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, 2000
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 13, 2000 3,525,000 Shares of
Common Stock outstanding
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC.
SEPTEMBER 30, 2000 FORM 10-Q
INDEX
Part I -- Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- September 30,
2000 and June 30, 2000.........................................Pg. 3.
Condensed Consolidated Statements of Operations -- Three
months ended September 30, 2000 and 1999.......................Pg. 4.
Condensed Consolidated Statements of Cash Flows -- Three
months ended September 30, 2000 and 1999.......................Pg. 5.
Notes to Condensed Consolidated Financial Statements........Pg. 6-10.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................Pg. 11-14.
Part II -- Other Information.
Item 1. Legal Proceedings.............................................Pg. 15.
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. 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,
2000 2000
(Unaudited) (Audited)
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,528,000 $ 1,265,000
Accounts and note receivable - net of allowance for
doubtful accounts of $1,636,000 and $1,634,000, respectively 15,709,000 16,963,000
Inventories, prepaid expenses and other current assets 1,430,000 1,349,000
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Total current assets 18,667,000 19,577,000
PROPERTY, EQUIPMENT & LEASEHOLD IMPROVEMENTS, net 5,017,000 4,477,000
OTHER ASSETS
Security deposits - related parties 2,337,000 2,337,000
Residents' funds 364,000 370,000
Goodwill - net 1,859,000 1,886,000
Bed licenses - net 1,365,000 1,394,000
Other assets - net 860,000 917,000
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6,785,000 6,904,000
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$ 30,469,000 $ 30,958,000
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Notes and capital leases payable (current portion) $ 4,772,000 $ 4,296,000
Due to SunBridge - purchased receivables 2,079,000 2,094,000
Accounts payable and accrued expenses 13,816,000 14,423,000
Estimated third-party payor settlements 504,000 188,000
Income taxes payable 64,000 74,000
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Total current liabilities 21,235,000 21,075,000
OTHER LIABILITIES
Notes and capital leases payable (less current portion) 8,132,000 7,892,000
Residents' funds payable 364,000 370,000
Deferred rent 888,000 809,000
Other liabilities 120,000 120,000
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9,504,000 9,191,000
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Total liabilities 30,739,000 30,266,000
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COMMITMENTS AND CONTINGENCIES (Note F)
MINORITY INTEREST 565,000 565,000
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock, par value $.01 per share, authorized
15,000,000 shares, issued and outstanding 3,525,000 shares 35,000 35,000
Additional paid-in capital 5,556,000 5,556,000
Deficit (6,426,000) (5,464,000)
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Total stockholders' equity (deficiency) (835,000) 127,000
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$ 30,469,000 $ 30,958,000
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</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
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
REVENUES
Net patient service revenue $ 17,247,000 $ 16,738,000
Management fee revenue 2,000 4,522,000
Other revenue 43,000 80,000
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Total revenues 17,292,000 21,340,000
EXPENSES
Operating expenses:
Salaries and benefits 14,131,000 15,972,000
Food, medical and other supplies 936,000 2,152,000
Other operating expenses 2,204,000 2,108,000
Corporate, general and administrative expenses 615,000 721,000
Interest expense 368,000 288,000
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Total expenses 18,254,000 21,241,000
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Income (loss) before income taxes and minority interest (962,000) 99,000
PROVISION FOR INCOME TAXES -- 10,000
MINORITY INTEREST IN INCOME OF CONSOLIDATED
JOINT VENTURES -- (57,000)
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Net income (loss) $ (962,000) $ 32,000
============ ============
Basic earnings (loss) per common share $ (0.27) $ (0.01)
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Weighted average number of common shares outstanding 3,525,000 3,695,000
============ ============
</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, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (962,000) $ 32,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities 241,000 197,000
Minority interest in income of consolidated joint ventures -- 57,000
Decrease in accounts and note receivable 1,254,000 2,559,000
Changes in other operating assets and liabilities 259,000 (332,000)
Decrease in accounts payable and accrued expenses (607,000) (2,912,000)
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Net cash provided by (used in) operating activities 185,000 (399,000)
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CASH FLOWS FROM INVESTING ACTIVITIES
Note receivable - related party -- (2,000)
Increase in security deposits - other -- (574,000)
Acquisition of fixed assets (109,000) (209,000)
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Net cash used in investing activities (109,000) (785,000)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds (repayments) of line of credit - net 482,000 (963,000)
Repayments of notes payable and capital lease obligations (295,000) (74,000)
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Net cash provided by (used in) financing activities 187,000 (1,037,000)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 263,000 (2,221,000)
CASH AND CASH EQUIVALENTS, beginning of period 1,265,000 3,675,000
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CASH AND CASH EQUIVALENTS, end of period $ 1,528,000 $ 1,454,000
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Certain assets acquired through assumption of mortgage note payable $ 494,000 $ 94,000
Equipment and leasehold improvements acquired through assumption
of notes payable and capital leases 35,000 33,000
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.
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LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to September 30, 2000 and for the
three months ended September 30, 2000 and 1999 is unaudited)
NOTE A - THE COMPANY
The condensed 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, 2000 with 1,063 beds licensed by
the State of Connecticut. PRN provides health care services in the homes of its
patients. Lexicore provides rehab services to patients in the Company's and
other nursing homes.
BALZ provided medical supplies and durable medical equipment to nursing homes,
but is now substantially inactive after selling its operating assets and
business (exclusive of cash and accounts receivable) as of June 1, 2000. Lexicon
ceased operations as of March 31, 2000. Once remaining accounts receivable have
been collected and all obligations paid, the members will terminate Lexicon.
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, 2000 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 - ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
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.
Page 6.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to September 30, 2000 and for
the three months ended September 30, 2000 and 1999 is unaudited)
NOTE C - ACQUISITIONS AND DISPOSITIONS OF BUSINESSES (Continued)
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 September 30, 2000, the balance owed is presented as "Due to
SunBridge - purchased receivables" in the accompanying condensed consolidated
balance sheet.
Effective September 1, 1999, the Company finalized agreements to acquire the
operations of two of the managed facilities, Adams House and Heritage Heights.
The related real property was leased with options to purchase which expire
August 30, 2001; 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. Under the terms of
the management agreement, which terminated on August 31, 1999, the Company
earned management fees of $4,422,000 and incurred costs and expenses of
$4,407,000 during the two months ended August 31, 1999.
SALE OF BUSINESS
On June 14, 2000 BALZ sold its operating assets and business (exclusive of cash
and accounts receivable) to an unrelated company, for $539,000 plus assumption
of certain liabilities relating to financed equipment and leases. The agreement
provided for a $40,000 cash payment at closing, a $260,000 note receivable
requiring twelve equal monthly installments of principal and interest of $22,000
beginning July 1, 2000, and a payment of $239,000 for the book value of
inventory due 90 days after closing.
As of September 30, 2000 the Company had received the payments due it under the
note receivable, but had not received the payment for the book value of the
inventory. However, the Company believes that its credit risk is minimal since
it has the right to offset payables for goods purchased from the unrelated
company in an amount sufficient to cover any unpaid amounts owing to the
Company.
Prior to the sale of the business later in the fiscal year, BALZ had revenues of
$395,000, expenses of $299,000 and net income of $96,000 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, 2000 and for
the three months ended September 30, 2000 and 1999 is unaudited)
NOTE D - RENEGOTIATION OF RELATED PARTY OPERATING LEASE
The Company leases four of its nursing 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 thirteen 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 that rent reduction
has been accounted for by increasing deferred rent which equalizes the annual
rent expense over the remaining fourteen-year term of the lease.
Rent expense charged to operations under this related party operating lease
aggregated $612,000 and $615,000 for the three months ended September 30, 2000
and 1999, respectively.
NOTE E - THIRD-PARTY REVENUE ADJUSTMENTS AND SETTLEMENTS
Revenues are recognized at the time the service is provided to the patient. A
substantial amount of the Company's revenues are billed to third party payors,
i.e., Medicaid, Medicare and others under the provisions of reimbursement
formulas and regulations in effect.
Patient service revenue is reported at the estimated net realizable amount from
residents, third-party payors, and others for services rendered. Revenue
received under cost reimbursement agreements is subject to audit and retroactive
adjustment by third-party payors. Provisions for estimated adjustments have been
reflected in patient service revenue. Differences between estimated adjustments
and final settlements are recorded in the year of settlement.
The Company has recorded reductions in patient service revenue of $430,000
during the three months ended September 30, 2000 in connection with adjustments
of previously recorded 1997 and 1998 estimated Medicare settlements.
Such amount represents management's best estimates of the amounts expected to be
due and are based on anticipated results of ongoing negotiations, interpretation
of applicable regulations and other assumptions. It is reasonably possible that
the amounts the Company will ultimately be obligated to pay could differ
materially in the near term.
Page 8.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to September 30, 2000 and for
the three months ended September 30, 2000 and 1999 is unaudited)
NOTE F - COMMITMENTS AND CONTINGENCIES
GOVERNMENT INVESTIGATION
In October 1999, Federal officials (the "government") seized records and
documents from the Company and subpoenaed current and former employees to
provide testimony in connection with a grand jury investigation being conducted
by the Office of the U.S. Attorney. The Company and certain members of present
and former senior management have been named as targets of the government's
investigation. However, the government has not provided the Company with any
documentation from which it may determine the nature and scope of the
investigation.
The Company is cooperating fully with the government investigation, has provided
all requested records and information, and management is confident that the
Company has not committed any wrongdoings. In addition, the Company has
established an independent committee of the Board of Directors to supervise its
own investigation. 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. Since the
inception of the government action through September 30, 2000 the Company has
recorded charges to expense of $378,000 relating to this matter.
OTHER CONTINGENCIES
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
PATIENT SERVICE REVENUE
Laws and regulations governing the Medicare and Medicaid programs are complex
and subject to interpretation. The Company believes that it is in compliance
with all applicable laws and regulations and is not aware of any significant
pending or threatened investigations involving allegations of potential
wrongdoing, except for the investigation discussed in Note F.
Compliance with such laws and regulations are subject to government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs. Changes in the
Medicare and Medicaid programs and/or the reduction of funding levels could have
an adverse impact on the Company.
Page 9.
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to September 30, 2000 and for
the three months ended September 30, 2000 and 1999 is unaudited)
NOTE G - RISKS AND UNCERTAINTIES (Continued)
LEGISLATION, REGULATIONS AND MARKET CONDITIONS
The Company is subject to extensive federal, state and local government
regulation relating to licensure, conduct of operations, ownership of
facilities, expansion of facilities and services and reimbursement for services.
As such, in the ordinary course of business, the Company's operations are
continuously subject to state and federal regulatory scrutiny, supervision and
control. Such regulatory scrutiny often includes inquiries, investigations,
examinations, audits, site visits and surveys, some of which may be non-routine.
The Company believes that it is in substantial compliance with the applicable
laws and regulations. However, if the Company is ever found to have engaged in
improper practices, it could be subjected to civil, administrative or criminal
fines, penalties or restitutionary relief which may have a material adverse
impact on the Company's financial results and operations.
NOTE H - OPERATIONS
The Company reported a loss of $962,000 for the three months ended September 30,
2000 which includes a reduction of patient service revenue of $430,000 as
discussed in Note E. Management has prepared plans which contemplate a
significant turnaround in ongoing operations and profitability and has plans to
address the Company's equity capital and cash flow needs so that operations may
continue in the normal manner.
Specifically, layoffs have been implemented, field and administrative positions
were restructured to reduce costs, and cost monitoring has been tightened.
Management is actively pursuing obtaining additional equity capital including a
warrant offering for which warrants have already been registered with the SEC
and potential investors have been contacted. In addition, positive cash flow is
expected to result from collection of receivables of BALZ and Lexicon estimated
at over $1,300,000, additional nursing home and home health agency collections
of $900,000 and a proposed sale of surplus bed licenses for $500,000.
Page 10.
<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 condensed consolidated financial
statements and notes thereto.
Overview
In the first three months of the fiscal year ending June 30, 2001, the Company
continued to operate eight nursing homes, a home health agency and therapy
company.
During the fiscal year ended June 30, 2000, the Company's operations were
affected when the management contract for two nursing homes was terminated, when
certain assets and the business of BALZ were sold, when the Company's joint
venture pharmacy ceased operations, and when settlements were negotiated on
employment agreements with two executives. The two remaining nursing homes under
management contract were leased and are now operated by the Company. Further,
the Company experienced a government investigation during the year ended June
30, 2000 which resulted in certain costs.
The long term care industry has experienced many changes in recent years
including the implementation of the Balanced Budget Act of 1997 ("BBA") which
resulted in a new Medicare Prospective Payment System (known as PPS). Under PPS,
Medicare revenues are substantially less than those earned under the former
cost-based reimbursement system. Some of the Company's Medicare rate cuts were
restored in October 1999 and April 2000; in addition, a 4% federal rate increase
became effective October 1, 2000.
In Connecticut, multiple long term care entities have undergone financial
reorganization in 1999 and 2000 due to reduced occupancy and PPS-related revenue
reductions and increasing cost pressures (including union costs), and have
experienced considerable losses in the market value of their own securities.
The Company believes its continued emphasis on cost controls and development of
ancillary businesses remains the most appropriate strategy. Further, the Company
is encouraged by the above-noted Medicare rate increases and recently proposed
legislation to fund staffing increases for nursing homes, although it cannot be
estimated what effect, if any, this proposed legislation may have on the
Company's revenues in the near term.
The Company continues to believe 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 and home care agencies. In addition, the
Company anticipates that recent trends toward industry consolidation will
continue.
Page 11.
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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 increasing marketing of rehabilitative services and nursing
services to affiliated and non-affiliated nursing homes as well as to 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.
Results of Operations
Three months ended September 30, 2000 ("2000 period") vs. three months ended
September 30, 1999 ("1999 period")
For the three months ended September 30, 2000, the Company had total revenues of
$17,292,000 and total expenses of $18,254,000. For the three months ended
September 30, 1999, the Company had total revenues of $21,340,000 and total
expenses of $21,241,000. The Company had a net loss of $962,000 or $(.27) per
share for the three months ended September 30, 2000. The Company had net income
of $32,000 or $.01 per share for the three months ended September 30, 1999,
after providing for income taxes of $10,000 and minority interests of $57,000.
For the three months ended September 30, 2000, operating expenses consisted of
salaries and benefits of $14,131,000, food, medical and other supplies of
$936,000, and other operating expenses (including rent of $832,000) of
$2,204,000. Also, the Company had corporate, general and administrative expenses
of $615,000 and interest expense of $368,000.
Revenues in the 2000 period decreased from the 1999 period by $4,048,000 or 19%,
largely as a result of the termination of the management agreement for two
nursing homes, the sale of Balz, and the termination of Lexicon's operations.
Operating expenses in the 2000 period decreased over the 1999 period by
$2,961,000 or 15% largely as a result of termination of the management agreement
and sale or termination of the businesses as noted above. Administrative and
general expenses decreased by $106,000 due to reduced staffing. Interest costs
increased by $80,000 as a result of additional borrowings and higher interest
rates.
Income taxes were provided in the 1999 period on pre-tax income of $42,000; the
combined federal and state effective rate was 24%.
Page 12.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company has primarily financed its operations through operating revenues,
borrowings from banks, 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, and through the sale of bed
licenses.
During the three months ended September 30, 2000, the Company expended
approximately $167,000, in capital improvements to its leased facilities. Any
capital improvements made to these 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, 2000 the Company expended $494,000 for capital improvements at its
owned facilities which was funded by the mortgagor under the terms of the
mortgage.
At September 30, 2000, the Company had cash and cash equivalents of $1,528,000,
receivables of $15,709,000, inventories, prepaid expenses and other current
assets of $1,430,000. Receivables decreased by $1,254,000 since June 30, 2000
due to reduced volume from the ancillary businesses, offset by generally higher
reimbursement rates in effect.
There was a working capital deficiency at September 30, 2000 of $2,568,000 as
compared with working capital deficiency of $1,498,000 at June 30, 2000. The
principal reasons for the change are the loss from operations (including the
adjustment to reduce revenues for prior years cost settlements of $430,000) and
costs relating to the government investigation. Current liabilities at September
30, 2000 consist principally of trade accounts payable, amounts due to SunBridge
for purchased accounts receivable, estimated third-party payor settlements due
Medicare and Medicaid, current portion of notes and capital leases payable,
accrued payroll and related taxes, and other accrued expenses.
In December 1998, the Company entered into a financing agreement with a
healthcare lender for up to $4,500,000, subsequently increased to $6,000,000,
which is secured by its accounts receivable and certain other assets. As of
September 30, 2000, $4,537,000 was borrowed under this agreement. The Company
has increased its utilization of this line of credit to finance working capital
needs as a result of payback of Medicare and Medicaid settlements, costs of the
government investigation, and operating losses.
The Company reported a loss of $962,000 for the three months ended September 30,
2000 which includes a reduction of patient service revenue of $430,000 as
discussed in Note E. Management has prepared plans which contemplate a
significant turnaround in ongoing operations and profitability and has plans to
address the Company's equity capital and cash flow needs so that operations may
continue in the normal manner.
Page 13.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (Continued)
Specifically, layoffs have been implemented, field and administrative positions
were restructured to reduce costs, and cost monitoring has been tightened.
Management is actively pursuing obtaining additional equity capital including a
warrant offering for which warrants have already been registered with the SEC
and potential investors have been contacted. In addition, positive cash flow is
expected to result from collection of receivables of BALZ and Lexicon estimated
at over $1,300,000, additional nursing home and home health agency collections
of $900,000 and a proposed sale of surplus bed
Inflation has not had, nor is it expected to have, a material impact on the
operations and financial condition of the Company.
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, Federal officials (the "government") seized records and
documents from the Company and subpoenaed current and former employees to
provide testimony in connection with a grand jury investigation being conducted
by the Office of the U.S. Attorney. The Company and certain members of present
and former senior management have been named as targets of the government's
investigation. However, the government has not provided the Company with any
documentation from which it may determine the nature and scope of the
investigation.
The Company is cooperating fully with the government investigation, has provided
all requested records and information, and management is confident that the
Company has not committed any wrongdoings. In addition, the Company has
established an independent committee of the Board of Directors to supervise its
own investigation. 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. Since
inception through September 30, 2000 the Company has incurred expenses of
$378,000 relating to this matter.
The independent committee of the Board of Directors approved a formal Corporate
Compliance Plan which was submitted to the Connecticut Department of Social
Services in February 2000. The following actions have been taken in support of
that plan:
o An experienced operations executive was named Corporate Compliance Officer
o An 800 "hot line" phone number to report questions or problems has been
set up and communicated to employees and others
o A Management Compliance Committee has held seven monthly meetings,
resulting in a number of formal policies being written and distributed
including a Corporate Compliance Handbook for employees which includes
disciplinary guidelines, an offense detection plan, and corrective action
initiatives
o Corporate compliance training for employees has been conducted
o Written policies and procedures have been prepared relating to State of CT
reimbursement (including related party transactions and cost report
preparation ); training will be completed before preparing the 2000 cost
reports
o Quarterly audits of management costs, related party transactions and rent
payments have been completed and submitted to the State of Connecticut
The Company has received notice of lawsuits initiated against it in April 2000
concerning four nursing homes which it was managing for SunBridge Healthcare
Corporation; the claims are being made by affiliates of SunBridge for therapy
and pharmacy services rendered. The total claimed is $1.2 million of which $1.1
million is reflected by invoices recorded on the Company's books. The Company
believes that the claim includes overbillings, payments and credits not applied,
and amounts charged in excess of contract rates. The Company intends to
vigorously contest the lawsuits as it works out arrangements to pay appropriate
charges.
Page 15.
<PAGE>
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
NONE
Item 5. Other Information
NONE.
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/ Harry Dermer
-----------------------------------
(Harry Dermer, Chief Executive Officer and President)
(Duly Authorized Officer)
Date November 14, 2000 /s/ Thomas E. Dybick
----------------- -----------------------------------
(Thomas E. Dybick, Chief Financial Officer)
(Principal Financial Officer)
Page 16.
