SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 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.
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(Exact name of registrant as specified in its charter)
Delaware 06-1468252
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
1577 New Britain Avenue, Farmington, CT 06032
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(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 12, 2001 3,525,000 Shares of
Common Stock outstanding
LEXINGTON HEALTHCARE GROUP, INC.
DECEMBER 31, 2000 FORM 10-Q
INDEX
Part I -- Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- December 31, 2000 and
June 30, 2000...................................................Pg. 3.
Condensed Consolidated Statements of Operations -- Six months
and three months ended December 31, 2000 and 1999...............Pg. 4.
Condensed Consolidated Statements of Cash Flows -- Six months
ended December 31, 2000 and 1999................................Pg. 5.
Notes to Condensed Consolidated Financial Statements..........Pg.6-11.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................Pg. 12-15.
Part II -- Other Information.
Item 1. Legal Proceedings................................................Pg. 16.
Item 2. Changes in Securities............................................Pg. 17.
Item 3. Defaults Upon Senior Securities..................................Pg. 17.
Item 4. Submission of Matters to a Vote of Security Holders..............Pg. 17.
Item 5. Other Information................................................Pg. 17.
Item 6. Exhibits and Reports on Form 8-K.................................Pg. 17.
Signatures...............................................................Pg. 17.
Page 2.
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2000 2000
(Unaudited) (Audited)
-------------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,302,000 $ 1,265,000
Accounts and notes receivable - net of allowance for
doubtful accounts of $2,076,000 and $1,634,000, respectively 14,449,000 16,963,000
Inventories, prepaid expenses and other current assets 1,109,000 1,349,000
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Total current assets 16,860,000 19,577,000
PROPERTY, EQUIPMENT & LEASEHOLD IMPROVEMENTS, net 5,629,000 4,477,000
OTHER ASSETS
Security deposits - related parties 2,337,000 2,337,000
Residents' funds 364,000 370,000
Goodwill, net 1,831,000 1,886,000
Bed licenses, net 1,336,000 1,394,000
Other assets, net 783,000 917,000
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6,651,000 6,904,000
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$ 29,140,000 $ 30,958,000
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Notes and capital leases payable (current portion) $ 4,139,000 $ 4,296,000
Due to SunBridge - purchased receivables 2,078,000 2,094,000
Accounts payable and accrued expenses 13,918,000 14,423,000
Estimated third-party payor settlements 276,000 188,000
Income taxes payable 78,000 74,000
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Total current liabilities 20,489,000 21,075,000
OTHER LIABILITIES
Notes and capital leases payable (less current portion) 8,723,000 7,892,000
Residents' funds payable 364,000 370,000
Deferred rent 952,000 809,000
Other liabilities 120,000 120,000
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10,159,000 9,191,000
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Total liabilities 30,648,000 30,266,000
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COMMITMENTS AND CONTINGENCIES (Note F)
MINORITY INTERESTS 565,000 565,000
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock, par value $.01 per share, authorized
15,000,000 shares, issued and outstanding 3,525,000 shares 35,000 35,000
Additional paid-in capital 5,556,000 5,556,000
Deficit (7,664,000) (5,464,000)
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Total stockholders' equity (deficiency) (2,073,000) 127,000
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$ 29,140,000 $ 30,958,000
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
- 3 -
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Three Months
Ended December 31, Ended December 31,
---------------------------- ----------------------------
2000 1999 2000 1999
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REVENUES
Net patient service revenue $ 34,772,000 $ 36,150,000 $ 17,525,000 $ 19,412,000
Management fee revenue 4,000 4,565,000 2,000 43,000
Other revenue 83,000 136,000 40,000 56,000
------------ ------------ ------------ ------------
Total revenues 34,859,000 40,851,000 17,567,000 19,511,000
EXPENSES
Operating expenses:
Salaries and benefits 28,220,000 29,719,000 14,089,000 13,747,000
Food, medical and other supplies 1,888,000 4,201,000 952,000 2,049,000
Other operating expenses 4,947,000 4,562,000 2,743,000 2,454,000
Corporate, general and administrative expenses 1,242,000 1,681,000 627,000 960,000
Interest expense 762,000 580,000 394,000 292,000
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Total expenses 37,059,000 40,743,000 18,805,000 19,502,000
------------ ------------ ------------ ------------
Income (loss) before income taxes and minority interest (2,200,000) 108,000 (1,238,000) 9,000
PROVISION FOR (BENEFIT FROM) INCOME TAXES -- 2,000 -- (8,000)
MINORITY INTEREST IN INCOME OF CONSOLIDATED
JOINT VENTURES -- (101,000) -- (44,000)
------------ ------------ ------------ ------------
Net income (loss) $ (2,200,000) $ 5,000 $ (1,238,000) $ (27,000)
============ ============ ============ ============
Basic earnings (loss) per share $ (0.62) $ 0.00 $ (0.35) $ (0.01)
============ ============ ============ ============
Weighted average number of shares outstanding 3,525,000 3,610,000 3,525,000 3,525,000
============ ============ ============ ============
- 4 -
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(2,200,000) $ 5,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities 912,000 393,000
Decrease in accounts receivable 2,072,000 2,088,000
Changes in other operating assets and liabilities 435,000 178,000
Minority interest in income of consolidated joint ventures -- 101,000
Decrease in accounts payable and accrued expenses (505,000) (2,750,000)
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Net cash provided by operating activities 714,000 15,000
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CASH FLOWS FROM INVESTING ACTIVITIES
Note receivable - related party -- (2,000)
Increase in security deposits - other -- (597,000)
Acquisition of fixed assets (364,000) (269,000)
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Net cash used in investing activities (364,000) (868,000)
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CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable and capital lease obligations (148,000) (136,000)
Net repayments from line of credit (165,000) (769,000)
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Net cash used in financing activities (313,000) (905,000)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 37,000 (1,758,000)
CASH AND CASH EQUIVALENTS, beginning of period 1,265,000 3,675,000
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CASH AND CASH EQUIVALENTS, end of period $ 1,302,000 $ 1,917,000
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Certain assets acquired through assumption of mortgage note payable $ 952,000 $ 126,000
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
- 5 -
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to December 31, 2000 and for the six
months and three months ended December 31, 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 eight
nursing home facilities at December 31, 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 the 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.
Page 6.
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to December 31, 2000 and for the
six months and three months ended December 31, 2000 and 1999 is unaudited)
NOTE C - ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
MANAGEMENT OF SUN HOMES, ACQUISITION OF ADAMS AND HERITAGE AND TERMINATION OF
MANAGEMENT AGREEMENT
On November 1, 1998 the Company began providing management services for four
skilled nursing facilities in Connecticut under an interim Management Agreement
with SunBridge Healthcare Corporation ("SunBridge"), a New Mexico corporation
and nation-wide healthcare provider.
As consideration for the services provided under this Management Agreement, the
Company was entitled to retain the excess of any revenues earned in the delivery
of patient services over the expenses incurred during the term and was
responsible for any excess of expenses incurred over revenues earned in the
operation of the facilities during the term. Under the terms of the agreement
SunBridge retained responsibility for all building lease costs. In addition, the
Company purchased substantially all of SunBridge's accounts receivable for these
facilities. As of December 31, 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 December 31, 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.
Page 7.
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to December 31, 2000 and for the
six months and three months ended December 31, 2000 and 1999 is unaudited)
NOTE C - ACQUISITIONS AND DISPOSITIONS OF BUSINESSES (Continued)
SALE OF BUSINESS (Continued)
Prior to the sale of the business later in the fiscal year, BALZ had revenues of
$1,699,000, expenses of $1,496,000 and net income of $203,000 during the six
months ended December 31, 1999.
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 $1,224,000 and $1,237,000 for the six months ended December 31, 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 six months ended December 31, 2000 in connection with adjustments of
1997 and 1998 estimated Medicare settlements.
Page 8.
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to December 31, 2000 and for the six
months and three months ended December 31, 2000 and 1999 is unaudited)
NOTE E - THIRD-PARTY REVENUE ADJUSTMENTS AND SETTLEMENTS (Continued)
Estimated third-party payor settlements payable represent 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.
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 December 31, 2000 the Company has
recorded charges to expense consisting primarily of legal fees of $388,000
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.
Page 9.
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to December 31, 2000 and for the six
months and three months ended December 31, 2000 and 1999 is unaudited)
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.
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 $2,200,000 for the six months ended December 31,
2000 which includes a reduction of patient service revenue of $430,000 as
discussed in Note E and a $450,000 increase to the provision for doubtful
accounts as a result of estimated uncollectable trade accounts receivable from
discontinued operations of subsidiaries. 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 a normal manner.
Page 10.
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to December 31, 2000 and for the six
months and three months ended December 31, 2000 and 1999 is unaudited)
NOTE H - OPERATIONS - (Continued)
Specifically, layoffs have been implemented, field and administrative positions
were restructured to reduce costs, and cost monitoring has been tightened.
Management is in the process of reviewing contracts for the outsourcing of the
dietary, housekeeping and laundry, and maintenance departments to professional
service firms. These contracts, when implemented, should generate positive cash
flow of approximately $2,000,000 assuming sixty day payment terms which are
currently being negotiated. The total anticipated contract costs should be equal
to or less than the costs the Company is currently incurring for such services.
Management has implemented an aggressive marketing plan, which includes patient
sharing arrangements with local hospitals, to improve the patient mix and
generate revenue from higher rate paying sources and the facilities are
undergoing a major redecoration program to attract more patients. Medicare
consultants have been engaged to improve nursing diagnoses skills and patient
admission procedures which should result in higher revenue and lower bad debt
write-offs in the future.
Page 11.
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 six 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 12.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview (Continued)
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
Six months ended December 31, 2000 ("2000 period") vs. six
months ended December 31, 1999 ("1999 period")
Revenues in the 2000 period decreased form the 1999 period by $5,992,000 or by
15% largely as a result of the termination of the management agreement for two
nursing homes, the sale of the assets and the business of BALZ, and the
termination of Lexicon's operations.
The Company had a net loss of $2,200,000 or (.62) per share for the 2000 period
and net income of $5,000 or (.00) per share for the 1999 period. The increase in
losses is due primarily to a $430,000 reduction in patient service revenue
resulting from adjustments to 1997 and 1998 Medicare settlements, a $450,000
increase to the provision for doubtful accounts as a result of estimated
uncollectable trade accounts receivable from discontinued operations of
subsidiaries, and reductions in net revenue from Medicare under the prospective
payment systems (PPS).
Three months ended December 31, 2000 ("2000 period") vs. three months ended
December 31, 1999 ("1999 period")
Revenues in the 2000 period declined from the 1999 period by $1,944,000 or by
10% largely as a result of the sale of the assets and the business of BALZ and
the termination of Lexicon's operations.
The Company had a net loss of $1,238,000 or (.35) per share for the 2000 period
and a net loss of $27,000 or (.01) per share for the 1999 period. The increase
in losses is primarily due to a $450,000 increase in the provision for doubtful
accounts as a result of estimated uncollectible trade accounts receivable from
discontinued operations of subsidiaries in the 2000 period, and higher payroll
and benefits.
Page 13.
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 six months ended December 31, 2000,the Company expended approximately
$1,316,000 in capital improvements to its owned and its leased facilities of
which $987,000 was funded by the mortgagor, banks or capital lease financing.
At December 31, 2000, the Company had a working capital deficit of $3,629,000 as
compared to a working capital deficit of $1,498,000 at June 30, 2000. The
increase in the working capital deficit is due primarily to the $2,200,000
operating loss reported for the 2000 period.
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
December 31, 2000, $3,890,000 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.
Management has prepared plans, as discussed in Note H, 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 a normal manner.
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.
Page 14.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements (Continued)
When used, words such as "believes," "anticipates," "expects," "intends" and
similar expressions are intended to identify forward-looking statements, but are
not the exclusive means of identifying forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. The Company undertakes no obligation
to revise any forward-looking statements in order to reflect events or
circumstances that may subsequently arise.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report, news releases, and other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business.
Page 15.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In October 1999, 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 December 31, 2000 the Company has incurred expenses of
$388,000 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 Written
policies and procedures have been prepared relating to State of CT
reimbursement (including related party transactions and cost report
preparation ); training was 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 settled a portion
of the lawsuit for $212,000 payable over ten months. This amount represents
invoices previously recorded on the Company's books. The Company intends to
vigorously contest the lawsuits as it works out arrangements to pay appropriate
charges.
Page 16.
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/
----------------------------------------
(Barry Feldscher, Chief Operating
Officer)
(Duly Authorized Officer)
Date /s/
------------------------------ ----------------------------------------
(Chief Financial Officer)
(Principal Financial Officer)
Page 17.