-----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, GlmUt5Wi1oTXEFwNOXDBWPENAkeq+/QTwFKzZI+f7qtiYhPJ/1f3WhO9NcQdyOd4 w4y1PP6XmCu+gH8aVT+Qog== 0001005477-00-001234.txt : 20000215 0001005477-00-001234.hdr.sgml : 20000215 ACCESSION NUMBER: 0001005477-00-001234 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 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: 540155 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 December 31, 1999 or |_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For The Transition Period from ______to______ Commission File Number 0-22261 ------- 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: February 11, 2000 3,525,000 Shares of Common Stock outstanding LEXINGTON HEALTHCARE GROUP, INC. December 31, 1999 FORM 10-Q INDEX Part I -- Financial Information Item 1. Consolidated Financial Statements Condensed Consolidated Balance Sheets -- December 31, 1999 and June 30, 1999................................................Pg. 3. Condensed Consolidated Statements of Operations -- Six months and three months ended December 31, 1999 and 1998.........Pg. 4. Condensed Consolidated Statements of Cash Flows -- Six months and three months ended December 31, 1999 and 1998.............................................................Pg. 5. Notes to Condensed Consolidated Financial Statements...........Pg. 6-9. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................Pg. 10-15. Part II -- Other Information. Item 1. Legal Proceedings...............................................Pg. 16. Item 2. Changes in Securities...........................................Pg. 16. Item 3. Defaults Upon Senior Securities.................................Pg. 16. Item 4. Submission of Matters to a Vote of Security Holders.............Pg. 17. Item 5. Other Information...............................................Pg. 17. Item 6. Exhibits and Reports on Form 8-K................................Pg. 17. Signatures...............................................................Pg. 17. Page 2. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30, 1999 1999 (Unaudited) ----------------- --------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,917,000 $ 3,675,000 Accounts receivable, net of allowance for doubtful accounts of $799,000 and $848,000, respectively 14,004,000 16,092,000 Inventories 1,022,000 1,058,000 Prepaid expenses and other current assets 694,000 1,031,000 ----------------- --------------- Total current assets 17,637,000 21,856,000 PROPERTY, EQUIPMENT & LEASEHOLD IMPROVEMENTS, net 4,336,000 4,147,000 OTHER ASSETS Goodwill, net 2,929,000 3,013,000 Security deposits - related parties 2,337,000 2,337,000 Security deposits - other 968,000 371,000 Bed licenses, net 1,452,000 1,510,000 Operating subsidy receivable (less current portion) 482,000 555,000 Other assets, net 163,000 91,000 Residents' funds 376,000 403,000 ----------------- --------------- 8,707,000 8,280,000 ----------------- --------------- $ 30,680,000 $ 34,283,000 ================= =============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 10,888,000 $ 13,473,000 Due to SunBridge - purchased receivables 2,582,000 2,582,000 Estimated third-party payor settlements 448,000 939,000 Notes and capital leases payable (current portion) 3,099,000 3,867,000 Income taxes payable 96,000 40,000 ----------------- --------------- Total current liabilities 17,113,000 20,901,000 OTHER LIABILITIES Notes and capital leases payable (less current portion) 7,790,000 7,768,000 Deferred rent 286,000 314,000 Residents' funds payable 376,000 403,000 Other liabilities 120,000 120,000 ----------------- --------------- 8,572,000 8,605,000 ----------------- --------------- Total liabilities 25,685,000 29,506,000 ----------------- --------------- MINORITY INTEREST 646,000 545,000 STOCKHOLDERS' EQUITY Common stock, par value $.01 per share, authorized 15,000,000 shares, issued 4,125,000 shares 41,000 41,000 Additional paid-in capital 6,126,000 6,126,000 Note receivable - related party -- (574,000) Treasury stock, at cost, 600,000 shares (576,000) -- Deficit (1,242,000) (1,361,000) ----------------- --------------- Total stockholders' equity 4,349,000 4,232,000 ----------------- --------------- $ 30,680,000 $ 34,283,000 ================= ===============
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)
Six months ended Three months ended December 31, December 31, ------------ ------------ 1999 1998 1999 1998 ---- ---- ---- ---- REVENUES Net patient service revenue $ 36,150,000 $ 30,248,000 $ 19,412,000 $14,694,000 Management fee revenue 4,565,000 4,596,000 43,000 4,544,000 Other revenue 136,000 169,000 56,000 77,000 -------------- -------------- ------------- ------------ Total revenues 40,851,000 35,013,000 19,511,000 19,315,000 EXPENSES Operating expenses: Salaries and benefits 29,719,000 25,012,000 13,747,000 14,251,000 Food, medical and other supplies 4,201,000 3,693,000 2,049,000 1,866,000 Other operating expenses 4,384,000 3,800,000 2,276,000 1,946,000 Corporate, general and administrative expenses 1,681,000 1,434,000 960,000 719,000 Interest expense 580,000 481,000 292,000 248,000 -------------- -------------- ------------- ------------ Total expenses 40,565,000 34,420,000 19,324,000 19,030,000 -------------- -------------- ------------- ------------ Income before income taxes and minority interest 286,000 593,000 187,000 285,000 INCOME TAXES 66,000 123,000 56,000 80,000 MINORITY INTEREST IN INCOME OF CONSOLIDATED JOINT VENTURES (101,000) (287,000) (44,000) (126,000) -------------- -------------- ------------- ------------ Net income $ 119,000 $ 183,000 $ 87,000 $ 79,000 ============== ============== ============= ============ Basic earnings per common share $ 0.03 $ 0.04 $ 0.02 $ 0.02 ============== ============== ============= ============ Weighted average number of common shares outstanding 3,610,000 4,125,000 3,525,000 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 SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 119,000 $ 183,000 Adjustments to reconcile net income to net cash provided by operating activities 393,000 333,000 Minority interest in income of consolidated joint ventures 101,000 287,000 Decrease (increase) in accounts receivable 2,088,000 (2,549,000) (Decrease) increase in accounts payable and accrued expenses (2,585,000) 1,357,000 Due to SunRise Healthcare Group - purchased receivables -- 3,043,000 Changes in other operating assets and liabilities (101,000) (1,188,000) ----------------- ----------------- Net cash provided by operating activities 15,000 1,466,000 ----------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES Note receivable - related party (2,000) (76,000) Repayments of note receivable - related party -- 30,000 Increase in security deposits - other (597,000) -- Acquisition of fixed assets (269,000) (326,000) ----------------- ----------------- Net cash used in investing activities (868,000) (372,000) ----------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES (Repayments of) proceeds from line of credit - net (769,000) 1,042,000 Repayments of notes payable and capital lease obligations (136,000) (125,000) ----------------- ----------------- Net (cash used in) provided by financing activities (905,000) 917,000 ----------------- ----------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,758,000) 2,011,000 CASH AND CASH EQUIVALENTS, beginning of period 3,675,000 831,000 ----------------- ----------------- CASH AND CASH EQUIVALENTS, end of period $ 1,917,000 $ 2,842,000 ================= ================= NON-CASH INVESTING AND FINANCING ACTIVITIES: Certain assets acquired through assumption of mortgage note payable $ 126,000 $ 315,000 Equipment and leasehold improvements acquired through assumption of notes payable and capital leases. 33,000 110,000 Receipt of treasury stock in satisfaction of note receivable - related party 576,000 --
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 December 31, 1999 and for the three months and six months ended December 31, 1999 and 1998 is unaudited) NOTE A - THE COMPANY The consolidated financial statements include the accounts of Lexington Healthcare Group, Inc. and all of its wholly-owned subsidiaries: Balz Medical Services, Inc. ("BALZ"), Professional Relief Nurses, Inc. ("PRN"), Lexington Highgreen Holding, Inc., and LexiCore Rehab Services, LLC ("Lexicore"), collectively, the "Company", as well as the accounts of Lexicon Pharmacy Services, LLC ("Lexicon"), a 70% owned joint venture controlled by the Company. All material intercompany balances and transactions have been eliminated in consolidation. The Company is a long-term and subacute care provider which operates eight nursing home facilities at December 31, 1999 with 1,063 beds licensed by the State of Connecticut. BALZ provides medical supplies and durable medical equipment to nursing homes ; PRN provides health care services in the homes of its patients. Lexicore and Lexicon provide rehab and pharmacy services respectively to patients in the Company's and other nursing homes. NOTE B - BASIS OF PRESENTATION The financial information included herein is unaudited and presented on a condensed basis; however, the information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary to present fairly the financial position, results of operations, and cash flows for the interim periods presented although the results shown for the interim periods presented herein are not necessarily indicative of the results to be obtained for a full fiscal year. The condensed balance sheet data as of June 30, 1999 is derived from audited financial statements; certain line items have been combined or condensed in their presentation herein. Inventories consisting of food, chemicals and medical and other supplies are valued at the lower of cost or market, with cost determined on a first-in, first-out (FIFO) basis. NOTE C - REORGANIZATION, PUBLIC STOCK OFFERING, ACQUISITIONS AND NEW BUSINESSES Lexington Healthcare Group, Inc. was incorporated in 1996. It completed an initial public offering of its common stock in May 1997 during which 1,125,000 shares of common stock at $5 per share and 1,940,625 common stock warrants at $.10 per warrant were issued resulting in net proceeds to the Company of $4.1 million. Upon completion of such offering, the Company became the successor to Lexington Health Care Group, LLC, a limited liability company ("LLC"). The business combination was accounted for as a reorganization of entities under common control, in a manner similar to a pooling of interests, using LLC's historical cost basis. Page 6. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information with respect to December 31, 1999 and for the three months and six months ended December 31, 1999 and 1998 is unaudited) NOTE C - REORGANIZATION, PUBLIC STOCK OFFERING, ACQUISITIONS AND NEW BUSINESSES (Continued) On October 15, 1997 Lexicore Rehab Services, LLC began operations as a 50% owned joint venture with Core Rehab Management, LLC. The joint venture was controlled by the Company and the results of its operations from inception are included in the Company's condensed consolidated financial statements with appropriate recognition of minority interest. As of January 1, 1999, the Company acquired the remaining 50% membership interest for a nominal amount plus $120,000 of residual payments which are payable based on the occurrence of certain future events. Henceforth the Company accounted for Lexicore's operations as a wholly-owned subsidiary; minority interest has been adjusted accordingly. On December 1, 1997 Lexicon Pharmacy Services, LLC began operations as a 70% owned joint venture with Pharmacy Corporation of America. The joint venture is controlled by the Company and the results of its operations from inception are included in the Company's condensed consolidated financial statements with appropriate recognition of minority interest. In January 2000, the Company agreed with its joint venture partner to terminate operations as of March 31, 2000. The Company has begun working with an unrelated company to receive pharmaceutical services. On November 1, 1998 the Company began providing management services for four skilled nursing facilities in Connecticut under an interim Management Agreement with SunBridge Healthcare Corporation ("SunBridge"), a New Mexico corporation and nation-wide healthcare provider. As consideration for the services provided under this Management Agreement, the Company was entitled to retain the excess of any revenues earned in the delivery of patient services over the expenses incurred during the term and was responsible for any excess of expenses incurred over revenues earned in the operation of the facilities during the term. Under the terms of the agreement SunBridge retained responsibility for all building lease costs. In addition, the Company purchased substantially all of SunBridge's accounts receivable for these facilities. As of December 31, 1999, the balance owed is presented as "Due to SunBridge - purchased receivables" in the accompanying consolidated balance sheet. Effective September 1, 1999, the Company acquired the operations of two of the managed facilities, Adams House and Heritage Heights; the buildings are leased with an option to purchase. These facilities have a total of 240 skilled nursing beds. Management contracts covering the two other SunBridge facilities with a total of 239 skilled nursing beds were terminated as of August 31, 1999 and the operations of those facilities were returned to SunBridge. Page 7. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information with respect to December 31, 1999 and for the three months and six months ended December 31, 1999 and 1998 is unaudited) NOTE C - REORGANIZATION, PUBLIC STOCK OFFERING, ACQUISITIONS AND NEW BUSINESSES (Continued) Under the terms of the management agreement, which terminated on August 31, 1999, the Company earned management fees of $4,426,000 and incurred costs and expenses of $4,407,000 during the two months ended August 31, 1999. NOTE D - NOTE RECEIVABLE-RELATED PARTY AND TREASURY STOCK In July 1999, the Company, pursuant to Board of Director's approval, defaulted an 8% interest-bearing promissory note due from an officer and director of the Company and seized the collateral of 600,000 shares of the Company's common stock in satisfaction of the note and interest due. The shares received have been put into the Company's treasury. The 600,000 shares had a market bid price of $731,000 at the time of their surrender and the note and accumulated interest had a carrying value of $576,000. The Company's Board of Directors considers the difference between the market price and carrying value of the note receivable of $155,000 to be a reasonable and fair discount for the shares received. NOTE E - RENEGOTIATION OF RELATED PARTY OPERATING LEASE The Company leases four of its nursing homes facilities (including certain equipment) under an operating lease with a partnership related through common ownership. The lease agreement, as amended, commenced on July 1, 1995 and is for a ten-year period, with four five-year renewal options at specified rents. 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. Rent expense charged to operations under this related party operating lease aggregated $1,059,000 and $1,234,000 for the six months ended December 31, 1999 and 1998, respectively. Page 8. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information with respect to December 31, 1999 and for the three months and six months ended December 31, 1999 and 1998 is unaudited) NOTE F - CONTINGENCIES In October 1999, the Company announced that certain employees of the Company were served with a subpoena by the Office of the U.S. Attorney to testify before a grand jury in the U.S. District Court, District of Connecticut. The Company and certain members of senior management have been named as targets of the government's investigation. In addition, the Company has provided certain documents to the government. The Company has established an independent committee of the Board of Directors to supervise its own investigation. The Company is cooperating fully with the inquiry and is confident that the Company has not committed any wrongdoings. The ultimate outcome of this uncertainty cannot presently be determined. Accordingly, no provision for any liability that may result has been made in the accompanying condensed consolidated financial statements. Through December 31, 1999 the Company has recorded expenses of $233,000 relating to this matter. The Company is involved in other legal proceedings and is subject to certain lawsuits and claims in the ordinary course of its business. Although the ultimate effect of these matters is often difficult to predict, management believes that their resolution will not have a material adverse effect on the Company's condensed consolidated financial statements. NOTE G - RISKS AND UNCERTAINTIES The Company receives its nursing home Medicare reimbursement under a new per diem system known as the prospective payment system (PPS). This new system entirely changed the way the Company is paid for Medicare Part A services. The Company's success under this acuity-based system is largely dependent on managing patient utilization of clinical resources. The Company's ability to maintain its current level of Medicare reimbursement is uncertain. Page 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto. Overview In the fiscal year ended June 30, 1997 the Company reorganized its capital structure and completed an initial public stock offering (the "Offering") which raised net proceeds of approximately $4.1 million. In connection with the Offering, the Company acquired two healthcare businesses, Balz Medical Services, Inc. and Professional Relief Nurses, Inc. During the fiscal year ended June 30, 1998, the Company expanded its nursing home operations with the acquisition of two additional facilities, formed and began operating two healthcare joint venture companies, and initiated plans to acquire additional nursing homes. Under a Management Agreement with SunBridge Healthcare Corporation, effective November 1, 1998, the Company began providing management services to four skilled nursing facilities. Growth also continued in its joint-venture ancillary businesses. Effective September 1, 1999, the Company acquired the operations of two of the managed facilities, Adams House and Heritage Heights; the buildings are leased with an option to purchase. These facilities have a total of 240 skilled nursing beds. Management contracts covering the two other SunBridge facilities with a total of 239 skilled nursing beds were terminated as of August 31, 1999 and the operations of those facilities were returned to SunBridge. As of January 1, 1999, the Company acquired the remaining 50% membership interest in one of the above-noted joint ventures, Lexicore Rehab Services, L.L.C., for a nominal amount plus $120,000 of residual payments. Henceforth the Company accounted for Lexicore's operations as a wholly-owned subsidiary; minority interest has been adjusted accordingly. In January 2000, the Company agreed with its joint venture partner to terminate operations of Lexicon Pharmacy Services, LLC as of March 31, 2000. The Company has begun working with an unrelated company to receive pharmaceutical services. The Company believes that the demand for long-term care and specialty medical services will increase substantially over the next decade due primarily to favorable demographic trends, advances in medical technology and emphasis on healthcare cost containment. At the same time, government restrictions and high construction and start-up costs are expected to limit the supply of long-term care facilities. In addition, the Company anticipates that recent trends toward industry consolidation will continue and will provide future acquisition opportunities. Page 10. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's operating strategy is to increase nursing home profitability levels, through aggressive marketing and by offering rehabilitation therapies and other specialized services; by adhering to strict cost standards at the Facility level while providing effective patient care and containing corporate overhead expenses; and by becoming a fully integrated health network whereby the Company will increase marketing of medical products and supplies, rehabilitative services, and nursing services to affiliated and non-affiliated nursing homes and hospitals, as well as patients at home. By concentrating its facilities and ancillary service operations within a selected geographic region, the Company's strategy is to achieve operating efficiencies through economies of scale, reduced corporate overhead, more effective management supervision and financial controls. In addition, the Company believes that geographic concentration also enhances the Company's ability to establish more effective relationships with referral sources and regulatory authorities in the states where the Company operates. YEAR 2000 As of calendar year 2000, the Company is continuing to complete the updating of its computerized information systems, where necessary, to continue to accurately process data. The Company experienced no systems failures, major errors, nor any significant interruptions in its ability to process operating data as a result of Year 2000 issues. The Company currently believes that costs of addressing this issue will not have a material adverse impact on the Company's financial position or results of operations. Results of Operations Three months ended December 31, 1999 ("1999 period") vs. three months ended December 31, 1998 ("1998 period") For the three months ended December 31, 1999, the Company had total revenues of $19,511,000 and total expenses of $19,324,000. For the three months ended December 31, 1998, the Company had total revenues of $19,315,000 and total expenses of $19,030,000. The Company had net income of $87,000 or $.02 per share for the three months ended December 31, 1999 after providing for income taxes of $56,000. The Company had net income of $79,000 or $.02 per share for the three months ended December 31, 1998, after providing for income taxes of $80,000. For the three months ended December 31, 1999, operating expenses consisted of salaries and benefits of $13,747,000, food, medical and other supplies of $2,049,000, and other operating expenses (including rent of $628,000) of $2,276,000. Also, the Company had corporate, general and administrative expenses of $960,000 and interest expense of $292,000. Page 11. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Three months ended December 31, 1999 ("1999 period") vs. three months ended December 31, 1998 ("1998 period") (Continued) Revenues in the 1999 period increased over the 1998 period by $196,000 or 1%. Changes in revenues resulted from rate increases (principally Medicaid) and additional ancillary revenues but were offset by the reduction in management fees for the two terminated facilities. Operating expenses in the 1999 period increased over the 1998 period by $9,000 as a result of higher wage and benefit costs resulting from state-funded Medicaid rate increases, offset by reductions resulting from the management contract terminations (noted above), and a $175,000 reduction in rent from related party operating leases. Administrative and general expenses increased by $241,000, consisting mostly of $233,000 of legal costs related to the government investigation. Interest costs increased by $44,000 as a result of additional borrowings and higher interest rates. Income taxes were provided in the 1999 period on pre-tax income of $143,000; the combined federal and state effective rate was 39%. Income taxes were provided in the 1998 period on pre-tax income of $159,000; the combined federal and state effective rate was 50%. Results of Operations Six months ended December 31, 1999 ("1999 period") vs. six months ended December 31, 1998 ("1998 period") For the six months ended December 31, 1999, the Company had total revenues of $40,851,000 and total operating expenses of $40,565,000. For the six months ended December 31, 1998, the Company had total revenues of $35,013,000 and total operating expenses of $34,420,000. The Company had net income of $119,000 or $.03 per share for the six months ended December 31, 1999, after providing for income taxes of $66,000. The Company had net income of $183,000 or $.04 per share for the six months ended December 31, 1998, after providing for income taxes of $123,000. For the six months ended December 31, 1999, operating expenses consisted of salaries and benefits of $29,719,000, food, medical and other supplies of $4,201,000, other operating expenses (including rent of $1,331,000) of $4,384,000, and corporate, general and administrative expenses of $1,681,000. In addition, income from operations was reduced by interest expense of $580,000 and net income was reduced by minority interest of $101,000. Page 12. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Six months ended December 31, 1999 ("1999 period") vs. six months ended December 31, 1998 ("1998 period") (Continued) Revenues in the 1999 period increased over the 1998 period by $5,838,000 or 17%. Changes in revenues resulted from rate increases (principally Medicaid) and additional ancillary revenues but were offset by the reduction in management fees for the two terminated facilities. Operating expenses in the 1999 period increased over the 1998 period by $5,799,000 or 18% as a result of higher wage and benefit costs resulting from state-funded Medicaid rate increases, offset by reductions resulting from the management contract terminations (noted above), and a $175,000 reduction in rent from related party operating leases. Administrative and general expenses increased by $247,000, consisting mostly of $233,000 of legal costs related to the government investigation. Interest costs increased by $99,000 as a result of additional borrowings and higher interest rates. Income taxes were provided in the 1999 period on pre-tax income of $185,000; the combined federal and state effective rate was 36%. Income taxes were provided in the 1998 period on pre-tax income of $306,000; the combined federal and state effective rate was 40%. Liquidity and Capital Resources Since its formation in 1995, the Company has primarily financed its operations through operating revenues, borrowings from the prior operator of certain of the Facilities and other private lenders (including stockholders), by financing its accounts receivable, through a public offering of its common stock which raised net proceeds of approximately $4.1 million and through the sale of a portion of certain bed licenses acquired in 1997. In July 1997, the Company borrowed $6.8 million in connection with the acquisition of land, buildings, bed licenses and operating assets of two nursing homes. Interest is payable at 10% over the 20 year term of the mortgage. In connection with the acquisitions, the Company also obtained from the seller an operating subsidy of $2.5 million to be received over five years. As noted above, some of the bed licenses acquired were sold for $1,550,000 in November 1997. In July 1995, the Company entered into an agreement to manage the day-to-day business affairs of Lexington House, Inc., a nursing home with 67 licensed beds; Lexington House was owned by Jack Friedler, the Company's Chairman and CEO and his wife. The Company made certain expenditures on behalf of Lexington House in anticipation that it would acquire Lexington House. Subsequently, the negotiations for the sale were terminated because the Company determined that such facility required too many capital improvements. As of September 30, 1998, Lexington House, Inc. was indebted to the Company for $649,000 which amount was formalized into an 8% interest bearing promissory note from Mr. Friedler. Page 13. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources (Continued) In July 1999, the Company, pursuant to Board of Director's approval, defaulted the note and seized the collateral of 600,000 shares of the Company's common stock in satisfaction of the note and interest due. The shares received have been put into the Company's treasury. The 600,000 shares had a market bid price of $731,000 at the time of their surrender and the note and accumulated interest had a carrying value of $576,000. The Company's Board of Directors considers the difference between the market price and carrying value of the note receivable of $155,000 to be a reasonable and fair discount for the shares received. In August 1997, the Company obtained a $2,000,000 revolving line of credit from a bank, which was secured by its accounts receivable and other assets. In December 1998, the Company refinanced this revolving line of credit with a $4.5 million financing agreement from a healthcare lender; the new financing is secured by certain accounts receivable and other assets. As of December 31, 1999, approximately $2,862,000 was borrowed under this line of credit. During the six months ended December 31, 1999, the Company expended approximately $168,000 in capital improvements at its leased facilities. Any capital improvements made to the Facilities belong to the landlord. However, any amounts expended for capital improvements are generally recouped in their entirety through the reimbursement system. During the six months ended December 31, 1999 the Company expended $94,000 for capital improvements at its owned facilities which was funded by the mortgagor under the terms of the mortgage. Working capital at December 31, 1999 was $524,000 as compared with working capital of $955,000 at June 30, 1999. During the six months ended December 31, 1999 the Company had made lease deposits in the amount of $574,000 and paid change of ownership capital expenses of $150,000 at its newly-leased facilities. At December 31, 1999 the Company had cash and cash equivalents of $1,917,000, receivables of $14,004,000, inventories of $1,022,000, prepaid expenses and other current assets of $694,000. Current liabilities at December 31, 1999 consist of trade accounts payable, amounts due SunBridge Healthcare for accounts receivable purchased, estimated third-party payor settlements, current portion of notes and capital leases payable, accrued payroll and related taxes, income taxes, and other accrued expenses. Page 14. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements This quarterly report contains certain forward-looking statements regarding the Company, its business prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause the Company's actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that may affect such forward-looking statements include, without limitations: the Company's ability to successfully and timely develop and finance new projects, the impact of competition on the Company's revenues, and changes in reimbursement rates, patient mix, and demand for the Company's services. When used, words such as "believes," "anticipates," "expects," "intends" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by the Company in this report, news releases, and other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business. Page 15. PART II - OTHER INFORMATION Item 1. Legal Proceedings In October 1999, the Company announced that certain employees of the Company were served with a subpoena by the Office of the U.S. Attorney to testify before a grand jury in the U.S. District Court, District of Connecticut. The Company and certain members of senior management have been named as targets of the government's investigation. In addition, the Company has provided certain documents to the government. The Company has established an independent committee of the Board of Directors to supervise its own investigation. The Company is cooperating fully with the inquiry and is confident that the Company has not committed any wrongdoings. The ultimate outcome of this uncertainty cannot presently be determined. Accordingly, no provision for any liability that may result has been made in the accompanying consolidated financial statements. The Company had previously disclosed the existence of a lawsuit initiated by the former President and Administrator of Professional Relief Nurses, Inc. (PRN), the Company's home care subsidiary, against Lexington Healthcare Group, Inc., PRN, and Jack Friedler, the Company's Chairman and CEO, in connection with her termination in July 1998. In September 1999 the Company settled this suit to avoid the expenses of protracted litigation. The Company had recorded a provision for lawsuit settlement of $539,000 in the consolidated statement of operations during the year ended June 30, 1999. In October 1999, the Company paid the settlement in full utilizing a previously-posted $350,000 cash bond. The Company is involved in other legal proceedings and is subject to certain lawsuits and claims in the ordinary course of its business. Although the ultimate effect of these matters is often difficult to predict, management believes that their resolution will not have a material adverse effect on the Company. Item 2. Change in Securities NONE Item 3. Defaults Upon Senior Securities NONE Page 16. Item 4. Submission of Matters to a Vote of Security Holders NONE Item 5. Other Information The Company was notified on October 1, 1999 by The Nasdaq - Amex Market Group that, based on their review of the Form 10-K for the year ended June 30, 1999, the Company was not in compliance with the net tangible asset criteria for continued listing on The Nasdaq SmallCap Market and as a result Nasdaq was reviewing the Company's eligibility for continued listing. On December 10, 1999, the Company was sent a bid price deficiency notification from Nasdaq staff which provided the Company until March 12, 2000 to show compliance. As of February 11, 2000 the closing bid price of the Company's common stock was $1.062. On February 3, 2000 the Company was sent a letter advising that the Nasdaq staff has determined to delist the Company from The Nasdaq Small Cap Market effective with the close of business February 11, 2000. On February 10, 2000 the Company requested a hearing with the Nasdaq Listing Qualifications Panel at which time the Company will present its plans for achieving compliance with the criteria. There can be no assurance that the Company will be successful in its efforts to remain listed on Nasdaq. Item 6. Exhibits and Reports on Form 8-K NONE. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. /s/ Jack Friedler ---------------------------------------- (Jack Friedler, Chief Executive Officer) (Duly Authorized Officer) /s/ Harry Dermer ---------------------------------------- (Harry Dermer, President) (Duly Authorized Officer) Date February 14, 2000 /s/ Thomas E. Dybick ---------------------------------------- (Thomas E. Dybick, Chief Financial Officer) (Principal Financial Officer) Page 17. EX-27 2 FDS
5 (Replace this text with the legend) 1000 US DOLLARS 6-MOS JUN-30-2000 JUL-01-1999 DEC-31-1999 1 1,917 0 14,803 (799) 1,022 17,637 5,384 (1,048) 30,680 17,113 7,790 0 0 41 4,308 30,680 40,715 40,851 0 39,985 101 0 580 286 66 119 0 0 0 119 .03 .03 Mortgages And Similar Debt Minority Interest
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