-----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, N4AviyUHFPaFmS/X0OEaUYpj2QDtpgeQ4WmBtEWCAyiieThjlFXk7XKVYTBE4HgY OwBYhdwczMSak7lvUatrLw== 0001005477-99-000688.txt : 19990217 0001005477-99-000688.hdr.sgml : 19990217 ACCESSION NUMBER: 0001005477-99-000688 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 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: 99541583 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, 1998 or | | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For The Transition Period from ______to______ Commission File Number 0-22261 LEXINGTON HEALTHCARE GROUP, INC. -------------------------------- (Exact name of registrant as specified in its charter) Delaware 06-1468252 - -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 1577 New Britain Avenue, Farmington, CT 06032 - --------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 860-674-2700 ------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: February 15, 1999 4,125,000 Shares of Common Stock outstanding LEXINGTON HEALTHCARE GROUP, INC. DECEMBER 31, 1998 FORM 10-Q INDEX Part I -- Financial Information Item 1. Consolidated Financial Statements Condensed Consolidated Balance Sheets -- December 31, 1998 and June 30, 1998.................................................Pg. 3. Condensed Consolidated Statements of Operations -- Six months and three months ended December 31, 1998 and 1997.............Pg. 4. Condensed Consolidated Statements of Cash Flows -- Six months ended December 31, 1998 and 1997..............................Pg. 5. Notes to Condensed Consolidated Financial Statements..................................................Pg. 6-8. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................Pg. 9-14. Part II -- Other Information. Item 1. Legal Proceedings............................................Pg. 15. Item 2. Changes in Securities........................................Pg. 15. Item 3. Defaults Upon Senior Securities..............................Pg. 15. Item 4. Submission of Matters to a Vote of Security Holders..........Pg. 15. Item 5. Other Information............................................Pg. 15. Item 6. Exhibits and Reports on Form 8-K.............................Pg. 15. Signatures...............................................................Pg. 16. Page 2. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30, 1998 1998 (Unaudited) ----------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 2,842,000 $ 831,000 Accounts receivable, net 13,397,000 10,848,000 Note receivable - related party 641,000 595,000 Estimated third-party payor settlements - Medicare 230,000 197,000 Inventories 776,000 777,000 Prepaid expenses and other current assets 397,000 533,000 ----------- ----------- Total current assets 18,283,000 13,781,000 PROPERTY, EQUIPMENT & LEASEHOLD IMPROVEMENTS, net 3,917,000 3,370,000 OTHER ASSETS Goodwill, net 3,097,000 3,181,000 Security deposits - related parties 2,337,000 2,337,000 Bed licenses, net 1,568,000 1,626,000 Operating subsidy receivable (less current portion) 628,000 701,000 Other assets, net 941,000 411,000 Residents' funds 250,000 206,000 ----------- ----------- 8,821,000 8,462,000 ----------- ----------- $31,021,000 $25,613,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 9,889,000 $ 8,532,000 Due to SunRise Healthcare Group - purchased receivables 3,043,000 -- Estimated third-party payor settlements - Medicaid 760,000 1,686,000 Notes and capital leases payable (current portion) 1,460,000 398,000 Income taxes payable 194,000 91,000 ----------- ----------- Total current liabilities 15,346,000 10,707,000 OTHER LIABILITIES Notes and capital leases payable (less current portion) 7,705,000 7,424,000 Deferred rent 338,000 364,000 Residents' funds payable 250,000 206,000 ----------- ----------- 8,293,000 7,994,000 ----------- ----------- Total liabilities 23,639,000 18,701,000 ----------- ----------- MINORITY INTERESTS 816,000 529,000 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 399,000 216,000 ----------- ----------- Total stockholders' equity 6,566,000 6,383,000 ----------- ----------- $31,021,000 $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)
Six months ended Three months ended December 31, December 31, ------------ ------------ 1998 1997 1998 1997 ---- ---- ---- ---- REVENUES Net patient service revenue $ 30,248,000 $ 27,859,000 $ 14,694,000 $ 14,044,000 Management fee revenue 4,596,000 122,000 4,544,000 52,000 Other revenue 169,000 208,000 77,000 162,000 ------------ ------------ ------------ ------------ Total revenues 35,013,000 28,189,000 19,315,000 14,258,000 EXPENSES Operating expenses: Salaries and benefits 25,012,000 20,639,000 14,251,000 10,478,000 Food, medical and other supplies 3,693,000 2,247,000 1,866,000 1,089,000 Other operating expenses 3,800,000 3,381,000 1,946,000 1,936,000 Corporate, general and administrative expenses 1,434,000 982,000 719,000 479,000 Interest expense 481,000 433,000 248,000 253,000 ------------ ------------ ------------ ------------ Total expenses 34,420,000 27,682,000 19,030,000 14,235,000 ------------ ------------ ------------ ------------ Income from operations 593,000 507,000 285,000 23,000 OTHER INCOME Gain on sale of bed licenses -- 280,000 -- 280,000 ------------ ------------ ------------ ------------ Income before income taxes and minority interest 593,000 787,000 285,000 303,000 INCOME TAXES 123,000 270,000 80,000 65,000 MINORITY INTEREST IN INCOME OF CONSOLIDATED JOINT VENTURES (287,000) (28,000) (126,000) (28,000) ------------ ------------ ------------ ------------ Net income $ 183,000 $ 489,000 $ 79,000 $ 210,000 ============ ============ ============ ============ Basic earnings per common share $ 0.04 $ 0.12 $ 0.02 $ 0.05 ==== ==== ==== ==== 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 SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED)
1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 183,000 $ 489,000 Adjustments to reconcile net income to net cash provided by operating activities 333,000 (10,000) Minority interest in income of consolidated joint ventures 287,000 28,000 Increase in accounts receivable (2,549,000) (2,583,000) Increase (decrease) in accounts payable and accrued expenses 1,357,000 (503,000) Due to SunRise Healthcare Group - purchased receivables 3,043,000 -- Changes in other operating assets and liabilities (1,188,000) 2,078,000 ----------- ----------- Net cash provided by (used in) operating activities 1,466,000 (501,000) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Note receivable - related party (76,000) (757,000) Repayments of note receivable - related party 30,000 457,000 Increase in security deposits -- (124,000) Acquisition of fixed assets (326,000) (138,000) ----------- ----------- Net cash used in investing activities (372,000) (562,000) ----------- ----------- 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 1,042,000 264,000 Minority interest investment in consolidated joint ventures -- 117,000 Repayments of notes payable and capital lease obligations (125,000) (90,000) ----------- ----------- Net cash provided by financing activities 917,000 1,799,000 ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 2,011,000 736,000 CASH AND CASH EQUIVALENTS, beginning of period 831,000 1,000,000 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 2,842,000 $ 1,736,000 =========== =========== NON-CASH INVESTING AND FINANCING ACTIVITIES: Certain assets acquired through assumption of mortgage note payable $ 315,000 $ 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 December 31, 1998 and for the three months and six months ended December 31, 1998 and 1997 is unaudited) NOTE A - THE COMPANY The consolidated financial statements include the accounts of Lexington Healthcare Group, Inc. and all of its wholly-owned subsidiaries: Balz Medical Services, Inc. ("BALZ"), Professional Relief Nurses, Inc. ("PRN"), and Lexington Highgreen Holding, Inc. (collectively, the "Company"), as well as the accounts of the following joint ventures controlled by the Company: LexiCore Rehab Services, LLC and Lexicon Pharmacy Services, LLC. All material intercompany balances and transactions have been eliminated in consolidation. The Company is a long-term and subacute care provider which operates or manages ten nursing home facilities at December 31, 1998 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 December 31, 1998 and for the three months and six months ended December 31, 1998 and 1997 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 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 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. As a result of this agreement, the Company earned management fees of $4,493,000 and incurred costs and expenses of $3,992,000 during the period ended December 31, 1998. Under the terms of the agreement SunRise also retained responsibility for all building lease costs. On November 12, 1998 the Company completed agreements under which it will formally purchase and/or lease these four facilities along with an additional Connecticut nursing facility from SunRise. The purchase or lease transactions are expected to close during the first six months of 1999. In total, the Company will acquire the license to approximately 600 skilled nursing beds. Page 7. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information with respect to December 31, 1998 and for the three months and six months ended December 31, 1998 and 1997 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 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. As a result, the entire balance of this note was $641,000 at December 31, 1998 (as reduced by principal payments of $30,000, together with accumulated interest of $21,000); it is classified as a current asset in the accompanying condensed consolidated balance sheet. 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 December 31, 1998, $1,243,000 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 of the five skilled nursing facilities which it had earlier agreed to acquire. Growth also continued in its joint-venture ancillary businesses. 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; adhere to strict cost standards at the Facility level while providing effective patient care and containing corporate overhead expenses; and 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. 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. Page 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 December 31, 1998 ("1998 period") vs. three months ended December 31, 1997 ("1997 period") For the three months ended December 31, 1998, the Company had total revenues of $19,315,000 and total operating expenses of $19,030,000. For the three months ended December 31, 1997, the Company had total revenues of $14,258,000 and total operating expenses of $14,235,000. 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. The Company had net income of $210,000 or $.05 per share for the three months ended December 31, 1997, after providing for income taxes of $65,000. 1997 net income included a one-time gain of $280,000 recorded on the bed license sale. For the three months ended December 31, 1998, operating expenses consisted of salaries and benefits of $14,251,000, food, medical and other supplies of $1,866,000, other operating expenses (including rent of $701,000) of $1,946,000, and corporate, general and administrative expenses of $719,000. In addition, income from operations was reduced by interest expense of $248,000 and net income was reduced by minority interest of $126,000. Revenues in the 1998 period increased over the 1997 period by $5,057,000 or 35%, 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, $4,493,000 pertained to the new management agreement, $1,184,000 pertained to the joint ventures and growth in ancillary businesses acquired in 1997; there was a $620,000 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 1998 period increased over the 1997 period by $4,795,000 or 34% 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 $240,000 due to the new businesses and acquisitions, higher rent, legal and other administrative costs. Income taxes were provided in the 1998 period on pre-tax income of $159,000; the combined federal and state effective tax rate was 50% (including year to date adjustments made in this quarter). Income taxes were provided in the 1997 period on pre-tax income of $275,000; the combined federal and state effective rate was 24%. Results of Operations Six months ended December 31, 1998 ("1998 period") vs. six months ended December 31, 1997 ("1997 period") 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. For the six months ended December 31, 1997, the Company had total revenues of $28,189,000 and total operating expenses of $27,682,000. 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. The Company had net income of $489,000 or $.12 per share for the six months ended December 31, 1997, after providing for income taxes of $270,000. 1997 net income included a one-time gain of $280,000 recorded on the bed license sale. For the six months ended December 31, 1998, operating expenses consisted of salaries and benefits of $25,012,000, food, medical and other supplies of $3,693,000, other operating expenses (including rent of $1,368,000) of $3,800,000, and corporate, general and administrative expenses of $1,434,000. In addition, income from operations was reduced by interest expense of $481,000 and net income was reduced by minority interest of $287,000. Revenues in the 1998 period increased over the 1997 period by $6,824,000 or 24%, 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, $4,493,000 pertained to the new management agreement, $3,199,000 pertained to the joint ventures and growth in ancillary businesses acquired in 1997; there was a $868,000 net revenue decrease in the nursing facilities due to lower occupancy. Page 11. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating expenses in the 1998 period increased over the 1997 period by $6,738,000 or 24% 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 $452,000 due to the new businesses and acquisitions, higher rent, legal and other administrative costs. Interest expense increased by $48,000 as a result of additional borrowings. Income taxes were provided in the 1998 period on pre-tax income of $306,000; the combined federal and state effective tax rate was 40%. Income taxes were provided in the 1997 period on pre-tax income of $759,000; the combined federal and state effective rate was 36%. Liquidity and Capital Resources Since its formation in 1995, the Company has primarily financed its operations through operating revenues, borrowings from the prior operator of the Facilities and other private lenders (including stockholders), by financing its accounts receivable, through a public offering of its common stock which raised net proceeds of approximately $4.1 million and through the sale of a portion of certain bed licenses acquired in 1997. In July 1997, the Company borrowed $6.8 million in connection with the acquisition of land, buildings, bed licenses and operating assets of the two nursing homes acquired. Interest is payable at 10% over the 20 year term of the mortgage. In connection with the acquisitions, the Company also obtained an operating subsidy of $2.5 million to be received over five years. As noted above, some of the bed licenses acquired were sold for $1,550,000 in November 1997. In 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 and his wife at that time. 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 in the amount of $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 and a balloon payment of the remaining balance due May 31, 1999. Page 12. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources (Continued) As security for the note, Mr. Friedler has pledged 600,000 of his shares of the common stock of the Company. As a result, the entire balance of this note was $641,000 at December 31, 1998 (as reduced by principal payments of $30,000, together with accumulated interest of $21,000); it is classified as a current asset in the accompanying condensed consolidated balance sheet. In August 1997, the Company obtained a $2,000,000 revolving line of credit (at prime plus .50%) 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, 1998, approximately $1,243,000 was borrowed against this agreement. During the six months ended December 31, 1998, the Company expended approximately $280,000 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, 1998 the Company expended $312,000 for capital improvements at its owned facilities which was funded by the mortgagor under the terms of the mortgage. At December 31, 1998, the Company had cash and cash equivalents of $2,842,000, receivables of $13,627,000, inventories of $776,000, prepaid expenses and other current assets of $397,000, and a note receivable including interest from a related party of $641,000. 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 December 31, 1998 was $2,937,000 as compared with working capital of $3,074,000 at June 30, 1998. Current liabilities at December 31, 1998 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. Page 13. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company has been notified by the New England Healthcare Employees Union, District 1199 that, unless there is an agreement reached by the expiration of the current contracts at midnight February 23, 1999, effective February 24, 1999 there will be a three-day state-wide strike to gain attention from the public and the Connecticut legislature in order to prompt the State to revise upward its nursing home reimbursement. This job action involves approximately 6,000 dietary, housekeeping, nursing and other employees in 52 nursing homes in Connecticut. This threatened action would affect eight of the ten nursing homes which the Company operates or manages. The Company has made contingency plans to deal with the impact of the threatened strike including hiring replacement staffing to continue to provide safe, secure, quality care during the job action. At this time it is not known whether the threatened strike would have a material effect on the Company's operations. Forward Looking Statements This quarterly report contains certain forward-looking statements regarding the Company, its business prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause the Company's actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that may affect such forward-looking statements include, without limitations: the Company's ability to successfully and timely develop and finance new projects, the impact of competition on the Company's revenues, and changes in reimbursement rates, patient mix, and demand for the Company's services. When used, words such as "believes," "anticipates," "expects," "intends" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by the Company in this report, news releases, and other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business. Page 14. 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 Annual Meeting held on December 23, 1998. The proposed slate of Directors was elected to the Board of Directors. The appointment of DiSanto Bertoline & Company, P.C. as the Company's independent certified public accountants was ratified. No other business came before the Shareholders for vote. Item 5. Other Information NONE. Item 6. Exhibits and Reports on Form 8-K Form 8-K dated February 2, 1999 and entitled Entering Into Management Agreement is incorporated herein by reference. 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/ Jack Friedler ------------------------------------------- (Jack Friedler, Chief Executive Officer) (Duly Authorized Officer) /s/ Harry Dermer ------------------------------------------- (Harry Dermer, President) (Duly Authorized Officer) Date February 16, 1999 /s/ Thomas E. Dybick ------------------------- ------------------------------------------- (Thomas E. Dybick, Chief Financial Officer) (Principal Financial Officer) Page 16. EX-27 2 FDS
5 001026348 LEXINGTON HEALTHCARE GROUP 1,000 U.S. Dollars 6-MOS JUN-30-1999 JUL-01-1998 DEC-31-1998 1 2,842 0 14,688 (420) 776 18,283 4,502 (585) 31,021 15,346 7,705 0 0 41 6,515 31,021 34,844 35,013 0 33,939 0 0 481 593 123 183 0 0 0 183 .04 .04
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