1
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, 1997
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.)
35 PARK PLACE, NEW BRITAIN, CT 06052
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 860-223-6902
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, 1998 4,125,000
Common Shares outstanding
2
LEXINGTON HEALTHCARE GROUP, INC.
DECEMBER 31, 1997 FORM 10-Q
INDEX
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets -- December 31, 1997 and
June 30, 1997................................................................................Pg. 3.
Condensed Consolidated Statements of Operations -- Six months and three
months ended December 31, 1997 and 1996.......................................................Pg. 4.
Condensed Consolidated Statements of Cash Flows -- Six months
ended December 31, 1997 and 1996..............................................................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. 15.
Page 2.
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LEXINGTON HEALTHCARE GROUP, INC.
AND SUBSIDIARIES CONDENSED
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1997 1997
(Unaudited)
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,736,000 $ 1,000,000
Accounts and note receivable, net 9,124,000 6,541,000
Note receivable - stockholder (Note C) 300,000 --
Estimated third-party payor settlements - Medicare & Medicaid 125,000 278,000
Inventories 468,000 403,000
Prepaid expenses and other current assets 477,000 418,000
----------- -----------
Total current assets 12,230,000 8,640,000
LAND, BUILDINGS, EQUIPMENT & LEASEHOLD
IMPROVEMENTS, net 2,686,000 814,000
OTHER ASSETS
Goodwill, net 3,192,000 3,275,000
Security deposits 2,406,000 2,282,000
Bed licenses, net 1,684,000 --
Operating subsidy receivable (less current portion) 738,000 --
Other assets, net 446,000 260,000
Residents' funds 204,000 161,000
----------- -----------
8,670,000 5,978,000
----------- -----------
$23,586,000 $15,432,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 7,234,000 $ 7,737,000
Estimated third-party payor settlements - Medicare & Medicaid 939,000 323,000
Notes and capital leases payable (current portion) 422,000 89,000
Income taxes payable 318,000 204,000
----------- -----------
Total current liabilities 8,913,000 8,353,000
OTHER LIABILITIES
Mortgage note payable (less current portion) 6,766,000 --
Notes and capital leases payable (less current portion) 284,000 107,000
Deferred rent 390,000 416,000
Residents' funds payable 204,000 161,000
Deferred taxes 42,000 --
----------- -----------
7,686,000 684,000
----------- -----------
Total liabilities 16,599,000 9,037,000
----------- -----------
MINORITY INTERESTS 145,000 --
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 6,168,000
Retained earnings 675,000 186,000
----------- -----------
Total stockholders' equity 6,842,000 6,395,000
=========== ===========
$23,586,000 $15,432,000
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3.
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LEXINGTON HEALTHCARE GROUP, INC.
AND SUBSIDIARIES CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
Six months ended Three months ended
December 31, 1997 December 31, 1997
1997 1996 1997 1996
REVENUES
Net patient service revenue $27,859,000 $17,295,000 $14,044,000 $8,732,000
Other revenue 610,000 152,000 494,000 96,000
----------- ----------- ----------- ----------
Total revenues 28,469,000 17,447,000 14,538,000 8,828,000
EXPENSES
Facility operating expenses:
Salaries and benefits 20,639,000 13,010,000 10,478,000 6,565,000
Food, medical and other supplies 2,247,000 1,075,000 1,089,000 336,000
Other operating expenses 3,381,000 2,574,000 1,936,000 1,234,000
Corporate, general and administrative expenses 1,010,000 486,000 507,000 380,000
Interest expense 433,000 70,000 253,000 44,000
----------- ----------- ----------- ----------
Total expenses 27,710,000 17,215,000 14,263,000 8,559,000
----------- ----------- ----------- ----------
Income before income taxes 759,000 232,000 275,000 269,000
INCOME TAXES (Note B) 270,000 -- 65,000 --
----------- ----------- ----------- ----------
Net income $ 489,000 $ 232,000 $ 210,000 $ 269,000
=========== =========== =========== ==========
Net income per common share $ 0.12 $ 0.09 $ 0.05 $ 0.10
=========== =========== =========== ==========
Weighted average number of common shares outstanding 4,125,000 2,592,000 4,125,000 2,592,000
=========== =========== =========== ==========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Page 4.
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LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 489,000 $ 232,000
Adjustments to reconcile net income to net cash
provided by operating activities 18,000 (53,000)
(Increase) decrease in accounts receivable (2,583,000) 1,249,000
Changes in other operating assets and liabilities 1,575,000 1,432,000
----------- -----------
Net cash provided by operating activities (501,000) 2,860,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Note receivable - related party (757,000) (64,000)
Repayments of note receivable - related party 457,000 --
Increase in security deposits (124,000) --
Acquisition of fixed assets (138,000) (173,000)
----------- -----------
Net cash used in investing activities (562,000) (237,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Stock registration costs (42,000) (28,000)
Proceeds from sale of bed licenses 1,550,000 --
Proceeds from notes payable 264,000 500,000
Minority interest investment in consolidated joint ventures 117,000 --
Issuance of common stock -- 215,000
Repayments of notes payable (68,000) (2,168,000)
Repayments of capital lease obligations (22,000) (21,000)
----------- -----------
Net cash provided by (used in) by financing activities 1,799,000 (1,502,000)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 736,000 1,121,000
CASH AND CASH EQUIVALENTS, beginning of year 1,000,000 212,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 1,736,000 $ 1,333,000
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Certain assets acquired through assumption of mortgage note payable $ 6,863,000 $ --
Equipment and leasehold improvements acquired through assumption
of notes payable and capital leases 220,000 --
The accompanying notes are an integral part of
these condensed consolidated financial statements.
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LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (INFORMATION WITH RESPECT TO DECEMBER
31, 1997 AND FOR THE THREE MONTHS
AND SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996 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" ), LEV Rehab
Services, Inc. ("LEV"), 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 six nursing
home facilities at December 31, 1997 with 853 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, 1997 is derived from audited financial statements; certain line items
have been combined or condensed in their presentation herein.
Inventories consisting of food, chemicals and supplies are valued at the lower
of cost or market, with cost determined on a first-in, first-out (FIFO) basis.
In 1996 the Company was operated as an LLC and accordingly no income taxes were
due at that time. However, income taxes are payable after the reorganization of
entities under common control discussed below. On a pro forma basis had income
taxes been due in 1996, income before income taxes, income taxes, net income,
and net income per common share would have been as follows:
Six months ended 12/31/96 Three months ended 12/31/96
$ Per share $ Per share
- --------- - ---------
Income before income taxes $232,000 $.09 $269,000 $.10
Income taxes (96,000) (96,000)
Net income $136,000 $.05 $173,000 $.07
Page 6.
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LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND FOR THE
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1997
AND 1996 IS UNAUDITED)
NOTE C - REORGANIZATION, PUBLIC STOCK OFFERING AND ACQUISITIONS
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.
Accordingly, the accompanying condensed consolidated financial statements for
the period prior to the reorganization reflect the accounts and operations of
LLC and adjustment has been made to give effect to the reorganization resulting
in the restatement of certain stockholders' equity accounts.
The Company acquired in May 1997, simultaneously with the closing of the public
offering, all of the common stock of BALZ and PRN. On the basis of a pro forma
consolidation of the results of operations as if these acquisitions had taken
place at the beginning of fiscal year 1997, consolidated total revenues would
have been $20.2 million for the six months ended December 31, 1996.
On October 14, 1997 the Company loaned $757,000 to its Chief Executive Officer
and principal stockholder in order for him to pay personal income taxes due as a
result of the reorganization of entities under common control (i.e., the
Company's IPO). There was no cash compensation paid to him as part of the
reorganization. The borrowing was evidenced by a 9% interest earning note
receivable on which payments were made on December 26 ($157,000) and December 31
($300,000) to reduce the note to $300,000, which remained outstanding as of
December 31, 1997. Interest on the note (amounting to $14,500) was paid in full
through December 31, 1997. Subsequently, an additional $150,000 was repaid on
February 3, 1998 leaving a balance of $150,000.
NURSING HOME ACQUISITIONS
On July 1, 1997 Lexington Highgreen Holding, Inc. (a wholly-owned subsidiary of
Lexington Healthcare Group, Inc.) purchased substantially all of the assets of
two skilled nursing facilities in Connecticut, Greenwood Health Center and
Highland Acres Extend-a-Care Center from Beverly Enterprises, Inc. ("Beverly").
Before the sale of the two nursing facilities, Beverly had operated 315 licensed
beds at these two facilities. The Company is operating 225 beds and has returned
the license on 40 beds to the State of Connecticut.
Page 7.
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LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND FOR THE
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1997
AND 1996 IS UNAUDITED)
NOTE C - REORGANIZATION, PUBLIC STOCK OFFERING AND ACQUISITIONS (CONTINUED)
The entire transaction was financed by a $6.8 million mortgage. Beverly has
agreed to pay a $2.5 million operating subsidy to the Company over five years,
bringing the net cost of the transaction to the Company to $4.3 million. In
November 1997, the Company sold the remaining license on 50 beds to an unrelated
party for $1,550,000 in cash which resulted in a gain of $280,000 ($.04 per
common share).
On the basis of a pro forma consolidation of the results of operations as if the
acquisitions had taken place on July 1, 1996, consolidated net revenues would
have been $24,087,000 for six months ended December 31, 1996. Consolidated pro
forma net loss would have been $(1,013,000) in the six months ended December 31,
1996 and pro forma net loss per share would have been $(.39). Such pro forma
amounts reflect the operating results produced by Beverly and are not
necessarily indicative of what the actual consolidated results of operations
might have been had the acquisitions been effective on July 1, 1996.
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 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 consolidated financial statements with appropriate
recognition of minority interest.
NOTE D - RECENTLY ISSUED ACCOUNTING STANDARDS; EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share". The objective of SFAS No. 128 is to simplify the
standards for computing earnings per share (EPS) and make them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. SFAS No. 128 was effective for periods ending after
December 15, 1997, including interim periods; earlier application was not
permitted. Implementation of SFAS No. 128 did not have any impact on the
Company's calculation of EPS.
Page 8.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In May 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 - a medical supplies company and a home
health agency.
During the six months ended December 1997, the Company expanded its nursing home
operations by adding two additional facilities, which were acquired on July 1,
1997. Also, in October and December 1997, the Company started two joint venture
companies with other healthcare providers to provide rehabilitation and pharmacy
services.
On January 20, 1998 the Company announced that it had signed a letter of intent
to acquire Franvale Nursing and Rehabilitation Center, a 128-bed skilled nursing
facility located in Braintree, Massachusetts from an unrelated party, Quality
Care Centers of Massachusetts, Inc., a subsidiary of PHC, Inc. (dba Pioneer
Healthcare). The acquisition of this facility expands the Company's operations
into Massachusetts, a target growth area.
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 Facility profitability levels,
through aggressive marketing and by offering rehabilitation therapies and other
specialized services; adhering to strict cost standards at the Facility level
while providing effective patient care and containing corporate overhead
expenses; and becoming a fully integrated health network whereby the Company
will market 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. The Company's
strategy is to gradually expand services into additional states including
Massachusetts and New Jersey.
Page 9.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 ("1997 PERIOD") VS. THREE MONTHS ENDED
DECEMBER 31, 1996 ("1996 PERIOD")
For the three months ended December 31, 1997, the Company had total revenues of
$14,538,000 and total expenses of $14,263,000. For the three months ended
December 31, 1996, the Company had total revenues of $8,828,000 and total
expenses of $8,559,000. 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. The Company had net income of $269,000 or $.10 per share for the
three months ended December 31, 1996, but no income taxes were due for the 1996
period since the Company was operated as an LLC at that time. On a pro forma
basis, had income taxes been provided in 1996 at a rate of 36%, net income would
have been $173,000 ($.07 per common share).
For the three months ended December 31, 1997, expenses consisted of salaries and
benefits of $10,478,000, food, medical and other supplies of $1,089,000, other
operating expenses (including rent of $669,000) of $1,936,000, corporate,
general and administrative expenses of $507,000 and interest expense of
$253,000.
Revenues in the 1997 period increased over the 1996 period by $5,710,000 or 65%,
largely as a result of the acquisitions during May 1997 and July 1997. Of the
total increase, $5,463,000 pertained to the nursing homes and healthcare
businesses acquired and $247,000 was from increased rates, mix changes and
higher occupancy (2% increase) in the existing nursing facilities. A gain of
$280,000 was recorded on the sale of the bed license in November 1997 which has
been included in other revenue.
The Company collected $102,000 in excess of the net carrying value of accounts
receivable purchased from Beverly in connection with the Greenwood and Highland
acquisitions. Since the Company has collected more than originally recorded for
these purchased accounts receivable such amount has been included in other
revenue.
Operating expenses in the 1997 period increased over the 1996 period by
$5,704,000 or 67%, largely as a result of the acquisitions noted above. Of the
total cost increase, $5,053,000 pertained to the nursing homes and healthcare
businesses acquired and $651,000 was from increased existing-facility and
corporate, general and administrative costs. The increase in existing nursing
home costs was attributable to higher salaries and benefits including additional
nursing, dietary, and housekeeping staffing (as a result of higher occupancy and
wage increases), higher therapy costs and occupancy-driven higher operating
expenses. Interest expense increased by $209,000 mostly as a result of the new
mortgage on the facilities acquired in July.
Income taxes were provided in the 1997 period on pre-tax income of $275,000; the
combined federal and state effective tax rate was 24%. No income taxes were
provided in the 1996 period since the Company was operated as an LLC at that
time.
Page 10.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1997 ("1997 PERIOD") VS.
SIX MONTHS ENDED DECEMBER 31, 1996 ("1996 PERIOD")
For the six months ended December 31, 1997, the Company had total revenues of
$28,469,000 and total expenses of $27,710,000. For the six months ended December
31, 1996, the Company had total revenues of $17,447,000 and total expenses of
$17,215,000. 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. The Company had net income of $232,000 or $.09 per share for the six
months ended December 31, 1996, but no income taxes were due for the 1996 period
since the Company was operated as an LLC at that time. On a pro forma basis, had
income taxes been provided in 1996 at a rate of 41%, net income would have been
$136,000 ($.05 per common share)
For the six months ended December 31, 1997, expenses consisted of salaries and
benefits of $20,639,000, food, medical and other supplies of $2,247,000, other
operating expenses (including rent of $1,304,000) of $3,381,000, corporate,
general and administrative expenses of $1,010,000 and interest expense of
$433,000.
Revenues in the 1997 period increased over the 1996 period by $11,022,000 or
63%, largely as a result of the acquisitions during May 1997 and July 1997. Of
the total increase, $10,100,000 pertained to the nursing homes and healthcare
businesses acquired and $922,000 was from increased rates, mix changes and
higher occupancy (3% increase) in the existing nursing facilities. A gain of
$280,000 was recorded on the sale of the bed license in November, 1997 which has
been included in other revenue.
The Company collected $102,000 in excess of the net carrying value of accounts
receivable purchased from Beverly in connection with the Greenwood and Highland
acquisitions. Since the Company has collected more than originally recorded for
these purchased accounts receivable such amount has been included in other
revenue.
Operating expenses in the 1997 period increased over the 1996 period by
$10,495,000 or 61%, largely as a result of the acquisitions noted above. Of the
total cost increase, $9,356,000 pertained to the nursing homes and healthcare
businesses acquired and $1,139,000 was from increased existing-facility and
corporate, general and administrative costs. The increase in existing nursing
home costs was attributable to higher salaries and benefits including additional
nursing, dietary, and housekeeping staffing (as a result of higher occupancy and
wage increases), higher therapy costs and occupancy-driven higher operating
expenses. Interest expense increased by $363,000 mostly as a result of the new
mortgage on the facilities acquired in July.
Page 11.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income taxes were provided in the 1997 period on pre-tax income of $759,000; the
combined federal and state effective tax rate was 36%. No income taxes were
provided in the 1996 period since the Company was operated as an LLC at that
time.
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 discussed
above, some of the bed licenses acquired were sold for $1,550,000 in November
1997.
In August 1997, the Company obtained a $2,000,000 revolving line of credit (at
prime plus .50%) from a bank, which is secured by its accounts receivable and
other assets. In November, 1997 this line of credit was utilized with a
borrowing of $1,000,000 for working capital purposes. This borrowing was repaid
later in November 1997 after the sale of bed licenses noted above. The full
$2,000,000 line of credit was available at December 31, 1997.
On October 14, 1997 the Company loaned $757,000 to its Chief Executive Officer
and principal stockholder in order for him to pay personal income taxes due as a
result of the reorganization of entities under common control (i.e., the
Company's IPO). There was no cash compensation paid to him as part of the
reorganization. The borrowing was evidenced by a 9% interest earning note
receivable on which payments were made on December 26 ($157,000) and December 31
($300,000) to reduce the note to $300,000, which remained outstanding as of
December 31, 1997. Interest on the note (amounting to $14,500) was paid in full
through December 31, 1997. Subsequently, an additional $150,000 was repaid on
February 3, 1998 leaving a balance of $150,000.
Page 12.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the six months ended December 31, 1997, the Company expended
approximately $87,000 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, 1997 the Company expended $160,000 for capital improvements at its owned
facilities, which amount was funded by the mortgagor under the terms of the
mortgage.
The Company has recorded $272,000 of investments in joint ventures (of which
$48,000 was paid through December 31, 1997) which began operations in 1997 and
became profitable in 1997; positive cash flow is expected in 1998. The Company's
profitable ancillary businesses grew by approximately 30% from 1996 to 1997.
At December 31, 1997, the Company had cash and cash equivalents of $1,736,000,
receivables of $9,249,000, inventories of $468,000, prepaid expenses and other
current assets of $477,000, and a note receivable from its principal stockholder
of $300,000. Accounts receivable increased by $2,430,000 since June 30, 1997 due
mostly to the nursing homes acquired in July and generally higher rates in
effect.
Working capital at December 31, 1997 was $3,317,000 as compared with working
capital of $287,000 at June 30, 1997. The principal reasons for the increase are
profitable operations in the first half of the year, the bed licenses sold, and
the operating subsidy receivable obtained in connection with the nursing home
acquisitions. Current liabilities at December 31, 1997 consist principally of
trade accounts payable, 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.
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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
NONE
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/ Jack Friedler
(Jack Friedler, Chief Executive Officer)
(Duly Authorized Officer)
/s/ Harry Dermer
(Harry Dermer, President)
(Duly Authorized Officer)
Date February 13, 1998 /s/ Thomas E. Dybick
(Thomas E. Dybick, Chief Financial Officer)
(Principal Financial Officer)
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