cash used in) provided by financing activities (905,000) 917,000
----------------- -----------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,758,000) 2,011,000
CASH AND CASH EQUIVALENTS, beginning of period 3,675,000 831,000
----------------- -----------------
CASH AND CASH EQUIVALENTS, end of period $ 1,917,000 $ 2,842,000
================= =================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Certain assets acquired through assumption of mortgage note payable $ 126,000 $ 315,000
Equipment and leasehold improvements acquired through assumption
of notes payable and capital leases. 33,000 110,000
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 December 31, 1999 and for the three months and
six months ended December 31, 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 eight
nursing home facilities at December 31, 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.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to December 31, 1999 and for the three months and
six months ended December 31, 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 joint venture was 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. 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. In January 2000, the Company
agreed with its joint venture partner to terminate operations as of March 31,
2000. The Company has begun working with an unrelated company to receive
pharmaceutical services.
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 was entitled to retain the excess of any revenues earned in the delivery
of patient services over the expenses incurred during the term and was
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 December 31, 1999, the balance owed is presented as "Due to
SunBridge - purchased receivables" in the accompanying consolidated balance
sheet.
Effective September 1, 1999, the Company acquired the operations of two of the
managed facilities, Adams House and Heritage Heights; the buildings are 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.
Page 7.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to December 31, 1999 and for the three months and
six months ended December 31, 1999 and 1998 is unaudited)
NOTE C - REORGANIZATION, PUBLIC STOCK OFFERING, ACQUISITIONS AND NEW BUSINESSES
(Continued)
Under the terms of the management agreement, which terminated on August 31,
1999, the Company earned management fees of $4,426,000 and incurred costs and
expenses of $4,407,000 during the two months ended August 31, 1999.
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 - RENEGOTIATION OF RELATED PARTY OPERATING LEASE
The Company leases four of its nursing homes facilities (including certain
equipment) under an operating lease with a partnership related through common
ownership. The lease agreement, as amended, commenced on July 1, 1995 and is for
an eighteen-year period, with renewal options for up to 13 years. Annual rentals
under the lease are currently $2.5 million.
The Company has renegotiated the required rent payments covering the period of
October 1999 through February 2001 which will reduce the rent due during that
period by approximately $800,000. However, recognition of the expense reduction
will be accounted for over the remaining 14-year term of the lease.
Rent expense charged to operations under this related party operating lease
aggregated $1,237,000 and $1,234,000 for the six months ended December 31, 1999
and 1998, respectively.
Page 8.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to December 31, 1999 and for the three months and
six months ended December 31, 1999 and 1998 is unaudited)
NOTE F - 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 condensed consolidated financial statements. Through December 31,
1999 the Company has recorded expenses of $233,000 relating to 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's condensed consolidated financial statements.
NOTE G - RISKS AND UNCERTAINTIES
The Company receives its nursing home Medicare reimbursement under a new per
diem system known as the prospective payment system (PPS). 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 acquired the operations of two of the
managed facilities, Adams House and Heritage Heights; the buildings are 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.
In January 2000, the Company agreed with its joint venture partner to terminate
operations of Lexicon Pharmacy Services, LLC as of March 31, 2000. The Company
has begun working with an unrelated company to receive pharmaceutical services.
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.
<PAGE>
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, 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
As of calendar year 2000, the Company is continuing to complete the updating of
its computerized information systems, where necessary, to continue to accurately
process data. The Company experienced no systems failures, major errors, nor any
significant interruptions in its ability to process operating data as a result
of Year 2000 issues.
The Company currently believes that costs of addressing this issue will not have
a material adverse impact on the Company's financial position or results of
operations.
Results of Operations
Three months ended December 31, 1999 ("1999 period") vs. three months ended
December 31, 1998 ("1998 period")
For the three months ended December 31, 1999, the Company had total revenues of
$19,511,000 and total expenses of $19,502,000. For the three months ended
December 31, 1998, the Company had total revenues of $19,315,000 and total
expenses of $19,030,000. The Company had a net loss of $(27,000) or $(.01) per
share for the three months ended December 31, 1999 after providing for an income
tax benefit of $8,000. 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.
For the three months ended December 31, 1999, operating expenses consisted of
salaries and benefits of $13,747,000, food, medical and other supplies of
$2,049,000, and other operating expenses (including rent of $806,000) of
$2,454,000. Also, the Company had corporate, general and administrative expenses
of $960,000 and interest expense of $292,000.
Page 11.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three months ended December 31, 1999 ("1999 period") vs. three months ended
December 31, 1998 ("1998 period") (Continued)
Revenues in the 1999 period increased over the 1998 period by $196,000 or 1%.
Changes in revenues resulted from rate increases (principally Medicaid) and
additional ancillary revenues but were offset by the reduction in management
fees for the two terminated facilities.
Operating expenses in the 1999 period increased over the 1998 period by $187,000
as a result of higher wage and benefit costs resulting from state-funded
Medicaid rate increases, offset by reductions resulting from the management
contract terminations (noted above). Administrative and general expenses
increased by $241,000, consisting mostly of $233,000 of legal costs related to
the government investigation. Interest costs increased by $44,000 as a result of
additional borrowings and higher interest rates.
Income taxes were provided in the 1999 period on pre-tax loss of $(35,000); the
combined federal and state effective rate was 23%. Income taxes were provided in
the 1998 period on pre-tax income of $159,000; the combined federal and state
effective rate was 50%.
Results of Operations
Six months ended December 31, 1999 ("1999 period") vs.
six months ended December 31, 1998 ("1998 period")
For the six months ended December 31, 1999, the Company had total revenues of
$40,851,000 and total operating expenses of $40,743,000. 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. The Company had net income of $5,000 or $.00
per share for the six months ended December 31, 1999, after providing for income
taxes of $2,000. 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.
For the six months ended December 31, 1999, operating expenses consisted of
salaries and benefits of $29,719,000, food, medical and other supplies of
$4,201,000, other operating expenses (including rent of $1,509,000) of
$4,562,000, and corporate, general and administrative expenses of $1,681,000. In
addition, income from operations was reduced by interest expense of $580,000 and
net income was reduced by minority interest of $101,000.
Page 12.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Six months ended December 31, 1999 ("1999 period") vs.
six months ended December 31, 1998 ("1998 period") (Continued)
Revenues in the 1999 period increased over the 1998 period by $5,838,000 or 17%.
Changes in revenues resulted from rate increases (principally Medicaid) and
additional ancillary revenues but were offset by the reduction in management
fees for the two terminated facilities.
Operating expenses in the 1999 period increased over the 1998 period by
$5,977,000 or 18% as a result of higher wage and benefit costs resulting from
state-funded Medicaid rate increases, offset by reductions resulting from the
management contract terminations (noted above). Administrative and general
expenses increased by $247,000, consisting mostly of $233,000 of legal costs
related to the government investigation. Interest costs increased by $99,000 as
a result of additional borrowings and higher interest rates.
Income taxes were provided in the 1999 period on pre-tax income of $7,000; the
combined federal and state effective rate was 28%. Income taxes were provided in
the 1998 period on pre-tax income of $306,000; the combined federal and state
effective rate was 40%.
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.
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.
Page 13.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (Continued)
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 December 31,
1999, approximately $2,862,000 was borrowed under this line of credit.
During the six months ended December 31, 1999, the Company expended
approximately $168,000 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, 1999 the Company expended $94,000 for capital improvements at its owned
facilities which was funded by the mortgagor under the terms of the mortgage.
Working capital at December 31, 1999 was $753,000 as compared with working
capital of $955,000 at June 30, 1999. During the six months ended December 31,
1999 the Company had made lease deposits in the amount of $574,000 and paid
change of ownership capital expenses of $150,000 at its newly-leased facilities.
At December 31, 1999 the Company had cash and cash equivalents of $1,917,000,
receivables of $14,004,000, inventories of $1,022,000, prepaid expenses and
other current assets of $694,000. Current liabilities at December 31, 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.
Page 14.
<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.
Page 15.
<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
NONE
Item 3. Defaults Upon Senior Securities
NONE
Page 16.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
NONE
Item 5. Other Information
The Company was notified on October 1, 1999 by The Nasdaq - Amex Market Group
that, based on their review of the Form 10-K for the year ended June 30, 1999,
the Company 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.
On December 10, 1999, the Company was sent a bid price deficiency notification
from Nasdaq staff which provided the Company until March 12, 2000 to show
compliance. As of February 11, 2000 the closing bid price of the Company's
common stock was $1.062.
On February 3, 2000 the Company was sent a letter advising that the Nasdaq staff
has determined to delist the Company from The Nasdaq Small Cap Market effective
with the close of business February 11, 2000. On February 10, 2000 the Company
requested a hearing with the Nasdaq Listing Qualifications Panel at which time
the Company will present its plans for achieving compliance with the criteria.
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 February 14, 2000 /s/ Thomas E. Dybick
----------------------------------------
(Thomas E. Dybick, Chief Financial Officer)
(Principal Financial Officer)
Page 17.
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