-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EB9scCdIDtSW34VjiBoODI18tnbvjrwrSpnoozqfNQ0ZBZ0TLEvtWkcgoS4QKjmG HybMAAOGq8bJ5X466ktfyw== 0000914039-98-000188.txt : 19980514 0000914039-98-000188.hdr.sgml : 19980514 ACCESSION NUMBER: 0000914039-98-000188 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEXINGTON HEALTHCARE GROUP INC CENTRAL INDEX KEY: 0001026348 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 061468252 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22261 FILM NUMBER: 98617940 BUSINESS ADDRESS: STREET 1: 35 PARK PL CITY: NEW BRITAIN STATE: CT ZIP: 06052 BUSINESS PHONE: 8602236902 MAIL ADDRESS: STREET 1: 35 PARK PLACE CITY: NEW BRITTAIN STATE: CT ZIP: 06052 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For The QUARTER ENDED MARCH 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 - -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 1577 NEW BRITAIN AVENUE, FARMINGTON, CT 06032 - --------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 860-674-2700 ------------ 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: MAY 12, 1998 4,125,000 Common Shares outstanding 2 LEXINGTON HEALTHCARE GROUP, INC. MARCH 31, 1998 FORM 10-Q INDEX PART I -- FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Condensed Consolidated Balance Sheets -- March 31, 1998 and June 30, 1997.........................................................................Pg. 3. Condensed Consolidated Statements of Operations -- Nine months and three months ended March 31, 1998 and 1997.........................................................Pg. 4. Condensed Consolidated Statements of Cash Flows -- Nine months ended March 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. 15.
Page 2 3 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, JUNE 30, 1998 1997 (UNAUDITED) ----------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,542,000 $ 1,000,000 Accounts and note receivable, net 10,019,000 6,541,000 Note receivable - stockholder (Note C) 155,000 - Estimated third-party payor settlements - Medicare & Medicaid 431,000 278,000 Inventories 506,000 403,000 Prepaid expenses and other current assets 766,000 418,000 ----------- ----------- Total current assets 13,419,000 8,640,000 LAND, BUILDINGS, EQUIPMENT & LEASEHOLD IMPROVEMENTS, net 2,821,000 814,000 OTHER ASSETS Goodwill, net 3,151,000 3,275,000 Security deposits 2,549,000 2,282,000 Bed licenses, net 1,655,000 - Operating subsidy receivable (less current portion) 698,000 - Other assets, net 462,000 260,000 Residents' funds 177,000 161,000 ----------- ----------- 8,692,000 5,978,000 ----------- ----------- $24,932,000 $15,432,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 7,477,000 $ 7,737,000 Estimated third-party payor settlements - Medicare & Medicaid 1,038,000 323,000 Notes and capital leases payable (current portion) 1,050,000 89,000 Income taxes payable 352,000 204,000 ----------- ----------- Total current liabilities 9,917,000 8,353,000 OTHER LIABILITIES Mortgage note payable (less current portion) 6,883,000 - Notes and capital leases payable (less current portion) 126,000 107,000 Deferred rent 377,000 416,000 Residents' funds payable 177,000 161,000 Deferred taxes 42,000 - ----------- ----------- 7,605,000 684,000 ----------- ----------- Total liabilities 17,522,000 9,037,000 ----------- ----------- MINORITY INTERESTS 234,000 - 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 6,431,000 6,168,000 Retained earnings 704,000 186,000 ----------- ----------- Total stockholders' equity 7,176,000 6,395,000 ----------- ----------- $24,932,000 $15,432,000 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 3 4 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED MARCH 31, MARCH 31, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ REVENUES Net patient service revenue $ 42,772,000 $ 26,072,000 $ 14,913,000 $ 8,777,000 Other revenue 474,000 226,000 144,000 74,000 ------------ ------------ ------------ ------------ Total revenues 43,246,000 26,298,000 15,057,000 8,851,000 EXPENSES Facility operating expenses: Salaries and benefits 31,288,000 20,027,000 10,649,000 7,017,000 Food, medical and other supplies 3,215,000 1,688,000 968,000 613,000 Other operating expenses 5,848,000 3,530,000 2,467,000 956,000 Corporate, general and administrative expenses 1,631,000 763,000 649,000 277,000 ----------- ------------ ------------ ------------ Total expenses 41,982,000 26,008,000 14,733,000 8,863,000 ------------ ------------ ------------ ------------ Income (loss) from operations 1,264,000 290,000 324,000 (12,000) ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE) Gain on sale of bed licenses 280,000 - - - Minority interest (117,000) - (90,000) - Interest expense (600,000) (98,000) (167,000) (28,000) ------------ ------------ ------------ ------------ Total income (expense) (437,000) (98,000) (257,000) (28,000) ------------ ------------ ------------ ------------ Income (loss) before income taxes 827,000 192,000 67,000 (40,000) INCOME TAXES (Note B) 309,000 - 39,000 - ------------ ------------ ------------ ------------ Net income (loss) $ 518,000 $ 192,000 $ 28,000 $ (40,000) ============ ============ ============ ============ Net income (loss) per common share $ 0.13 $ 0.06 $ 0.01 $ (0.01) ============ ============ ============ ============ Weighted average number of common shares outstanding 4,125,000 3,092,000 4,125,000 3,092,000 ============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 4 5 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
1998 1997 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 518,000 $ 192,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities 273,000 (54,000) (Increase) decrease in accounts receivable (3,298,000) 1,319,000 Changes in other operating assets and liabilities 1,110,000 1,104,000 ----------- ----------- Net cash provided by (used in) operating activities (1,397,000) 2,561,000 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Note receivable - related party (757,000) (121,000) Repayments of note receivable - related party 607,000 - Increase in security deposits (267,000) - Acquisition of fixed assets (334,000) (246,000) ----------- ----------- Net cash used in investing activities (751,000) (367,000) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Stock registration costs (42,000) (141,000) Proceeds from sale of bed licenses 1,550,000 - Proceeds from notes payable 901,000 1,002,000 Minority interest investment in consolidated joint ventures 117,000 - Issuance of preferred capital in joint venture 305,000 - Issuance of common stock - 275,000 Repayments of notes payable and capital lease obligations (141,000) (2,759,000) ----------- ----------- Net cash provided by (used in) financing activities 2,690,000 (1,623,000) ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 542,000 571,000 CASH AND CASH EQUIVALENTS, beginning of year 1,000,000 212,000 ----------- ----------- CASH AND CASH EQUIVALENTS, end of year $ 1,542,000 $ 783,000 =========== =========== NON-CASH INVESTING AND FINANCING ACTIVITIES: Certain assets acquired through assumption of mortgage note payable $ 6,997,000 $ - Equipment and leasehold improvements acquired through assumption of notes payable and capital leases 86,000 -
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 5 6 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 1998 AND FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 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 six nursing home facilities at March 31, 1998 with 853 beds licensed by the State of Connecticut. BALZ provides medical supplies and durable medical equipment to nursing homes ; PRN provides health care services in the homes of its patients. 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, 1997 is derived from audited financial statements; certain line items have been combined or condensed in their presentation herein. Inventories consisting of food, chemicals and medical and other supplies are valued at the lower of cost or market, with cost determined on a first-in, first-out (FIFO) basis. In 1996 the Company was operated as an LLC and accordingly no income taxes were due at that time. However, income taxes have been provided for after the reorganization of entities under common control discussed below. 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. 7 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 1998 AND FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED) NOTE C - REORGANIZATION, PUBLIC STOCK OFFERING AND ACQUISITIONS Accordingly, the accompanying condensed consolidated financial statements for the period prior to the reorganization reflect the accounts and operations of LLC and adjustment has been made to give effect to the reorganization resulting in the restatement of certain stockholders' equity accounts. The Company acquired in May 1997, simultaneously with the closing of the public offering, all of the common stock of BALZ and PRN. On the basis of a pro forma consolidation of the results of operations as if these acquisitions had taken place at the beginning of fiscal year 1997, consolidated total revenues would have been $30.3 million for the nine months ended March 31, 1997. On October 14, 1997 the Company loaned $757,000 to its Chief Executive Officer and principal stockholder in order for him to pay personal income taxes due as a result of the reorganization of entities under common control (i.e., the Company's IPO). There was no cash compensation paid to him as part of the reorganization. The borrowing was evidenced by a 9% interest earning note receivable on which payments were made on December 26 ($157,000) and December 31 ($300,000) to reduce the note to $300,000, which remained outstanding as of December 31, 1997. Interest on the note (amounting to $14,500) was paid in full through December 31, 1997. Subsequently, an additional $150,000 was repaid on February 3, 1998 leaving a balance of $150,000, plus accrued interest through March 31, 1998 of $4,549. NURSING HOME ACQUISITIONS On July 1, 1997 Lexington Highgreen Holding, Inc. (a wholly-owned subsidiary of Lexington Healthcare Group, Inc.) purchased substantially all of the assets of two skilled nursing facilities in Connecticut, Greenwood Health Center and Highland Acres Extend-a-Care Center from Beverly Enterprises, Inc. ("Beverly"). Before the sale of the two nursing facilities, Beverly had operated 315 licensed beds at these two facilities. The Company is operating 225 beds and has returned the license on 40 beds to the State of Connecticut. The entire transaction was financed by a $6.8 million mortgage. Beverly has agreed to pay a $2.5 million operating subsidy to the Company over five years, bringing the net cost of the transaction to the Company to $4.3 million. In November 1997, the Company sold the remaining license on 50 beds to an unrelated party for $1,550,000 in cash which resulted in a gain of $280,000 ($.04 per common share). Page 7. 8 LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 1998 AND FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED) NOTE C - REORGANIZATION, PUBLIC STOCK OFFERING AND ACQUISITIONS (CONTINUED) On the basis of a pro forma consolidation of the results of operations as if the acquisitions had taken place on July 1, 1996, consolidated net revenues would have been $34,000,000 for nine months ended March 31, 1997. Consolidated pro forma net loss would have been $(1,667,000) for the nine months ended March 31, 1997 and pro forma net loss per share would have been $(.54). Such pro forma amounts reflect the operating results produced by Beverly and are not necessarily indicative of what the actual consolidated results of operations might have been had the acquisitions been effective on July 1, 1996. 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 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 consolidated financial statements with appropriate recognition of minority interest. NOTE D - RECENTLY ISSUED ACCOUNTING STANDARDS; EARNINGS PER SHARE The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". The objective of SFAS No. 128 is to simplify the standards for computing earnings per share (EPS) and make them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. SFAS No. 128 was effective for periods ending after December 15, 1997, including interim periods; earlier application was not permitted. Implementation of SFAS No. 128 did not have any impact on the Company's calculation of EPS. Page 8. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW In May 1997, the Company reorganized its capital structure and completed an initial public stock offering (the "Offering") which raised net proceeds of approximately $4.1 million. In connection with the Offering, the Company acquired two healthcare businesses - a medical supplies company and a home health agency. During the nine months ended March 1998, the Company expanded its nursing home operations by adding two additional facilities, which were acquired on July 1, 1997. Also, in October and December 1997, the Company started two joint venture companies with other healthcare providers to provide rehabilitation and pharmacy services. On January 20, 1998 the Company announced that it had signed a letter of intent to acquire Franvale Nursing and Rehabilitation Center, a 128-bed skilled nursing facility located in Braintree, Massachusetts from an unrelated party, Quality Care Centers of Massachusetts, Inc., a subsidiary of PHC, Inc. (dba Pioneer Healthcare). The acquisition of this facility expands the Company's operations into Massachusetts, a target growth area. The Company is continuing to pursue the necessary federal and state approvals required to close this transaction. On March 9, 1998 the Company announced that it had formed a joint venture (to be known as Behavioral Rehab Services) with Pioneer Healthcare to develop and provide psychological services to residents in nursing homes, initially in Connecticut, with later expansion to other states planned. As of March 31, 1998, operations had not yet commenced. The Company believes that the demand for long-term care and specialty medical services will increase substantially over the next decade due primarily to favorable demographic trends, advances in medical technology and emphasis on healthcare cost containment. At the same time, government restrictions and high construction and start-up costs are expected to limit the supply of long-term care facilities. In addition, the Company anticipates that recent trends toward industry consolidation will continue and will provide future acquisition opportunities. The Company's operating strategy is to increase Facility profitability levels, through aggressive marketing and by offering rehabilitation therapies and other specialized services; adhering to strict cost standards at the Facility level while providing effective patient care and containing corporate overhead expenses; and becoming a fully integrated health network whereby the Company will market medical products and supplies, rehabilitative services, institutional pharmaceutical services and nursing services to affiliated and non-affiliated nursing homes and hospitals, as well as patients at home. Page 9. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS By concentrating its facilities and ancillary service operations within a selected geographic region, the Company's strategy is to achieve operating efficiencies through economies of scale, reduced corporate overhead, more effective management supervision and financial controls. In addition, the Company believes that geographic concentration also enhances the Company's ability to establish more effective relationships with referral sources and regulatory authorities in the states where the Company operates. The Company's strategy is to gradually expand services into additional states including Massachusetts and New Jersey. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 ("1998 PERIOD") VS. THREE MONTHS ENDED MARCH 31, 1997 ("1997 PERIOD") For the three months ended March 31, 1998, the Company had total revenues of $15,057,000 and total operating expenses of $14,733,000. For the three months ended March 31, 1997, the Company had total revenues of $8,851,000 and total operating expenses of $8,863,000. The Company had net income of $28,000 or $.01 per share for the three months ended March 31, 1998, after providing for income taxes of $39,000. The Company had a net loss of $40,000 or $(.01) per share for the three months ended March 31, 1997, but no income taxes were due for the 1997 period since the Company was operated as an LLC at that time and income taxes were paid by its members. For the three months ended March 31, 1998, operating expenses consisted of salaries and benefits of $10,649,000, food, medical and other supplies of $968,000, other operating expenses (including rent of $655,000) of $2,467,000, and corporate, general and administrative expenses of $649,000. In addition, income from operations was reduced by minority interest of $90,000 and interest expense of $167,000. Revenues in the 1998 period increased over the 1997 period by $6,206,000 or 71%, largely as a result of the acquisitions during May 1997 and July 1997. Of the total increase, $6,159,000 pertained to the nursing homes and healthcare businesses acquired and $47,000 was from increased rates, mix changes and lower occupancy (1.5% decrease) in the existing nursing facilities. Operating expenses in the 1998 period increased over the 1997 period by $5,870,000 or 66%, largely as a result of the acquisitions noted above. Of the total cost increase, $5,844,000 pertained to the nursing homes and healthcare businesses acquired and $26,000 was from increased existing-facility and corporate, general and administrative costs. The increase in existing nursing home costs was attributable to higher salaries and benefits including additional nursing, dietary, and housekeeping staffing (as a result of higher occupancy and wage increases), higher therapy costs and occupancy-driven higher operating expenses. Minority interest increased by $90,000 on the joint ventures acquired in fiscal 1998; interest expense increased by $139,000 mostly as a result of the new mortgage on the facilities acquired in July. Page 10. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Income taxes were provided in the 1998 period on pre-tax income of $67,000; the combined federal and state effective tax rate was 58%. No income taxes were provided in the 1997 period since the Company was operated as an LLC at that time. RESULTS OF OPERATIONS NINE MONTHS ENDED MARCH 31, 1998 ("1998 PERIOD") VS. NINE MONTHS ENDED MARCH 31, 1997 ("1997 PERIOD") For the nine months ended March 31, 1998, the Company had total revenues of $43,246,000 and total operating expenses of $41,982,000. For the nine months ended March 31, 1997, the Company had total revenues of $26,298,000 and total operating expenses of $26,008,000. The Company had net income of $518,000 or $.13 per share for the nine months ended March 31, 1998, after providing for income taxes of $309,000. The Company had net income of $192,000 or $.06 per share for the nine months ended March 31, 1997, but no income taxes were due for the 1997 period since the Company was operated as an LLC at that time and income taxes were paid by its members. On a pro forma basis, had income taxes been provided in 1997 at a rate of 38%, net income would have been $119,000 ($.04 per common share). For the nine months ended March 31, 1998, operating expenses consisted of salaries and benefits of $31,288,000, food, medical and other supplies of $3,215,000, other operating expenses (including rent of $1,959,000) of $5,848,000, and corporate, general and administrative expenses of $1,631,000. In addition, income from operations was reduced by minority interests of $117,000 and interest expense of $600,000. Other income of $280,000 was recorded on the sale of the bed license in November, 1997. Revenues in the 1998 period increased over the 1997 period by $16,948,000 or 64%, largely as a result of the acquisitions during May 1997 and July 1997. Of the total increase, $16,230,000 pertained to the nursing homes and healthcare businesses acquired and $718,000 was from increased rates, mix changes and higher occupancy (2% increase) in the existing nursing facilities. The Company collected $102,000 in excess of the net carrying value of accounts receivable purchased in connection with the Greenwood and Highland acquisitions. Since the Company has collected more than originally recorded for these purchased AR such amount has been included in other revenue. Page 11. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating expenses in the 1998 period increased over the 1997 period by $15,974,000 or 61%, largely as a result of the acquisitions noted above. Of the total cost increase, $15,022,000 pertained to the nursing homes and healthcare businesses acquired and $952,000 was from increased existing-facility and corporate, general and administrative costs. The increase in existing nursing home costs was attributable to higher salaries and benefits including additional nursing, dietary, and housekeeping staffing (as a result of higher occupancy and wage increases), higher therapy costs and occupancy-driven higher operating expenses. Minority interest increased by $117,000 on the joint ventures acquired in fiscal 1998; interest expense increased by $502,000 mostly as a result of the new mortgage on the facilities acquired in July. Income taxes were provided in the 1998 period on pre-tax income of $827,000; the combined federal and state effective tax rate was 37%. No income taxes were provided in the 1997 period since the Company was operated as an LLC at that time. 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 August 1997, the Company obtained a $2,000,000 revolving line of credit (at prime plus .50%) from a bank, which is secured by its accounts receivable and other assets. In November, 1997 this line of credit was utilized with a borrowing of $1,000,000 which was repaid after the sale of bed licenses. In March $400,000 was borrowed for working capital purposes; $200,000 of this was repaid in April, 1998; $1,600,000 was available at March 31, 1998. Page 12. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On October 14, 1997 the Company loaned $757,000 to its Chief Executive Officer and principal stockholder in order for him to pay personal income taxes due as a result of the reorganization of entities under common control (i.e., the Company's IPO). There was no cash compensation paid to him as part of the reorganization. The borrowing was evidenced by a 9% interest earning note receivable on which payments were made on December 26 ($157,000) and December 31 ($300,000) to reduce the note to $300,000, which remained outstanding as of December 31, 1997. Interest on the note (amounting to $14,500) was paid in full through December 31, 1997. Subsequently, an additional $150,000 was repaid on February 3, 1998 leaving a balance of $150,000, plus accrued interest of $4,549 at March 31, 1998. During the nine months ended March 31,1998, the Company expended approximately $106,000 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 nine months ended March 31, 1998 the Company expended $191,000 for capital improvements at its owned facilities, of which $134,000 was funded by the mortgagor under the terms of the mortgage. The Company has recorded $272,000 of investments in joint ventures (of which $48,000 was paid through March 31, 1998) which began operations in 1997 and became profitable in 1997; positive cash flow is expected in 1998. The Company's profitable ancillary businesses grew by approximately 31% from 1997 to 1998. At March 31, 1998, the Company had cash and cash equivalents of $1,542,000, receivables of $10,450,000, inventories of $506,000, prepaid expenses and other current assets of $766,000, and a note receivable from its principal stockholder of $155,000. Receivables including estimated third-party payer settlements increased by $3,631 ,000 since June 30, 1997 due mostly to the nursing homes acquired in July and generally higher rates in effect. Working capital at March 31, 1998 was $3,502,000 as compared with working capital of $287,000 at June 30, 1997. The principal reasons for the increase are profitable operations in the first nine months, the bed licenses sold, and the operating subsidy receivable obtained in connection with the nursing home acquisitions. Current liabilities at March 31, 1998 consist principally of trade accounts payable, 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. 14 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 14. 15 PART II - OTHER INFORMATION Item 1. Legal Proceedings NONE Item 2. Change in Securities NONE Item 3. Defaults Upon Senior Securities NONE Item 4. Submission of Matters to a Vote of Security Holders NONE Item 5. Other Information The Company was advised by The NASDAQ Stock Market, Inc. on February 26 & 27, 1998 that it was not in compliance with new net tangible asset requirements and new market value of public float requirements both of which became effective February 23, 1998. The Company is required to have net tangible assets of $4,000,000; as of March 31, 1998 the Company had net tangible assets of $4,025,000. The Company is required to have a value of public float of $5,000,000; the value of public float at close of trading on May 11, 1998 ($3.00 per share) is $4,059,000. The Company is pursuing remedies to the public float requirement and has requested an extension of time from NASDAQ which has been granted. 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 May 13, 1998 /s/ Thomas E. Dybick -------------------- ------------------------------------------- (Thomas E. Dybick, Chief Financial Officer) (Principal Financial Officer) Page 15. EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S MARCH 31, 1998 CONDENSED CONSOLIDATED BALANCE SHEETS, CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS AND CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS OF LEXINGTON HEALTH GROUP, INC. 1,000 U.S. DOLLARS 9-MOS JUN-30-1998 JUL-01-1997 MAR-31-1998 1 1,542 0 10,019 0 506 13,419 2,821 0 24,932 9,917 7,009 0 0 41 7,135 24,932 42,772 43,246 0 41,982 (163) 0 600 827 309 518 0 0 0 518 .13 .13
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