-----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, KAMBXbIcaJP+ZjaqALJZtumKRWske20ZanBtMeUHeS0K80GUHx2Bk8KDhs3oRsQg 2evV7CtzdtTvIrAv8zHJHg== 0001005477-99-002439.txt : 19990518 0001005477-99-002439.hdr.sgml : 19990518 ACCESSION NUMBER: 0001005477-99-002439 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99626547 BUSINESS ADDRESS: STREET 1: 1557 NEW BRITAIN AVE CITY: FARMINGTON STATE: CT ZIP: 06032 BUSINESS PHONE: 8606742700 MAIL ADDRESS: STREET 1: 1557 NEW BRITAIN AVE CITY: FARMINGTON STATE: CT ZIP: 06032 10-Q 1 FORM 10-Q 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, 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 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 14, 1999 4,125,000 Shares of Common Stock outstanding LEXINGTON HEALTHCARE GROUP, INC. MARCH 31, 1999 FORM 10-Q INDEX Part I -- Financial Information Item 1. Consolidated Financial Statements Condensed Consolidated Balance Sheets -- March 31, 1999 and June 30, 1998.......................................................................Pg. 3. Condensed Consolidated Statements of Operations -- Nine months and three months ended March 31, 1999 and 1998................................................Pg. 4. Condensed Consolidated Statements of Cash Flows -- Nine months ended March 31, 1999 and 1998.............................................................Pg. 5. Notes to Condensed Consolidated Financial Statements..............................Pg. 6-8. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................Pg. 9-14. Part II -- Other Information. Item 1. Legal Proceedings..................................................................Pg. 15. Item 2. Changes in Securities..............................................................Pg. 15. Item 3. Defaults Upon Senior Securities....................................................Pg. 15. Item 4. Submission of Matters to a Vote of Security Holders................................Pg. 15. Item 5. Other Information..................................................................Pg. 15. Item 6. Exhibits and Reports on Form 8-K...................................................Pg. 15. Signatures.....................................................................................Pg. 16.
Page 2. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE STATEMENTS
March 31, June 30, 1999 1998 (Unaudited) ----------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,419,000 $ 831,000 Accounts receivable, net 13,444,000 10,848,000 Note receivable - related party 622,000 595,000 Estimated third-party payor settlements - Medicare 430,000 197,000 Inventories 933,000 777,000 Prepaid expenses and other current assets 1,102,000 533,000 ----------- ----------- Total current assets 19,950,000 13,781,000 PROPERTY, EQUIPMENT & LEASEHOLD IMPROVEMENTS, net 4,046,000 3,370,000 OTHER ASSETS Goodwill, net 3,055,000 3,181,000 Security deposits - related parties 2,337,000 2,337,000 Bed licenses, net 1,539,000 1,626,000 Operating subsidy receivable (less current portion) 592,000 701,000 Other assets, net 928,000 411,000 Residents' funds 265,000 206,000 ----------- ----------- 8,716,000 8,462,000 ----------- ----------- $32,712,000 $25,613,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $10,460,000 $ 8,532,000 Due to SunRise Healthcare Group - purchased receivables 2,632,000 -- Estimated third-party payor settlements - Medicaid 1,017,000 1,686,000 Notes and capital leases payable (current portion) 2,768,000 398,000 Income taxes payable 153,000 91,000 ----------- ----------- Total current liabilities 17,030,000 10,707,000 OTHER LIABILITIES Notes and capital leases payable (less current portion) 7,695,000 7,424,000 Deferred rent 327,000 364,000 Residents' funds payable 265,000 206,000 Other liabilities 120,000 -- ----------- ----------- 8,407,000 7,994,000 ----------- ----------- Total liabilities 25,437,000 18,701,000 ----------- ----------- MINORITY INTERESTS 662,000 529,000 STOCKHOLDERS' EQUITY Common stock, par value $.01 per share, authorized 15,000,000 shares, issued and outstanding 4,125,000 shares 41,000 41,000 Additional paid-in capital 6,126,000 6,126,000 Retained earnings 446,000 216,000 ----------- ----------- Total stockholders' equity 6,613,000 6,383,000 ----------- ----------- $32,712,000 $25,613,000 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 3. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Nine months ended Three months ended March 31, March 31, --------- --------- 1999 1998 1999 1998 ---- ---- ---- ---- REVENUES Net patient service revenue $ 44,474,000 $ 42,772,000 $ 14,226,000 $ 14,913,000 Management fee revenue 10,958,000 173,000 6,362,000 52,000 Other revenue 285,000 301,000 116,000 92,000 ------------ ------------ ------------ ------------ Total revenues 55,717,000 43,246,000 20,704,000 15,057,000 EXPENSES Operating expenses: Salaries and benefits 40,335,000 31,288,000 15,323,000 10,649,000 Food, medical and other supplies 5,693,000 3,215,000 2,000,000 968,000 Other operating expenses 6,142,000 5,848,000 2,342,000 2,467,000 Corporate, general and administrative expenses 2,221,000 1,631,000 787,000 649,000 Interest expense 751,000 600,000 270,000 167,000 ------------ ------------ ------------ ------------ Total expenses 55,142,000 42,582,000 20,722,000 14,900,000 ------------ ------------ ------------ ------------ Income (loss) from operations 575,000 664,000 (18,000) 157,000 OTHER INCOME Gain on sale of bed licenses -- 280,000 -- -- ------------ ------------ ------------ ------------ Income (loss) before income taxes and minority interest 575,000 944,000 (18,000) 157,000 INCOME TAXES 92,000 309,000 (31,000) 39,000 MINORITY INTEREST IN INCOME OF CONSOLIDATED JOINT VENTURES (253,000) (117,000) 34,000 (90,000) ------------ ------------ ------------ ------------ Net income $ 230,000 $ 518,000 $ 47,000 $ 28,000 ============ ============ ============ ============ Basic earnings per common share $ 0.06 $ 0.13 $ 0.01 $ 0.01 ==== ==== ==== ==== Weighted average number of common shares outstanding 4,125,000 4,125,000 4,125,000 4,125,000 ============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 4. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 230,000 $ 518,000 Adjustments to reconcile net income to net cash provided by operating activities 509,000 273,000 Minority interest in income of consolidated joint ventures 253,000 117,000 Increase in accounts receivable (2,596,000) (3,298,000) Increase (decrease) in accounts payable and accrued expenses 1,928,000 (260,000) Due to SunRise Healthcare Group - purchased receivables 2,632,000 -- Changes in other operating assets and liabilities (1,996,000) 1,871,000 ----------- ----------- Net cash provided by (used in) operating activities 960,000 (779,000) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Note receivable - related party (87,000) (757,000) Repayments of note receivable - related party 60,000 607,000 Increase in security deposits -- (267,000) Acquisition of fixed assets (513,000) (334,000) ----------- ----------- Net cash used in investing activities (540,000) (751,000) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Stock registration costs -- (42,000) Proceeds from sale of bed licenses -- 1,550,000 Proceeds from line of credit, net 2,350,000 400,000 Minority investment in consolidated joint ventures -- 305,000 Repayments of notes payable and capital lease obligations (182,000) (141,000) ----------- ----------- Net cash provided by financing activities 2,168,000 2,072,000 ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 2,588,000 542,000 CASH AND CASH EQUIVALENTS, beginning of period 831,000 1,000,000 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 3,419,000 $ 1,542,000 =========== =========== NON-CASH INVESTING AND FINANCING ACTIVITIES: Certain assets acquired through assumption of mortgage note payable $ 362,000 $ 6,863,000 Equipment and leasehold improvements acquired through assumption of notes payable and capital leases. 110,000 220,000
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 5. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information with respect to March 31, 1999 and for the three months and nine months ended March 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 (collectively, the "Company"), as well as the accounts of Lexicon Pharmacy Services, LLC, 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 ten nursing home facilities at March 31, 1999 with 1,302 beds licensed by the State of Connecticut. BALZ provides medical supplies and durable medical equipment to nursing homes ; PRN provides health care services in the homes of its patients. Lexicore and Lexicon provide rehab and pharmacy services respectively to patients in the Company's and other nursing homes. NOTE B - BASIS OF PRESENTATION The financial information included herein is unaudited and presented on a condensed basis; however, the information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary to present fairly the financial position, results of operations, and cash flows for the interim periods presented although the results shown for the interim periods presented herein are not necessarily indicative of the results to be obtained for a full fiscal year. The condensed balance sheet data as of June 30, 1998 is derived from audited financial statements; certain line items have been combined or condensed in their presentation herein. Inventories consisting of food, chemicals and medical and other supplies are valued at the lower of cost or market, with cost determined on a first-in, first-out (FIFO) basis. NOTE C - REORGANIZATION, PUBLIC STOCK OFFERING, ACQUISITIONS AND NEW BUSINESSES Lexington Healthcare Group, Inc. was incorporated in 1996. It completed an initial public offering of its common stock in May 1997 during which 1,125,000 shares of common stock at $5 per share and 1,940,625 common stock warrants at $.10 per warrant were issued resulting in net proceeds to the Company of $4.1 million. Upon completion of such offering, the Company became the successor to Lexington Health Care Group, LLC, a limited liability company ("LLC"). The business combination was accounted for as a reorganization of entities under common control, in a manner similar to a pooling of interests, using LLC's historical cost basis. Page 6. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information with respect to March 31, 1999 and for the three months and nine months ended March 31, 1999 and 1998 is unaudited) New Businesses On October 15, 1997 Lexicore Rehab Services, LLC began operations as a 50% owned joint venture with Core Rehab Management, LLC. The 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 based on the occurrence of certain future events. Henceforth the Company accounted for Lexicore's operations as a wholly-owned subsidiary; minority interest and liabilities were adjusted accordingly. On December 1, 1997 Lexicon Pharmacy Services, LLC began operations as a 70% owned joint venture with Pharmacy Corporation of America. The joint venture is controlled by the Company and the results of its operations from inception are included in the Company's condensed consolidated financial statements with appropriate recognition of minority interest. On November 1, 1998 the Company began providing management services for four skilled nursing facilities in Connecticut under an interim Management Agreement with SunRise Healthcare Corporation, a New Mexico corporation and nation-wide healthcare provider. As consideration for the services provided under this Management Agreement, the Company is entitled to retain the excess of any revenues earned over the expenses incurred during the term and will be responsible for any excess of expenses incurred over revenues earned in the operation of the facilities during the term. In addition, under the terms of the agreement SunRise also retained responsibility for all building lease costs. As a result of this agreement, the Company earned management fees of $6,310,000 and $10,803,000 and incurred costs and expenses of $6,100,000 and $10,066,000, respectively, during the three months and nine months ended March 31, 1999. The Company has completed agreements under which it will formally purchase and/or lease these four facilities; closings are expected during 1999. In total, the Company will acquire the license to approximately 500 skilled nursing beds. Page 7. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information with respect to March 31, 1999 and for the three months and nine months ended March 31, 1999 and 1998 is unaudited) NOTE D - NOTE RECEIVABLE--RELATED PARTY During September 1998, the Company converted an existing note receivable from and additional advances to an entity in which an officer and director of the Company has a controlling ownership interest into an 8% interest-bearing promissory note in the amount of $649,000 due from the officer. This note provides for $15,000 monthly installment payments beginning in November 1998 and a balloon payment of the remaining balance due May 31, 1999. As security for the note, the officer has pledged 600,000 of his shares of the common stock of the Company, with the certificate representing such shares being held in escrow by the Company's legal counsel. The balance of this note was $589,000 at March 31, 1999, which together with accumulated interest of $33,500, is classified as a current asset in the accompanying condensed consolidated balance sheet. Principal payments totaling $90,000 were made through April 1999 as required. NOTE E - CONTINGENCIES On July 31, 1998, the former President of PRN, the Company's home care subsidiary, initiated a lawsuit against Lexington Healthcare Group, Inc., PRN, and the Company's Chairman and CEO, in connection with her termination as President of PRN. The suit alleges breach of contract and wrongful discharge against the Company. The Company will vigorously defend the suit; it believes that the plaintiff breached the contract, failed to perform in good faith and was therefore terminated. At this time, it is not possible to estimate the final cost to the Company to resolve this matter. The Company is also involved in other legal proceedings and is subject to certain lawsuits and claims in the ordinary course of its business. Although the ultimate effect of these matters is often difficult to predict, management believes that their resolution will not have a material adverse effect on the Company's condensed consolidated financial statements. Effective in its current fiscal year, the Company will receive its nursing home Medicare reimbursement under a new per diem system known as the prospective payment system. This new system will entirely change the way the Company is paid for Medicare Part A services. The Company's success under this acuity-based system is largely dependent on managing patient utilization of clinical resources. The Company's ability to maintain its current level of Medicare reimbursement is uncertain. NOTE F - NEW FINANCING ARRANGEMENTS In December 1998, the Company entered into a financing agreement with a healthcare lender for up to $4.5 million, which is secured by its accounts receivable and other assets. As of March 31, 1999, $2,551,000 was borrowed under this agreement. Page 8. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto. Overview In the fiscal year ended June 30, 1997 the Company reorganized its capital structure and completed an initial public stock offering (the "Offering") which raised net proceeds of approximately $4.1 million. In connection with the Offering, the Company acquired two healthcare businesses, Balz Medical Services, Inc. and Professional Relief Nurses, Inc. During the fiscal year ended June 30, 1998, the Company expanded its nursing home operations with the acquisition of two additional facilities, formed and began operating two healthcare joint venture companies, and initiated plans to acquire five additional nursing homes. Under a Management Agreement effective November 1, 1998, the Company began providing management services to four skilled nursing facilities which it had earlier agreed to acquire. Growth also continued in its joint-venture ancillary businesses. 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 and liabilities were adjusted accordingly. The Company believes that the demand for long-term care and specialty medical services will increase substantially over the next decade due primarily to favorable demographic trends, advances in medical technology and emphasis on healthcare cost containment. At the same time, government restrictions and high construction and start-up costs are expected to limit the supply of long-term care facilities. In addition, the Company anticipates that recent trends toward industry consolidation will continue and will provide future acquisition opportunities. The Company's operating strategy is to increase nursing home profitability levels, through aggressive marketing and by offering rehabilitation therapies and other specialized services; to adhere to strict cost standards at the Facility level while providing effective patient care and containing corporate overhead expenses; and to become a fully integrated health network whereby the Company will increase marketing of medical products and supplies, rehabilitative services, institutional pharmaceutical services and nursing services to affiliated and non-affiliated nursing homes and hospitals, as well as patients at home. Page 9. 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. Year 2000 Disclosure The Company is working to resolve the potential impact of the year 2000 on the ability of the Company's computerized information systems to accurately process information that may be date-sensitive. Any of the Company's programs that recognize a date using "00" as the year 1900 rather than the year 2000 could result in errors or system failures. The Company utilizes a number of computer programs across its entire operation. The Company has not completed its assessment, but currently believes that costs of addressing this issue will not have a material adverse impact on the Company's financial position. However, if the Company and third parties upon which it relies are unable to address this issue in a timely manner, it could result in a material financial risk to the Company. In order to assure that this does not occur, the Company plans to devote all resources required to resolve any significant year 2000 issues in a timely manner. Results of Operations Three months ended March 31, 1999 ("1999 period") vs. three months ended March 31, 1998 ("1998 period") For the three months ended March 31, 1999, the Company had total revenues of $20,704,000 and total expenses of $20,722,000. For the three months ended March 31, 1998, the Company had total revenues of $15,057,000 and total expenses of $14,900,000. The Company had net income of $47,000 or $.01 per share for the three months ended March 31, 1999, after providing for income tax benefits of $31,000. 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. For the three months ended March 31, 1999, operating expenses consisted of salaries and benefits of $15,323,000, food, medical and other supplies of $2,000,000, and other operating expenses (including rent of $684,000) of $2,342,000. Also, the Company had corporate, general and administrative expenses of $787,000 and interest expense of $270,000. Revenues in the 1999 period increased over the 1998 period by $5,647,000 or 38%, largely as a result of the management agreement effective November 1, 1998. Of this net increase, $6,310,000 pertained to the new management agreement, $190,000 pertained to the joint ventures and growth in ancillary businesses acquired in 1997; there was a $853,000 net revenue decrease in the nursing facilities due to lower occupancy. Page 10. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating expenses in the 1999 period increased over the 1998 period by $5,581,000 or 40% largely as a result of the management agreement and joint ventures noted above and the increased volume in the ancillary businesses. Net nursing home costs decreased somewhat as a result of lower occupancy offset by higher employee benefit costs. Administrative and general expenses increased by $138,000 due to the new businesses and acquisitions, higher rent, legal and other administrative costs. Interest costs increased by $103,000 as a result of additional borrowing. In 1998 Lexicore Rehab Services, a company controlled joint venture, provided $90,000 of services to a nursing home owned by Jack Friedler, the Company's Chairman and CEO. Subsequently, Mr. Friedler sold the operations of that entity, but those billings for services have not yet been paid. In connection with the finalization of its 1998 tax returns, Lexicore established a collection reserve for the balance which reduced the operating profit of Lexicore by $90,000. The Company's share of this reduction was $45,000 and is reflected in the operating results of the 1999 period. At this time it is not certain when the balance will be paid nor what, if any effect, payments will have on the Company's financial statements. Income taxes were provided in the 1999 period on pre-tax income of $16,000; year to date adjustments made in this quarter included a state tax reduction which produced a non-typical effective rate for the quarter. Income taxes were provided in the 1998 period on pre-tax income of $67,000; the combined federal and state effective rate was 58%. Results of Operations Nine months ended March 31, 1999 ("1999 period") vs. nine months ended March 31, 1998 ("1998 period") For the nine months ended March 31, 1999, the Company had total revenues of $55,717,000 and total expenses of $55,142,000. For the nine months ended March 31, 1998, the Company had total revenues of $43,246,000 and total expenses of $42,582,000. The Company had net income of $230,000 or $.06 per share for the nine months ended March 31, 1999, after providing for income taxes of $92,000. 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. 1998 net income included a one-time gain of $280,000 recorded on the bed license sale. For the nine months ended March 31, 1999, operating expenses consisted of salaries and benefits of $40,335,000, food, medical and other supplies of $5,693,000, and other operating expenses (including rent of $2,052,000) of $6,142,000. The Company also had corporate, general and administrative expenses of $2,221,000 and interest expense of $751,000. Page 11. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Revenues in the 1999 period increased over the 1998 period by $12,471,000 or 29%, largely as a result of the management agreement effective November 1, 1998 and the full-period effect of the two joint ventures started in 1997. Of this net increase, $10,803,000 pertained to the new management agreement, $3,389,000 pertained to the joint ventures and growth in ancillary businesses acquired in 1997; there was a $1,721,000 net revenue decrease in the nursing facilities due to lower occupancy. Operating expenses in the 1999 period increased over the 1998 period by $11,819,000 or 29% largely as a result of the management agreement effective November 1, 1998 and the full-period effect of the two new joint ventures noted above and the increased volume in the ancillary businesses. Net nursing home costs decreased somewhat as a result of lower occupancy offset by higher benefit costs. Administrative and general expenses increased by $590,000 due to the new businesses and acquisitions, higher rent, legal and other administrative costs. Interest expense increased by $151,000 as a result of additional borrowings. In 1998 Lexicore Rehab Services, a company controlled joint venture, provided $90,000 of services to a nursing home owned by Jack Friedler, the Company's Chairman and CEO. Subsequently, Mr. Friedler sold the operations of that entity, but those billings for services have not yet been paid. In connection with the finalization of its 1998 tax returns, Lexicore established a collection reserve for the balance which reduced the operating profit of Lexicore by $90,000. The Company's share of this reduction was $45,000 and is reflected in the operating results of the 1999 period. At this time it is not certain when the balance will be paid nor what, if any, effect payments will have on the Company's financial statements. Income taxes were provided in the 1999 period on pre-tax income of $322,000; the combined federal and state effective tax rate was 29%. Income taxes were provided in the 1998 period on pre-tax income of $827,000; the combined federal and state effective rate was 37%. 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 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. Page 12. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources (Continued) 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 June 30, 1997, Lexington House, Inc. was indebted to the Company for $290,000. During the year ended June 30, 1998, $23,000 was charged for management fees and costs, interest of $26,000 accumulated, and an additional $286,000 was advanced; $30,000 was repaid; the balance due at June 30, 1998 was $595,000. In July 1998 an additional $50,000 was advanced. During September 1998, the balance of $649,000 was formalized into an 8% interest bearing promissory note from Jack Friedler with $15,000 monthly installments beginning in November 1998 and a balloon payment of the remaining balance due May 31, 1999. As security for the note, Mr. Friedler has pledged 600,000 of his shares of the common stock of the Company. The balance of this note was $589,000 at March 31, 1999, which together with accumulated interest of $33,500, is classified as a current asset in the accompanying condensed consolidated balance sheet. Principal payments totaling $90,000 were made through April 1999 as required. 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 March 31, 1999, approximately $2,551,000 was borrowed against this agreement. During the nine months ended March 31, 1999, the Company expended approximately $436,000 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, 1999 the Company expended $314,000 for capital improvements at its owned facilities which was funded by the mortgagor under the terms of the mortgage. Page 13. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources (Continued) At March 31, 1999 the Company had cash and cash equivalents of $3,419,000, receivables of $13,874,000, inventories of $933,000, prepaid expenses and other current assets of $1,102,000, and a note receivable including interest from a related party of $622,000. In October 1998, the Company secured a $700,000 discharge-of-attachment Surety Bond with a $350,000 payment as collateral. This collateral is included in Other Assets, Net (non-current classification in the accompanying balance sheet), which reduced working capital. Working capital at March 31, 1999 was $2,920,000 as compared with working capital of $3,074,000 at June 30, 1998. Current liabilities at March 31, 1999 consist of trade accounts payable, amounts due SunRise Healthcare for accounts receivable purchased, estimated third-party payor settlements due Medicare and Medicaid, current portion of notes and capital leases payable, accrued payroll and related taxes, income taxes, and other accrued expenses. 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. PART II - OTHER INFORMATION Item 1. Legal Proceedings On July 31, 1998, Suzanne Nettleton, the former President and Administrator of Professional Relief Nurses, Inc., the Company's home care subsidiary, initiated a lawsuit against Lexington Healthcare Group, Inc., Professional Relief Nurses, Inc. (PRN), and Jack Friedler, the Company's Chairman and CEO, in connection with her termination as President of PRN. The suit alleges breach of contract and wrongful discharge against the Company. The Company will vigorously defend the suit on behalf of itself, PRN and Mr. Friedler; it believes that Ms. Nettleton breached the contract, failed to perform in good faith and was therefore terminated. At this time, it is not possible to estimate the final cost to the Company to resolve this matter. The Company is involved in other legal proceedings and is subject to certain lawsuits and claims in the ordinary course of its business. Although the ultimate effect of these matters is often difficult to predict, management believes that their resolution will not have a material adverse effect on the Company. Item 2. Change in Securities NONE Item 3. Defaults Upon Senior Securities NONE Item 4. Submission of Matters to a Vote of Security Holders NONE Item 5. Other Information On May 6, 1999 Jack Friedler, the Company's Chairman and CEO, had heart by-pass surgery. He is currently recuperating and expects to return to work when medically appropriate. There are no assurances at this time as to when or to what degree he will be able to resume his normal duties. Item 6. Exhibits and Reports on Form 8-K NONE. Page 15. 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, President) (Duly Authorized Officer) Date May 17, 1999 /s/ Thomas E. Dybick -------------------- --------------------------------------- (Thomas E. Dybick, Chief Financial Officer) (Principal Financial Officer) Page 16. EX-27 2 FDS --
5 1,000 U.S. DOLLARS 9-MOS JUN-30-1999 JUL-01-1998 MAR-31-1999 1 3,419 0 13,997 (553) 933 19,950 4,736 (690) 32,712 17,030 7,695 0 0 41 6,572 32,712 55,432 55,717 0 54,391 0 0 751 322 92 230 0 0 0 230 .06 .06
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