-----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, U7fPM57qZ1x90EaI0kDaaUUGhPErT8r0IF45BW/iOow+CFtUI8fbiOoT+AC5As9H vOeoROfjRxiZdUwe1ZNNpQ== /in/edgar/work/0001005477-00-007865/0001005477-00-007865.txt : 20001115 0001005477-00-007865.hdr.sgml : 20001115 ACCESSION NUMBER: 0001005477-00-007865 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEXINGTON HEALTHCARE GROUP INC CENTRAL INDEX KEY: 0001026348 STANDARD INDUSTRIAL CLASSIFICATION: [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: 764911 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 0001.txt 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 September 30, 2000 or |_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For The Transition Period from ______to______ Commission File Number 0-22261 ------- 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: November 13, 2000 3,525,000 Shares of Common Stock outstanding LEXINGTON HEALTHCARE GROUP, INC. SEPTEMBER 30, 2000 FORM 10-Q INDEX Part I -- Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets -- September 30, 2000 and June 30, 2000.........................................Pg. 3. Condensed Consolidated Statements of Operations -- Three months ended September 30, 2000 and 1999.......................Pg. 4. Condensed Consolidated Statements of Cash Flows -- Three months ended September 30, 2000 and 1999.......................Pg. 5. Notes to Condensed Consolidated Financial Statements........Pg. 6-10. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................Pg. 11-14. Part II -- Other Information. Item 1. Legal Proceedings.............................................Pg. 15. Item 2. Changes in Securities.........................................Pg. 16. Item 3. Defaults Upon Senior Securities...............................Pg. 16. Item 4. Submission of Matters to a Vote of Security Holders...........Pg. 16. Item 5. Other Information.............................................Pg. 16. Item 6. Exhibits and Reports on Form 8-K..............................Pg. 16. Signatures...............................................................Pg. 16. Page 2. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30, 2000 2000 (Unaudited) (Audited) ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,528,000 $ 1,265,000 Accounts and note receivable - net of allowance for doubtful accounts of $1,636,000 and $1,634,000, respectively 15,709,000 16,963,000 Inventories, prepaid expenses and other current assets 1,430,000 1,349,000 ------------ ------------ Total current assets 18,667,000 19,577,000 PROPERTY, EQUIPMENT & LEASEHOLD IMPROVEMENTS, net 5,017,000 4,477,000 OTHER ASSETS Security deposits - related parties 2,337,000 2,337,000 Residents' funds 364,000 370,000 Goodwill - net 1,859,000 1,886,000 Bed licenses - net 1,365,000 1,394,000 Other assets - net 860,000 917,000 ------------ ------------ 6,785,000 6,904,000 ------------ ------------ $ 30,469,000 $ 30,958,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES Notes and capital leases payable (current portion) $ 4,772,000 $ 4,296,000 Due to SunBridge - purchased receivables 2,079,000 2,094,000 Accounts payable and accrued expenses 13,816,000 14,423,000 Estimated third-party payor settlements 504,000 188,000 Income taxes payable 64,000 74,000 ------------ ------------ Total current liabilities 21,235,000 21,075,000 OTHER LIABILITIES Notes and capital leases payable (less current portion) 8,132,000 7,892,000 Residents' funds payable 364,000 370,000 Deferred rent 888,000 809,000 Other liabilities 120,000 120,000 ------------ ------------ 9,504,000 9,191,000 ------------ ------------ Total liabilities 30,739,000 30,266,000 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note F) MINORITY INTEREST 565,000 565,000 STOCKHOLDERS' EQUITY (DEFICIENCY) Common stock, par value $.01 per share, authorized 15,000,000 shares, issued and outstanding 3,525,000 shares 35,000 35,000 Additional paid-in capital 5,556,000 5,556,000 Deficit (6,426,000) (5,464,000) ------------ ------------ Total stockholders' equity (deficiency) (835,000) 127,000 ------------ ------------ $ 30,469,000 $ 30,958,000 ============ ============
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 FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
2000 1999 ------------ ------------ REVENUES Net patient service revenue $ 17,247,000 $ 16,738,000 Management fee revenue 2,000 4,522,000 Other revenue 43,000 80,000 ------------ ------------ Total revenues 17,292,000 21,340,000 EXPENSES Operating expenses: Salaries and benefits 14,131,000 15,972,000 Food, medical and other supplies 936,000 2,152,000 Other operating expenses 2,204,000 2,108,000 Corporate, general and administrative expenses 615,000 721,000 Interest expense 368,000 288,000 ------------ ------------ Total expenses 18,254,000 21,241,000 ------------ ------------ Income (loss) before income taxes and minority interest (962,000) 99,000 PROVISION FOR INCOME TAXES -- 10,000 MINORITY INTEREST IN INCOME OF CONSOLIDATED JOINT VENTURES -- (57,000) ------------ ------------ Net income (loss) $ (962,000) $ 32,000 ============ ============ Basic earnings (loss) per common share $ (0.27) $ (0.01) ============ ============ Weighted average number of common shares outstanding 3,525,000 3,695,000 ============ ============
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 THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
2000 1999 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (962,000) $ 32,000 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities 241,000 197,000 Minority interest in income of consolidated joint ventures -- 57,000 Decrease in accounts and note receivable 1,254,000 2,559,000 Changes in other operating assets and liabilities 259,000 (332,000) Decrease in accounts payable and accrued expenses (607,000) (2,912,000) ----------- ----------- Net cash provided by (used in) operating activities 185,000 (399,000) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Note receivable - related party -- (2,000) Increase in security deposits - other -- (574,000) Acquisition of fixed assets (109,000) (209,000) ----------- ----------- Net cash used in investing activities (109,000) (785,000) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds (repayments) of line of credit - net 482,000 (963,000) Repayments of notes payable and capital lease obligations (295,000) (74,000) ----------- ----------- Net cash provided by (used in) financing activities 187,000 (1,037,000) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 263,000 (2,221,000) CASH AND CASH EQUIVALENTS, beginning of period 1,265,000 3,675,000 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 1,528,000 $ 1,454,000 =========== =========== NON-CASH INVESTING AND FINANCING ACTIVITIES: Certain assets acquired through assumption of mortgage note payable $ 494,000 $ 94,000 Equipment and leasehold improvements acquired through assumption of notes payable and capital leases 35,000 33,000 Receipt of treasury stock in satisfaction of note receivable - related party -- 576,000
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 September 30, 2000 and for the three months ended September 30, 2000 and 1999 is unaudited) NOTE A - THE COMPANY The condensed consolidated financial statements include the accounts of Lexington Healthcare Group, Inc. and all of its wholly-owned subsidiaries: Balz Medical Services, Inc. ("BALZ"), Professional Relief Nurses, Inc. ("PRN"), Lexington Highgreen Holding, Inc., and LexiCore Rehab Services, LLC ("Lexicore"), collectively, the "Company", as well as the accounts of Lexicon Pharmacy Services, LLC ("Lexicon"), a 70% owned joint venture controlled by the Company. All material intercompany balances and transactions have been eliminated in consolidation. The Company is a long-term and subacute care provider which operates or manages eight nursing home facilities at September 30, 2000 with 1,063 beds licensed by the State of Connecticut. PRN provides health care services in the homes of its patients. Lexicore provides rehab services to patients in the Company's and other nursing homes. BALZ provided medical supplies and durable medical equipment to nursing homes, but is now substantially inactive after selling its operating assets and business (exclusive of cash and accounts receivable) as of June 1, 2000. Lexicon ceased operations as of March 31, 2000. Once remaining accounts receivable have been collected and all obligations paid, the members will terminate Lexicon. NOTE B - BASIS OF PRESENTATION The financial information included herein is unaudited and presented on a condensed basis; however, the information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary to present fairly the financial position, results of operations, and cash flows for the interim periods presented although the results shown for the interim periods presented herein are not necessarily indicative of the results to be obtained for a full fiscal year. The condensed balance sheet data as of June 30, 2000 is derived from audited financial statements; certain line items have been combined or condensed in their presentation herein. Inventories consisting of food, chemicals and medical and other supplies are valued at the lower of cost or market, with cost determined on a first-in, first-out (FIFO) basis. NOTE C - ACQUISITIONS AND DISPOSITIONS OF BUSINESSES On November 1, 1998 the Company began providing management services for four skilled nursing facilities in Connecticut under an interim Management Agreement with SunBridge Healthcare Corporation ("SunBridge"), a New Mexico corporation and nation-wide healthcare provider. Page 6. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information with respect to September 30, 2000 and for the three months ended September 30, 2000 and 1999 is unaudited) NOTE C - ACQUISITIONS AND DISPOSITIONS OF BUSINESSES (Continued) As consideration for the services provided under this Management Agreement, the Company was entitled to retain the excess of any revenues earned in the delivery of patient services over the expenses incurred during the term and was responsible for any excess of expenses incurred over revenues earned in the operation of the facilities during the term. Under the terms of the agreement SunBridge retained responsibility for all building lease costs. In addition, the Company purchased substantially all of SunBridge's accounts receivable for these facilities. As of September 30, 2000, the balance owed is presented as "Due to SunBridge - purchased receivables" in the accompanying condensed consolidated balance sheet. Effective September 1, 1999, the Company finalized agreements to acquire the operations of two of the managed facilities, Adams House and Heritage Heights. The related real property was leased with options to purchase which expire August 30, 2001; these facilities have a total of 240 skilled nursing beds. Management contracts covering the two other SunBridge facilities with a total of 239 skilled nursing beds were terminated as of August 31, 1999 and the operations of those facilities were returned to SunBridge. Under the terms of the management agreement, which terminated on August 31, 1999, the Company earned management fees of $4,422,000 and incurred costs and expenses of $4,407,000 during the two months ended August 31, 1999. SALE OF BUSINESS On June 14, 2000 BALZ sold its operating assets and business (exclusive of cash and accounts receivable) to an unrelated company, for $539,000 plus assumption of certain liabilities relating to financed equipment and leases. The agreement provided for a $40,000 cash payment at closing, a $260,000 note receivable requiring twelve equal monthly installments of principal and interest of $22,000 beginning July 1, 2000, and a payment of $239,000 for the book value of inventory due 90 days after closing. As of September 30, 2000 the Company had received the payments due it under the note receivable, but had not received the payment for the book value of the inventory. However, the Company believes that its credit risk is minimal since it has the right to offset payables for goods purchased from the unrelated company in an amount sufficient to cover any unpaid amounts owing to the Company. Prior to the sale of the business later in the fiscal year, BALZ had revenues of $395,000, expenses of $299,000 and net income of $96,000 during the three months ended September 30, 1999. Page 7. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information with respect to September 30, 2000 and for the three months ended September 30, 2000 and 1999 is unaudited) NOTE D - RENEGOTIATION OF RELATED PARTY OPERATING LEASE The Company leases four of its nursing facilities (including certain equipment) under an operating lease with a partnership related through common ownership. The lease agreement, as amended, commenced on July 1, 1995 and is for an eighteen-year period, with renewal options for up to thirteen years. Annual rentals under the lease are currently $2.5 million. The Company has renegotiated the required rent payments covering the period of October 1999 through February 2001 which will reduce the rent due during that period by approximately $800,000. However, recognition of that rent reduction has been accounted for by increasing deferred rent which equalizes the annual rent expense over the remaining fourteen-year term of the lease. Rent expense charged to operations under this related party operating lease aggregated $612,000 and $615,000 for the three months ended September 30, 2000 and 1999, respectively. NOTE E - THIRD-PARTY REVENUE ADJUSTMENTS AND SETTLEMENTS Revenues are recognized at the time the service is provided to the patient. A substantial amount of the Company's revenues are billed to third party payors, i.e., Medicaid, Medicare and others under the provisions of reimbursement formulas and regulations in effect. Patient service revenue is reported at the estimated net realizable amount from residents, third-party payors, and others for services rendered. Revenue received under cost reimbursement agreements is subject to audit and retroactive adjustment by third-party payors. Provisions for estimated adjustments have been reflected in patient service revenue. Differences between estimated adjustments and final settlements are recorded in the year of settlement. The Company has recorded reductions in patient service revenue of $430,000 during the three months ended September 30, 2000 in connection with adjustments of previously recorded 1997 and 1998 estimated Medicare settlements. Such amount represents management's best estimates of the amounts expected to be due and are based on anticipated results of ongoing negotiations, interpretation of applicable regulations and other assumptions. It is reasonably possible that the amounts the Company will ultimately be obligated to pay could differ materially in the near term. Page 8. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information with respect to September 30, 2000 and for the three months ended September 30, 2000 and 1999 is unaudited) NOTE F - COMMITMENTS AND CONTINGENCIES GOVERNMENT INVESTIGATION In October 1999, Federal officials (the "government") seized records and documents from the Company and subpoenaed current and former employees to provide testimony in connection with a grand jury investigation being conducted by the Office of the U.S. Attorney. The Company and certain members of present and former senior management have been named as targets of the government's investigation. However, the government has not provided the Company with any documentation from which it may determine the nature and scope of the investigation. The Company is cooperating fully with the government investigation, has provided all requested records and information, and management is confident that the Company has not committed any wrongdoings. In addition, the Company has established an independent committee of the Board of Directors to supervise its own investigation. The ultimate outcome of this uncertainty cannot presently be determined. Accordingly, no provision for any liability that may result has been made in the accompanying condensed consolidated financial statements. Since the inception of the government action through September 30, 2000 the Company has recorded charges to expense of $378,000 relating to this matter. OTHER CONTINGENCIES The Company is involved in other legal proceedings and is subject to certain lawsuits and claims in the ordinary course of its business. Although the ultimate effect of these matters is often difficult to predict, management believes that their resolution will not have a material adverse effect on the Company's condensed consolidated financial statements. NOTE G - RISKS AND UNCERTAINTIES PATIENT SERVICE REVENUE Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any significant pending or threatened investigations involving allegations of potential wrongdoing, except for the investigation discussed in Note F. Compliance with such laws and regulations are subject to government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. Changes in the Medicare and Medicaid programs and/or the reduction of funding levels could have an adverse impact on the Company. Page 9. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information with respect to September 30, 2000 and for the three months ended September 30, 2000 and 1999 is unaudited) NOTE G - RISKS AND UNCERTAINTIES (Continued) LEGISLATION, REGULATIONS AND MARKET CONDITIONS The Company is subject to extensive federal, state and local government regulation relating to licensure, conduct of operations, ownership of facilities, expansion of facilities and services and reimbursement for services. As such, in the ordinary course of business, the Company's operations are continuously subject to state and federal regulatory scrutiny, supervision and control. Such regulatory scrutiny often includes inquiries, investigations, examinations, audits, site visits and surveys, some of which may be non-routine. The Company believes that it is in substantial compliance with the applicable laws and regulations. However, if the Company is ever found to have engaged in improper practices, it could be subjected to civil, administrative or criminal fines, penalties or restitutionary relief which may have a material adverse impact on the Company's financial results and operations. NOTE H - OPERATIONS The Company reported a loss of $962,000 for the three months ended September 30, 2000 which includes a reduction of patient service revenue of $430,000 as discussed in Note E. Management has prepared plans which contemplate a significant turnaround in ongoing operations and profitability and has plans to address the Company's equity capital and cash flow needs so that operations may continue in the normal manner. Specifically, layoffs have been implemented, field and administrative positions were restructured to reduce costs, and cost monitoring has been tightened. Management is actively pursuing obtaining additional equity capital including a warrant offering for which warrants have already been registered with the SEC and potential investors have been contacted. In addition, positive cash flow is expected to result from collection of receivables of BALZ and Lexicon estimated at over $1,300,000, additional nursing home and home health agency collections of $900,000 and a proposed sale of surplus bed licenses for $500,000. Page 10. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto. Overview In the first three months of the fiscal year ending June 30, 2001, the Company continued to operate eight nursing homes, a home health agency and therapy company. During the fiscal year ended June 30, 2000, the Company's operations were affected when the management contract for two nursing homes was terminated, when certain assets and the business of BALZ were sold, when the Company's joint venture pharmacy ceased operations, and when settlements were negotiated on employment agreements with two executives. The two remaining nursing homes under management contract were leased and are now operated by the Company. Further, the Company experienced a government investigation during the year ended June 30, 2000 which resulted in certain costs. The long term care industry has experienced many changes in recent years including the implementation of the Balanced Budget Act of 1997 ("BBA") which resulted in a new Medicare Prospective Payment System (known as PPS). Under PPS, Medicare revenues are substantially less than those earned under the former cost-based reimbursement system. Some of the Company's Medicare rate cuts were restored in October 1999 and April 2000; in addition, a 4% federal rate increase became effective October 1, 2000. In Connecticut, multiple long term care entities have undergone financial reorganization in 1999 and 2000 due to reduced occupancy and PPS-related revenue reductions and increasing cost pressures (including union costs), and have experienced considerable losses in the market value of their own securities. The Company believes its continued emphasis on cost controls and development of ancillary businesses remains the most appropriate strategy. Further, the Company is encouraged by the above-noted Medicare rate increases and recently proposed legislation to fund staffing increases for nursing homes, although it cannot be estimated what effect, if any, this proposed legislation may have on the Company's revenues in the near term. The Company continues to believe that the demand for long-term care and specialty medical services will increase substantially over the next decade due primarily to favorable demographic trends, advances in medical technology and emphasis on healthcare cost containment. At the same time, government restrictions and high construction and start-up costs are expected to limit the supply of long-term care facilities and home care agencies. In addition, the Company anticipates that recent trends toward industry consolidation will continue. Page 11. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's operating strategy is to increase nursing home profitability levels through aggressive marketing and by offering rehabilitation therapies and other specialized services; by adhering to strict cost standards at the Facility level while providing effective patient care and containing corporate overhead expenses; and by increasing marketing of rehabilitative services and nursing services to affiliated and non-affiliated nursing homes as well as to patients at home. By concentrating its facilities and ancillary service operations within a selected geographic region, the Company's strategy is to achieve operating efficiencies through economies of scale, reduced corporate overhead, more effective management supervision and financial controls. In addition, the Company believes that geographic concentration also enhances the Company's ability to establish more effective relationships with referral sources and regulatory authorities in the states where the Company operates. Results of Operations Three months ended September 30, 2000 ("2000 period") vs. three months ended September 30, 1999 ("1999 period") For the three months ended September 30, 2000, the Company had total revenues of $17,292,000 and total expenses of $18,254,000. For the three months ended September 30, 1999, the Company had total revenues of $21,340,000 and total expenses of $21,241,000. The Company had a net loss of $962,000 or $(.27) per share for the three months ended September 30, 2000. The Company had net income of $32,000 or $.01 per share for the three months ended September 30, 1999, after providing for income taxes of $10,000 and minority interests of $57,000. For the three months ended September 30, 2000, operating expenses consisted of salaries and benefits of $14,131,000, food, medical and other supplies of $936,000, and other operating expenses (including rent of $832,000) of $2,204,000. Also, the Company had corporate, general and administrative expenses of $615,000 and interest expense of $368,000. Revenues in the 2000 period decreased from the 1999 period by $4,048,000 or 19%, largely as a result of the termination of the management agreement for two nursing homes, the sale of Balz, and the termination of Lexicon's operations. Operating expenses in the 2000 period decreased over the 1999 period by $2,961,000 or 15% largely as a result of termination of the management agreement and sale or termination of the businesses as noted above. Administrative and general expenses decreased by $106,000 due to reduced staffing. Interest costs increased by $80,000 as a result of additional borrowings and higher interest rates. Income taxes were provided in the 1999 period on pre-tax income of $42,000; the combined federal and state effective rate was 24%. Page 12. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The Company has primarily financed its operations through operating revenues, borrowings from banks, the prior operator of certain of the facilities and other private lenders including stockholders, by financing its accounts receivable, through a public offering of its common stock, and through the sale of bed licenses. During the three months ended September 30, 2000, the Company expended approximately $167,000, in capital improvements to its leased facilities. Any capital improvements made to these facilities belong to the landlord. However, any amounts expended for capital improvements are generally recouped in their entirety through the reimbursement system. During the three months ended September 30, 2000 the Company expended $494,000 for capital improvements at its owned facilities which was funded by the mortgagor under the terms of the mortgage. At September 30, 2000, the Company had cash and cash equivalents of $1,528,000, receivables of $15,709,000, inventories, prepaid expenses and other current assets of $1,430,000. Receivables decreased by $1,254,000 since June 30, 2000 due to reduced volume from the ancillary businesses, offset by generally higher reimbursement rates in effect. There was a working capital deficiency at September 30, 2000 of $2,568,000 as compared with working capital deficiency of $1,498,000 at June 30, 2000. The principal reasons for the change are the loss from operations (including the adjustment to reduce revenues for prior years cost settlements of $430,000) and costs relating to the government investigation. Current liabilities at September 30, 2000 consist principally of trade accounts payable, amounts due to SunBridge for purchased accounts receivable, estimated third-party payor settlements due Medicare and Medicaid, current portion of notes and capital leases payable, accrued payroll and related taxes, and other accrued expenses. In December 1998, the Company entered into a financing agreement with a healthcare lender for up to $4,500,000, subsequently increased to $6,000,000, which is secured by its accounts receivable and certain other assets. As of September 30, 2000, $4,537,000 was borrowed under this agreement. The Company has increased its utilization of this line of credit to finance working capital needs as a result of payback of Medicare and Medicaid settlements, costs of the government investigation, and operating losses. The Company reported a loss of $962,000 for the three months ended September 30, 2000 which includes a reduction of patient service revenue of $430,000 as discussed in Note E. Management has prepared plans which contemplate a significant turnaround in ongoing operations and profitability and has plans to address the Company's equity capital and cash flow needs so that operations may continue in the normal manner. Page 13. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources (Continued) Specifically, layoffs have been implemented, field and administrative positions were restructured to reduce costs, and cost monitoring has been tightened. Management is actively pursuing obtaining additional equity capital including a warrant offering for which warrants have already been registered with the SEC and potential investors have been contacted. In addition, positive cash flow is expected to result from collection of receivables of BALZ and Lexicon estimated at over $1,300,000, additional nursing home and home health agency collections of $900,000 and a proposed sale of surplus bed Inflation has not had, nor is it expected to have, a material impact on the operations and financial condition of the Company. Forward Looking Statements This quarterly report contains certain forward-looking statements regarding the Company, its business prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause the Company's actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that may affect such forward-looking statements include, without limitations: the Company's ability to successfully and timely develop and finance new projects, the impact of competition on the Company's revenues, and changes in reimbursement rates, patient mix, and demand for the Company's services. When used, words such as "believes," "anticipates," "expects," "intends" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by the Company in this report, news releases, and other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business. Page 14. PART II - OTHER INFORMATION Item 1. Legal Proceedings In October 1999, Federal officials (the "government") seized records and documents from the Company and subpoenaed current and former employees to provide testimony in connection with a grand jury investigation being conducted by the Office of the U.S. Attorney. The Company and certain members of present and former senior management have been named as targets of the government's investigation. However, the government has not provided the Company with any documentation from which it may determine the nature and scope of the investigation. The Company is cooperating fully with the government investigation, has provided all requested records and information, and management is confident that the Company has not committed any wrongdoings. In addition, the Company has established an independent committee of the Board of Directors to supervise its own investigation. The ultimate outcome of this uncertainty cannot presently be determined. Accordingly, no provision for any liability that may result has been made in the accompanying condensed consolidated financial statements. Since inception through September 30, 2000 the Company has incurred expenses of $378,000 relating to this matter. The independent committee of the Board of Directors approved a formal Corporate Compliance Plan which was submitted to the Connecticut Department of Social Services in February 2000. The following actions have been taken in support of that plan: o An experienced operations executive was named Corporate Compliance Officer o An 800 "hot line" phone number to report questions or problems has been set up and communicated to employees and others o A Management Compliance Committee has held seven monthly meetings, resulting in a number of formal policies being written and distributed including a Corporate Compliance Handbook for employees which includes disciplinary guidelines, an offense detection plan, and corrective action initiatives o Corporate compliance training for employees has been conducted o Written policies and procedures have been prepared relating to State of CT reimbursement (including related party transactions and cost report preparation ); training will be completed before preparing the 2000 cost reports o Quarterly audits of management costs, related party transactions and rent payments have been completed and submitted to the State of Connecticut The Company has received notice of lawsuits initiated against it in April 2000 concerning four nursing homes which it was managing for SunBridge Healthcare Corporation; the claims are being made by affiliates of SunBridge for therapy and pharmacy services rendered. The total claimed is $1.2 million of which $1.1 million is reflected by invoices recorded on the Company's books. The Company believes that the claim includes overbillings, payments and credits not applied, and amounts charged in excess of contract rates. The Company intends to vigorously contest the lawsuits as it works out arrangements to pay appropriate charges. Page 15. The Company is involved in other legal proceedings and is subject to certain lawsuits and claims in the ordinary course of its business. Although the ultimate effect of these matters is often difficult to predict, management believes that their resolution will not have a material adverse effect on the Company. Item 2. Change in Securities NONE Item 3. Defaults Upon Senior Securities NONE Item 4. Submission of Matters to a Vote of Security Holders NONE Item 5. Other Information NONE. Item 6. Exhibits and Reports on Form 8-K NONE. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. /s/ Harry Dermer ----------------------------------- (Harry Dermer, Chief Executive Officer and President) (Duly Authorized Officer) Date November 14, 2000 /s/ Thomas E. Dybick ----------------- ----------------------------------- (Thomas E. Dybick, Chief Financial Officer) (Principal Financial Officer) Page 16. EX-27 2 0002.txt FDS
5 1000 US DOLLARS 3-MOS JUN-30-2000 JUL-01-2000 SEP-30-2000 1 1,528 0 17,345 (1,636) 437 18,667 6,151 (1,134) 30,469 21,235 8,132 0 0 35 (870) 30,469 17,249 17,292 0 17,886 0 0 368 (962) 0 (962) 0 0 0 (962) (0.27) (0.27) Mortgages And Similar Debt Minority Interest
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