-----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, A2aWoRjpGX4djaUI9oG0pL6iZA5qv/yXElbS9cN1p8LUIPH1KuhcdgyhLJjwEVqG 1yJpw7gfULB+A3/t+z6w7A== 0001005477-99-005315.txt : 19991117 0001005477-99-005315.hdr.sgml : 19991117 ACCESSION NUMBER: 0001005477-99-005315 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99755075 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 September 30, 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: November 12, 1999 3,525,000 Shares of Common Stock outstanding LEXINGTON HEALTHCARE GROUP, INC. SEPTEMBER 30, 1999 FORM 10-Q INDEX Part I -- Financial Information Item 1. Consolidated Financial Statements Condensed Consolidated Balance Sheets -- September 30, 1999 and June 30, 1999..............................................Pg.3. Condensed Consolidated Statements of Operations -- Three months ended September 30, 1999 and 1998..............................Pg.4. Condensed Consolidated Statements of Cash Flows -- Three months ended September 30, 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.10-14. 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.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, 1999 1999 (Unaudited) ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,454,000 $ 3,675,000 Accounts receivable, net of allowance for doubtful accounts of $868,000 and $848,000, respectively 13,533,000 16,092,000 Inventories 1,141,000 1,058,000 Prepaid expenses and other current assets 1,041,000 1,031,000 ------------ ------------ Total current assets 17,169,000 21,856,000 PROPERTY, EQUIPMENT & LEASEHOLD IMPROVEMENTS, net 4,363,000 4,147,000 OTHER ASSETS Goodwill, net 2,971,000 3,013,000 Security deposits - related parties 2,337,000 2,337,000 Security deposits - other 945,000 371,000 Bed licenses, net 1,481,000 1,510,000 Operating subsidy receivable (less current portion) 518,000 555,000 Other assets, net 85,000 91,000 Residents' funds 481,000 403,000 ------------ ------------ 8,818,000 8,280,000 ------------ ------------ $ 30,350,000 $ 34,283,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 10,561,000 $ 13,473,000 Due to SunBridge - purchased receivables 2,582,000 2,582,000 Estimated third-party payor settlements 678,000 939,000 Notes and capital leases payable (current portion) 2,908,000 3,867,000 Income taxes payable 40,000 40,000 ------------ ------------ Total current liabilities 16,769,000 20,901,000 OTHER LIABILITIES Notes and capital leases payable (less current portion) 7,817,000 7,768,000 Deferred rent 299,000 314,000 Residents' funds payable 481,000 403,000 Other liabilities 120,000 120,000 ------------ ------------ 8,717,000 8,605,000 ------------ ------------ Total liabilities 25,486,000 29,506,000 ------------ ------------ MINORITY INTEREST 602,000 545,000 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 (1,329,000) (1,361,000) ------------ ------------ Total stockholders' equity 4,262,000 4,232,000 ------------ ------------ $ 30,350,000 $ 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 FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
1999 1998 ---- ---- REVENUES Net patient service revenue $ 16,738,000 $ 15,554,000 Management fee revenue 4,522,000 52,000 Other revenue 80,000 92,000 ------------ ------------ Total revenues 21,340,000 15,698,000 EXPENSES Operating expenses: Salaries and benefits 15,972,000 10,761,000 Food, medical and other supplies 2,152,000 1,827,000 Other operating expenses 2,108,000 1,854,000 Corporate, general and administrative expenses 721,000 715,000 Interest expense 288,000 233,000 ------------ ------------ Total expenses 21,241,000 15,390,000 ------------ ------------ Income before income taxes and minority interest 99,000 308,000 INCOME TAXES 10,000 43,000 MINORITY INTEREST IN INCOME OF CONSOLIDATED JOINT VENTURES (57,000) (161,000) ------------ ------------ Net income $ 32,000 $ 104,000 ============ ============ Basic earnings per common share $ 0.01 $ 0.03 ============ ============ Weighted average number of common shares outstanding 3,695,000 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 THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 32,000 $ 104,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities 197,000 176,000 Minority interest in income of consolidated joint ventures 57,000 161,000 Decrease in accounts receivable 2,559,000 557,000 (Decrease) increase in accounts payable and accrued expenses (2,912,000) 25,000 Changes in other operating assets and liabilities (332,000) (886,000) ----------- ----------- Net cash provided by (used in) operating activities (399,000) 137,000 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Note receivable - related party (2,000) (63,000) Increase in security deposits - other (574,000) -- Acquisition of fixed assets (209,000) (199,000) ----------- ----------- Net cash used in investing activities (785,000) (262,000) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Repayments of line of credit - net (963,000) -- Repayments of notes payable and capital lease obligations (74,000) (66,000) ----------- ----------- Net cash used in financing activities (1,037,000) (66,000) ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (2,221,000) (191,000) CASH AND CASH EQUIVALENTS, beginning of period 3,675,000 831,000 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 1,454,000 $ 640,000 =========== =========== NON-CASH INVESTING AND FINANCING ACTIVITIES: Certain assets acquired through assumption of mortgage note payable $ 94,000 $ 86,000 Equipment and leasehold improvements acquired through assumption of notes payable and capital leases 33,000 72,000 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, 1999 and for the three months ended September 30, 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 or manages eight nursing home facilities at September 30, 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 September 30, 1999 and for the three months ended September 30, 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 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. 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 is entitled to retain the excess of any revenues earned in the delivery of patient services 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. 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, 1999, the balance owed is presented as "Due to SunBridge - purchased receivables" in the accompanying consolidated balance sheet. Effective September 1, 1999, the Company agreed to acquire the operations of two of the managed facilities, Adams House and Heritage Heights. Initially the buildings will be 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. In connection with the management agreement and operation of these facilities, the Company earned management fees and patient service revenue of $5,501,000 and incurred costs and expenses of $5,508,000 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, 1999 and for the three months ended September 30, 1999 and 1998 is unaudited) 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 - 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 consolidated financial statements. 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. Page 8. LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information with respect to September 30, 1999 and for the three months ended September 30, 1999 and 1998 is unaudited) NOTE F - RISKS AND UNCERTAINTIES The Company receives its nursing home Medicare reimbursement under a new per diem system known as the prospective payment system. 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 agreed to acquire the operations of two of the managed facilities, Adams House and Heritage Heights. Initially the buildings will be 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. 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, 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. YEAR 2000 The Company is continuing work on resolving the potential impact of the year 2000 on the ability of its 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, however it primarily uses licensed software products, with a significant portion of processes and transactions centralized in only a few third party vendor packages. Certain of those packages were acquired in recent years and are Year 2000 compliant. Management has made plans to complete the conversion of remaining programs before the end of the calendar year. The Company 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. Page 11. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Three months ended September 30, 1999 ("1999 period") vs. three months ended September 30, 1998 ("1998 period") For the three months ended September 30, 1999, the Company had total revenues of $21,340,000 and total expenses of $21,241,000. For the three months ended September 30, 1998, the Company had total revenues of $15,698,000 and total expenses of $15,390,000. The Company had net income of $32,000 or $.01 per share for the three months ended September 30, 1999 after providing income taxes of $10,000. The Company had net income of $104,000 or $.03 per share for the three months ended September 30, 1998, after providing for income taxes of $43,000. For the three months ended September 30, 1999, operating expenses consisted of salaries and benefits of $15,972,000, food, medical and other supplies of $2,152,000, and other operating expenses (including rent of $703,000) of $2,108,000. Also, the Company had corporate, general and administrative expenses of $721,000 and interest expense of $288,000. Revenues in the 1999 period increased over the 1998 period by $5,642,000 or 36%, largely as a result of the management agreement effective November 1, 1998. Of this net increase, $5,501,000 pertained to the new management agreement and $345,000 pertained to the nursing facilities due to payer mix and rate changes; there was a $204,000 net revenue decrease in the joint ventures and the ancillary businesses acquired in 1997. Operating expenses in the 1999 period increased over the 1998 period by $5,790,000 or 40% largely as a result of the management agreement and joint ventures noted above and the increased volume in the ancillary businesses. Of this net increase, $5,508,000 pertained to the management agreement effective November 1, 1998. In addition, net nursing home costs increased by $378,000 mostly for higher wage and benefit costs resulting from state-funded Medicaid rate increases. There was a $96,000 expense decrease in joint ventures and the ancillary businesses acquired in 1997. Administrative and general expenses increased by $6,000. Interest costs increased by $55,000 as a result of additional borrowings. Income taxes were provided in the 1999 period on pre-tax income of $42,000; the combined federal and state effective rate was 24%. Income taxes were provided in the 1998 period on pre-tax income of $147,000; the combined federal and state effective rate was 29%. 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. Page 12. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources (Continued) 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. 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 September 30, 1999, approximately $2,668,000 was borrowed under this line of credit. During the three months ended September 30, 1999, the Company expended approximately $138,000 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 three months ended September 30, 1999 the Company expended $66,000 for capital improvements at its owned facilities which was funded by the mortgagor under the terms of the mortgage. Page 13. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Working capital at September 30, 1999 was $400,000 as compared with working capital of $955,000 at June 30, 1999. During the three months ended September 30, 1999 the Company had made lease deposits in the amount of $574,000 and paid change of ownership capital expenses of $120,000 at its newly-leased facilities. At September 30, 1999 the Company had cash and cash equivalents of $1,454,000, receivables of $13,533,000, inventories of $1,141,000, prepaid expenses and other current assets of $1,041,000. Current liabilities at September 30, 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. 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, 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 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. Item 3. Defaults Upon Senior Securities NONE Page 15. Item 4. Submission of Matters to a Vote of Security Holders NONE Item 5. Other Information On October 1, 1999, the Registrant was notified by The Nasdaq - Amex Market Group that, based on their review of the Form 10-K for the year ended June 30, 1999, the Registrant 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. The Company responded with the plan for achieving compliance with the criteria. Nasdaq has not notified the Company that it has commenced the delisting process. In the event that Nasdaq does notify the Company that they intend to commence a delisting procedure, the Company intends to submit a Formal Plan for compliance. 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 November 15, 1999 /s/ Thomas E. Dybick ------------------ -------------------------------------- (Thomas E. Dybick, Chief Financial Officer) (Principal Financial Officer) Page 16. EX-27 2 FDS FOR LEXINGTON HEALTHCARE GROUP
5 1,000 U.S. dollars 3-MOS JUN-30-2000 JUL-01-1999 SEP-30-1999 1 1,454 0 14,401 (868) 1,141 17,169 5,291 (928) 30,350 16,769 7,817 0 0 41 4,221 30,350 21,260 21,340 0 20,953 0 0 288 42 10 32 0 0 0 32 .01 .01 Mortgages And Similar Debt
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