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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended JUNE 30, 1997
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OR
[ ] TRANSISTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22261
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LEXINGTON HEALTHCARE GROUP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 06-1468252
- ---------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
35 PARK PLACE, NEW BRITAIN, CONNECTICUT 06052
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (860) 223-6902
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON
------------------- WHICH REGISTERED
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COMMON STOCK, $.01 PAR VALUE NASDAQ STOCK EXCHANGE
- ---------------------------- ---------------------
Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
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 No X.
--- ----
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based on the closing sales price on September 25, 1997, the aggregate market
value of the voting common stock held by nonaffiliates of the registrant was
$5,158,313.
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LEXINGTON HEALTHCARE GROUP, INC.
Table of Contents
PAGE NO.
Part I
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 6
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 8. Financial Statements and Supplementary Data 12, F1-F20
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 13
Part III
Item 10. Directors and Executive Officers of the Registrant 13
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners
and Management 16
Item 13. Certain Relationships and Related Transactions 16
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K. 18
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PART 1
ITEM I. BUSINESS
Lexington Healthcare Group, Inc. has four wholly-owned subsidiaries: Balz
Medical Services, Inc., Professional Relief Nurses, Inc., LEV Rehab Services,
Inc. ("LEV"), and Lexington Highgreen Holding, Inc. (collectively, the
"Company").
The Company is a long-term and subacute care provider, which operates six
nursing home facilities (the "Facilities") with a total of 853 licensed beds in
the State of Connecticut; two of these facilities (representing 225 beds) were
acquired on July 1, 1997. The Facilities provide a broad range of healthcare
services, including nursing care, subacute care (including rehabilitation
therapy), and other specialized services (such as care to Alzheimer's patients).
The Company's strategy in healthcare is to integrate the main disciplines of
nursing, pharmacy, social services and other therapies under one program.
In addition, the Company manages two nursing homes (the "Managed Facilities"),
Lexington House, Inc. in Connecticut and Oak Island Skilled Nursing Center ("Oak
Island") in Massachusetts, pursuant to management agreements. Lexington House,
Inc. is owned by a partnership controlled by Jack Friedler, the Company's CEO
and largest shareholder. Oak Island is a non-affiliated facility.
The Facilities and the Managed Facilities service two basic patient populations:
the traditional geriatric patient population and the emerging population of
subacute care patients with higher acuity disorders who require more complex and
intensive medical services. Subacute care patients generally require more
rehabilitative therapy and are residents for a shorter time than traditional
geriatric patients. An important part of the Company's strategy is to achieve
high occupancy and a favorable payor mix by offering specialty medical services.
The Facilities have an occupancy rate of approximately 92% as of August 31, 1997
(including the two facilities acquired on July 1, 1997 whose occupancy at August
31, 1997 is 81%). The Company operates a dedicated subacute unit within two of
the Facilities, in addition to providing subacute services in each of the other
Facilities.
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 completed an initial public offering of its shares (the "Offering")
in May, 1997 during which 1,125,000 shares of common stock and 1,940,625 common
stock purchase warrants were issued, resulting in net proceeds to the Company of
$4.1 million. Upon completion of the Offering the Company became the successor
to Lexington Health Care Group, LLC, a limited liability company ("LLC"), and
the members of LLC exchanged their membership interests in LLC for shares of the
Company's Common Stock representing a combined 59.7% ownership of the Company.
In May, 1997 the Company acquired all of the capital stock of BALZ Medical
Services, Inc. ("BALZ") and also of Professional Relief Nurses, Inc. ("PRN")
from the shareholders of BALZ and PRN simultaneously with the closing of the
Offering.
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BALZ provides a variety of medical supplies, nutritional supplements,
institutional cleaning products, linens and everyday products including
toothpaste and incontinence products, to affiliated and non-affiliated nursing
homes, other institutional facilities and private persons. The Company's
strategy is to expand BALZ's business to become more of a traditional medical
supply company by supplying products to hospitals, doctor's offices and persons
at their homes through PRN.
PRN provides skilled nursing services to persons at home. PRN's personnel
include (i) registered nurses, who provide a broad range of nursing care
services, including skilled observation and assessment and intravenous therapy;
(ii) licensed practical nurses who perform, under the supervision of a
registered nurse, technical nursing procedures; (iii) physical and
rehabilitation therapists and (iv) certified nurses aides, who, under the
supervision of a nurse, provide health-related services and personal care. The
Company intends to establish PRN as a nursing pool agency whereby it supplies
nurses and other skilled personnel to hospitals, affiliated and non-affiliated
nursing homes and other home healthcare agencies on a temporary basis.
On July 1, 1997, Lexington Highgreen Holding, Inc. purchased substantially
all of the assets of two skilled nursing facilities, Greenwood Health Center
and Highland Acres Extend-a-Care Center from Beverly Enterprises, Inc. (
Beverly"). All real estate, property, fixed and substantially all operating
assets of the nursing homes were acquired for a purchase price of
approximately $6.8 million which was financed by a mortgage on the real
estate from Nationwide Health Properties, Inc., the previous lessor to
Beverly.
LEV was incorporated in 1996 as a wholly-owned subsidiary and commenced
operations in May 1996 to provide physical, occupational, speech and other
therapies to patients at the nursing home facilities owned or managed by the
Company, unaffiliated facilities and persons in their homes. LEV has not
generated any significant revenues to date.
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. Through September 25, 1997 this line of credit has not been
accessed.
In August and September, the Company signed letters of intent to form new joint
venture operations with unrelated companies in the pharmacy, respiratory,
oxygen and rehab therapy business. Services will be provided to patients in the
Company's and unrelated nursing facilities and to patients in their homes.
In September, 1997, the Company signed a letter of intent to acquire a 49%
ownership position in a regional medical supply business in exchange for 100,000
shares of the Company's common stock, subject to various terms and conditions
yet to be finalized. The Company has the option to acquire the remaining 51% of
the business within twelve months.
As of August 31, 1997 the Company had approximately 1,200 full and part-time
employees, of which approximately 45% were covered by collective bargaining
agreements.
Lexington Healthcare Group, Inc. was incorporated on February 23, 1996. Prior to
its initial public offering, the Company had operated as Lexington Health Care
Group, LLC, a limited liability company that was formed on March 8, 1995 and
commenced operations on July 1, 1995. The Company's principal offices are
located at 35 Park Place, New Britain, Connecticut 06052 and its telephone
number is (860) 223-6902.
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ITEM 2. PROPERTIES
The following properties are leased.
APPROXIMATE
LOCATION USE SQ. FT.
OCCUPIED
Bentley Gardens Nursing Home 21,500
31 Terrace Avenue, West Haven, CT 06516-2698
Country Manor Nursing Home 27,000
64 Summit Road, Prospect, CT 06712-7060
Fairfield Manor Nursing Home 55,000
23 Prospect Street, Norwalk, CT 06850-3798
Pond Point Nursing Home 27,000
60 Platt Street, Milford, CT 06460-7697
Professional Relief Nurses, Inc. Nursing Services
800 Plaza Middlesex, Middletown, CT 06457 3,000
80 Phoenix Avenue, Waterbury, CT 06702 1,400
560 Saw Mill Road, West Haven, CT 06516 1,300
Balz Medical Services, Inc. Ancillary 9,000
362 Industrial Park Road, Services/Products
Middletown, CT 06457
The following properties are owned.
APPROXIMATE
LOCATION USE SQ. FT.
OCCUPIED
Greenwood Health Center Nursing Home 53,000
5 Greenwood Street, Hartford, CT 06106
Highland Acres Extend-a-Care Center Nursing Home 20,500
108 East Lake Street, Winsted, CT 06098
Management considers its properties to be well maintained and sufficient for its
present operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Lexington Healthcare Group, Inc.'s common stock, $.01 par value, is traded on
the National Market System of the NASDAQ Stock Market.
The following table presents its high and low market prices, and dividend
information since trading began on May 14, 1997.
QUARTERLY COMMON STOCK PRICE RANGES AND DIVIDENDS
FY 1997
QUARTER HIGH LOW DIVIDEND
4th 8 1/4 5 1/2 $-0-
The Company has not paid dividends to date and has no present intention of
paying any dividends on its Common Stock in the foreseeable future, as it
intends to reinvest profits, if any, in the development and expansion of its
business.
The number of shareholders of record for the Company's common stock as of
September 1, 1997 was 21; The Company believes that its shares are beneficially
owned by over 500 individuals.
On September 25, 1997, the closing price of the Company's common stock was
$3.81.
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED JUNE 30,
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1997 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA
Net revenues $35,900 $33,641
Operating costs and expenses 36,244 33,180
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Income (loss) before income taxes (341) 461
Provision for (benefit from)
income taxes (66) 0
-- --
NET INCOME (LOSS) $ (275) $ 461
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Net income (loss) per share $ (.10) $ .18
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BALANCE SHEET DATA
Cash and cash equivilents $ 1,000 $ 212
Working capital (deficiency) 287 (2,381)
Total Assets 15,432 9,614
Short-term borrowings 89 2,580
Total long-term debt excluding
current maturities 107 102
Total stockholders equity $ 6,395 $ 487
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
During 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 businesses in the healthcare field and later
initiated plans to expand its nursing home operations with two additional
facilities, which were acquired immediately after the close of the fiscal year.
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; adhere to strict cost standards at the Facility level
while providing effective patient care and containing corporate overhead
expenses; and become a fully integrated health network whereby the Company will
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.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1997 ("1997 PERIOD") VS. YEAR ENDED JUNE 30, 1996 ("1996
PERIOD")
The 1997 period results include the nursing facility operations for a full year.
The Company has recorded a reduction in patient service revenue of $45,000
during the year ended June 30, 1997 in connection with estimated Medicare and
Medicaid settlements. The results of operations of the acquired subsidiaries,
BALZ and PRN, are included in operations since acquisition on May 15.
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For the year ended June 30, 1997, the Company had total revenues of $35,900,000
and total expenses of $36,241,000. These expenses consisted of salaries and
benefits of $26,979,000, food, medical and other supplies of $2,689,000, other
operating expenses (including rent of $2,497,000) of $5,113,000, corporate,
general and administrative expenses of $1,282,000 and interest expense of
$178,000. The Company had a net loss of $275,000 for the year ended June 30,
1997.
Revenues in the 1997 period increased over the 1996 period by $2,259,000 or
6.7%; $1,301,000 of this increase was a result of increased rates, mix changes
and higher occupancy in the nursing facilities (net of $45,000 in revenue
adjustments as a result of expected Medicare and Medicaid settlements), $699,000
is due to additional revenues from subsidiaries acquired, and $259,000 as a
result of other revenue increases, principally third-party management fees.
Expenses in the 1997 period increased over the 1996 period by $3,061,000 or
9.2%. $2,464,000 of this increase was a result of increased costs in the
nursing facilities and $597,000 is due to additional costs from subsidiaries
acquired. The major increase in nursing home costs were for higher salaries
and benefits including additional nursing, dietary, and housekeeping staffing
(as a result of higher occupancy and union and non-union wage increases of
approximately 4%), higher therapy costs and occupancy-driven higher operating
expenses in housekeeping, laundry, and nursing.
RESULTS OF OPERATIONS
FOR THE PERIOD FROM JULY 1, 1995 ("COMMENCEMENT OF OPERATIONS") TO JUNE 30, 1996
The Company had total revenues of $33,641,000 for the year ended June 30, 1996.
The Company had total expenses of $33,180,000 for the year ended June 30, 1996.
These expenses consisted of salaries and benefits of $24,839,000, food, medical
and other supplies of $2,065,000, other operating expenses (including rent of
$2,468,000) of $4,896,000, corporate, general and administrative expenses of
$1,126,000 and interest expense of $254,000. The Company had net income of
$461,000 for the year ended June 30, 1996.
During this year, the Company began its operations of the nursing homes and
incurred startup and financing costs which have been reduced in later periods.
Revenues in the second six months of this year decreased as the Company
experienced some vacancies due to construction of a subacute wing at the
Fairfield Facility but implemented plans to improve patient mix and census.
Expenses in the second six months increased by a total of $783,000 or 4.8% due
to higher salaries and benefits ($319,000), higher legal, accounting and
professional costs ($172,000), higher laundry and housekeeping costs to improve
service ($238,000) and higher interest ($54,000).
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LIQUIDITY AND CAPITAL RESOURCES
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, by a private
placement of shares and warrants (subsequently rescinded), and through a public
offering of its common stock (the "Offering") which raised net proceeds of
approximately $4.1 million.
The net proceeds of the Offering were used to pay off remaining balances of
previous borrowings, to fund the acquisition of PRN and, after providing for
other business development plans, were added to the working capital of the
Company. As a result of the acquisitions, internally-generated cash flow will
increase from the addition of BALZ and PRN.
Between October 1995 and July 1996, the Company borrowed an aggregate of
$286,000 from Jack Friedler and Harry Dermer. $104,000 of such loan was repaid
to Mr. Friedler in August 1996. In May 1997 Mr. Friedler loaned $100,000 to the
Company in connection with the reacquisition of shares from a private placement
investor. Mr. Friedler's balance of $266,000 was then offset against loans due
from Lexington House in May 1997. Mr. Friedler also instructed the Company to
offset interest due him from the Company of $10,000 each during May and June
1997 against the Lexington House loan (which is discussed below). The Company is
still indebted to Mr. Dermer for $16,000 as of June 30, 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 is owned by Jack Friedler 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. At June 30, 1997, Lexington House, Inc. is indebted to the Company
in the net amount of $290,000 after Mr. Friedler's balance due the Company and
interest due to him from the Company were offset as discussed above. Lexington
House has agreed to a payment schedule of $10,000 per month.
During the years ended June 30, 1997 and 1996, the Company expended
approximately $290,000 and $462,000, respectively, in capital improvements to
the 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.
At June 30, 1997, on a consolidated basis, the Company had cash and cash
equivalents of $1,000,000, receivables of $6,819,000, inventories of $403,000
and prepaid and other current assets of $418,000. Overall, current assets
increased by $2,611,000 during the year ended June 30, 1997. Current notes
payable decreased by $2,250,000 since June 30, 1996; overall, current
liabilities decreased by $57,000 from July 1, 1996 to June 30, 1997.
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Working capital at June 30, 1997 was $287,000 as compared with a working capital
deficit of $(2,381,000) at June 30, 1996. Current assets consist mostly of cash,
cash equivalents and accounts receivable which are not collateralized as of
June 30, 1997. Current liabilities at June 30, 1997 consist principally of trade
accounts payable, accrued payroll and related taxes, and other accrued expenses.
In August, 1997, the Company has 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. Through September 25, 1997 this line of credit has not been
utilized.
Inflation has not had, nor is it expected to have, a material impact on the
operations and financial condition of the Company.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Reports of Independent Certified Public Accountants on Consolidated
Financial Statements as of and for the Years Ended June 30, 1997 and 1996
Financial Statements:
Consolidated Balance Sheets
June 30, 1997 and 1996
Consolidated Statements of Operations
Years Ended June 30, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity
Years Ended June 30, 1997 and 1996
Consolidated Statements of Cash Flows,
Years Ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 15, 1997, the Board of Directors of Lexington Healthcare Group, Inc.
appointed the firm of DiSanto Bertoline and Company, P.C. as the Company's
auditors replacing the firm of Richard A. Eisner and Company, LLP, which was
dismissed by the Board of Directors effective the same date.
The report of Richard A Eisner and Company, LLP on the Company's June 30,
1996 consolidated financial statements contained an emphasis of a matter
paragraph expressing substantial doubt about the Company's ability to
continue as a going concern.
There were no disagreements as to accounting policies or other financial issues
with the former accounting firm.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company, together with their ages
and present positions with the Company are as follows:
NAME AGE POSITION
Jack Friedler...............65 Chief Executive Officer, Chairman of the
Board and Director
Harry Dermer................45 President, Chief Operating Officer and
Director
Jon Mills...................57 Director
Eric D. Moskow, MD..........38 Director
Thomas E. Dybick............49 Chief Financial Officer
Mary Archambault............46 Executive Vice President and Secretary
Suzanne J. Nettleton........51 Executive Vice President
Lawrence W. Fusco...........49 Controller
All directors of the Company hold office until the next annual meeting of the
stockholders and until their successors have been elected and qualified. The
officers of the Company are elected by the Board of Directors at the first
meeting after each annual meeting of the Company's stockholders, and hold office
until their death, until they resign or until they have been removed from
office.
The following is a brief summary of the background of each director and
executive officer of the Company:
Jack Friedler has been Chief Executive Officer and Chairman of the Board since
the Company's inception in February 1995. Since 1988, Mr. Friedler served as
President of Lexington House, Inc. which is currently managed by the Company.
Mr. Friedler and his wife own 100% of Lexington House, Inc. He managed Fairfield
Manor Health Care Center, Pond Point Health Care Center, Country Manor Health
Care Center and Bentley Gardens Health Care Center from 1981 to 1986. Mr.
Friedler was a co-founder of PRN in 1981.
Mr. Friedler spends approximately 35 hours per week on matters relating to the
Company's business.
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Harry Dermer has served as President, Chief Financial Officer and Director of
the Company since its inception in February 1995. Mr. Dermer has a Connecticut
nursing home administrator's license. Prior to February, 1995, Mr. Dermer
co-founded Prometheus Pharmacy and Nursing Homes America, Inc., which are
divisions of the Olympus Healthcare Group, where he served as Chief Financial
Officer from 1994 to 1995, and Mediscript Pharmacy, Inc., a division of
Mediplex, where he served as Chief Financial Officer from 1993 to 1994.
Previously from 1990 to 1993 he was Vice President of Operations and Chief
Financial Officer of Reliance Pharmacy Corp.
Jon Mills has served as a Director of the Company since March 1996. He is
currently President and a Director of Medline Industries, Inc., a national
manufacturer of healthcare products, positions he has held since 1966.
Eric D. Moskow, MD has served as a Director of the Company since March 1997. Dr.
Moskow has been the Executive Vice President of Strategic Planning for
PhyMatrix, Inc. and has served as a member of the PhyMatrix Board of Directors
since that time. In 1993, he founded Physician's Choice Management, LLC and
served as its Executive Vice President until 1996. Prior to establishing
Physician's Choice, he served as Medical Director for US Healthcare in
Connecticut. Dr. Moskow is board-certified in internal medicine and served as
President of the Family Medical Associates of Ridgefield, Connecticut for the
past nine years.
Thomas E. Dybick has served as the Company's Chief Financial Officer since
September, 1996. He is a Certified Public Accountant. Prior thereto, from 1992
to 1996 Mr. Dybick was Chief Financial Officer of AHF/Connecticut Management,
Inc. which managed six nursing homes in Connecticut and Massachussetts.
Previously, Mr. Dybick was employed by the law firm of Levy & Droney, PC as
Executive Director (1985-1992).
Mary Archambault has served as President of BALZ since its inception in 1995.
Prior thereto, Ms. Archambault co-founded Prometheus Pharmacy and Nursing Homes
America, Inc., where she served as Executive Vice President from 1994 to 1995.
She also co-founded Mediscript Pharmacy, Inc.'s Medicare Part B division, which
was a division of Mediplex, where she served as Executive Vice-President from
1993 to 1994. Previously, Ms. Archambault was Manager of Medical Supplies and
Medicare Part B Services for Allcare Pharmacy, Inc. from 1990 - 1993. Ms.
Archambault has a Connecticut Nursing Home Administrator's license and is a
licensed Practical Nurse in Connecticut.
Suzanne J. Nettleton founded and has served as President and Administrator of
PRN since its inception in 1981. She is licensed as a Nursing Home Administrator
in Connecticut and is licensed as a Registered Nurse in both New York and
Connecticut. Ms. Nettleton owned 25% of PRN prior to its acquisition by the
Company.
Lawrence W. Fusco has served as the Company's Controller since July, 1997. He is
a Certified Public Accountant. Prior thereto, from 1996 to 1997, Mr. Fusco was
Division Controller of American Medical Response, a national ambulance and
handi-van company. Previously, since 1991 he was Controller of
The H.P. Hallock Co., a retailer.
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation, as well as certain other
compensation paid or accrued, by the Company to Jack Friedler, its Chief
Executive Officer, and Harry Dermer, its President and Chief Operating Officer
during the fiscal years ended June 30, 1997 and 1996. Other than Messrs.
Friedler and Dermer, no other executive officer of the Company had a total
annual salary and bonus of $100,000 during the reported periods. The executive
compensation received from PRN by Suzanne Nettleton, its President, and that
received from BALZ by Mary Archambault, its President, is also disclosed below.
Long Term
Annual Compensation Compensation
Stock
Name and Principal Position Year Salary Bonus Options Granted
Jack Friedler, Fiscal 1996 $210,000(1) --- ---
Chief Executive Officer and Fiscal 1997 $260,000 --- ---
Director
Harry Dermer, Fiscal 1996 $127,204 --- ---
President, Chief Operating Fiscal 1997 $174,980 ---
Officer and Director
Suzanne Nettleton, Fiscal 1996 $122,237(1) $38,121 ---
Executive Vice President, Fiscal 1997 $132,492 $31,376
President of PRN
Mary Archambault, Fiscal 1996 $159,783 --- ---
Executive Vice President, Fiscal 1997 $ 54,256
Secretary, President of BALZ
1) In addition, Jack Friedler and Suzanne Nettleton each received director
fees of $40,000 for serving as Directors of PRN, but are no longer entitled
to such fees after the Company's acquisition of PRN.
The Company has employment agreements with four of its executive officers which
became effective upon consummation of the Offering. The agreements provide that
such individuals shall devote substantially all of their working time and
attention to the business of the Company and contain certain non-compete
provisions.
The agreements with the CEO and President have an initial term of five years and
are automatically renewable for successive one-year periods unless either the
Company or the employee elects not to renew his employment. The agreements with
the subsidiary presidents have an initial term of three years and are
automatically renewable for successive one-year periods unless either the
Company or the employee elects not to renew her employment.
The CEO's agreement provides for a $250,000 annual salary, with cost of living
increases and a bonus equal to 1% of the Company's net income before taxes. The
President's employment agreement is identical except that the salary is $175,000
annually.
The agreement with the president of BALZ provides for a base annual salary of
$100,000, subject to five percent annual increases, plus a bonus of 3.75% of
BALZ's net profits before taxes. The agreement with the president of PRN
provides for an annual salary of $160,000, subject to five percent annual
increases.
15
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No person owned of record or was known to own beneficially more than
five percent (5%) of the outstanding common stock of the Company except as noted
below. The following table shows the amount of common stock owned as of
September 24, 1997 by each Director, and by all Directors and officers as a
group, consisting of seven persons.
Amount and Nature
Name and Address of Beneficial Percent
of Beneficial Owner Ownership of
Shares Owned Class
Jack Friedler,
Chief Executive Officer,
Chairman of the Board and Director 2,026,500 49.1%
Harry Dermer, President,
Chief Operating Officer and Director 685,500 16.6%
Thomas E. Dybick, Chief Financial Officer 0 0%
Jon Mills, Director 0 0%
Mary Archambault,
Executive Vice President, Secretary 60,000 1.5%
Suzanne J. Nettleton, Executive Vice President 0 0%
Eric D. Moskow, MD, Director 0 0%
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 is owned by Jack Friedler and his wife.
As of June 30, 1997, Lexington House, Inc. is indebted to the Company in the
amount of $290,000. Lexington House has agreed to a payment schedule of $10,000
per month.
In connection with the Company's reorganization and the Offering, the previous
members of Lexington Health Care Group, LLC, Jack Friedler, his wife Stephanie
Friedler and Harry Dermer, exchanged their respective interests (37.5%, 37.5%
and 25%) in the LLC for an aggregate of 2,462,000 shares of Common Stock of the
Company.
Effective July 1, 1995, the Company entered into a ten-year lease, which was
subsequently and retroactively amended, for four of the nursing homes operated
by the Company. Jack Friedler, the Company's Chief Executive Officer is a 33.33%
limited partner of the lessor, Fairfield Group Health Care Centers Limited
Partnership ("Fairfield"). The Company's annual rent expense for the year ended
June 30, 1997 was $2,468,000. The Company believes that the terms of the lease
are as favorable to the Company as those that could have been obtained from
nonaffiliated parties.
The partners owning the remaining 66.66% interest in Fairfield were also owners
of an aggregate of 50% of the capital stock of PRN which interest was purchased
by the Company for a total of $1,080,000. Jack Friedler was the owner of 25% of
PRN; in exchange for Mr. Friedler's interest in PRN, the Company issued Mr.
Friedler 108,000 shares of the Company's Common Stock valued at $540,000, based
on the public offering price. Suzanne J. Nettleton, Executive Vice President of
the Company, was owner of the remaining 25% of the capital stock of PRN. The
Company purchased Ms. Nettleton's interest for $540,000.
16
<PAGE>
The Company acquired all of the capital stock of BALZ from its existing
stockholders (including Jack Friedler, Harry Dermer and Mary Archambault) in
exchange for an aggregate of 300,000 shares of the Company's Common Stock
(valued at $1,500,000 based on the public offering price). The following number
of shares were issued to Officers and Directors of the Company in exchange for
their shares of BALZ:
Jack Friedler 72,000
Harry Dermer 60,000
Mary Archambault 60,000
Between October 1995 and July 1996, the Company borrowed an aggregate of
$286,000 from Jack Friedler and Harry Dermer which loans bear interest at an
annual rate of 10%. A total of $104,000 was repaid to Mr. Friedler in August
1996. In May 1997 Mr. Friedler loaned another $100,000 to the Company in
connection with the reacquisition of shares from a private placement investor.
Mr. Friedler's balance of $266,000 was then offset against loans due from
Lexington House in May 1997. Mr. Friedler also instructed the Company to offset
interest due him from the Company of $10,000 each during May and June 1997
against the Lexington House loan. The Company is still indebted to Mr. Dermer
for $16,000 as of June 30, 1997.
In March 1997, the Company entered into an agreement with Physicians Choice, LLC
("PCL") whereby it agreed to provide skilled nursing and rehabilitation services
to patients in the PCL network that reside at the Company's Facilities. PCL is a
subsidiary of PhyMatrix, Inc. Eric D. Moskow, MD, a Director of the Company, is
a director of PhyMatrix, Inc. No significant revenues have yet been generated as
a result of this contract.
Jack Friedler and Harry Dermer entered into a stockholder's agreement, effective
in May, 1997, which includes, among other things, the grant of a mutual right of
first refusal to purchase any shares of Common Stock beneficially owned by the
other stockholder, and a mutual agreement to vote for the other stockholder as a
Director of the Company.
With respect to each of the foregoing transactions, although the Company has not
obtained any independent fairness opinions, the Company believes that the terms
of such transactions were as fair to the Company as could be obtained from an
unrelated third party. In the event the Company enters into negotiations to
acquire any business or assets of a related party it will secure an independent
appraisal. Future transactions with affiliates will be on terms no less
favorable than could be obtained from unaffiliated parties and will be approved
by a majority of the independent and/or disinterested members of the Board of
Directors.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page
(a) Financial Statements
(1) The following financial statements and supplementary data are
included in Part II Item 8:
Reports of Independent Certified Public Accountants on Financial
Statements
Financial Statements:
Consolidated Balance Sheets - June 30, 1997 and 1996
Consolidated Statements of Operations - Years Ended June 30, 1997
and 1996
Consolidated Statements of Changes in Stockholders' Equity -
Years Ended June 30, 1997 and 1996
Consolidated Statements of Cash Flows - Years Ended June 30, 1997
and 1996
Notes to Consolidated Financial Statements
(2) The following financial statement schedule for the years 1997
and 1996 is submitted herewith:
Reports of Independent Certified Public Accountants on Financial
Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable
or the required information is shown in the consolidated
financial statements or notes thereto.
(b) REPORTS ON FORM 8-K:
No reports were filed during the quarter ended June 30, 1997, however,
subsequently and to date the following reports have been filed:
July 15, 1997 Acquisition of Greenwood and Highland nursing
facilities
August 29, 1997 Change in Accountants
September 24, 1997 Change in Accountants, Response of Prior
Accounting Firm
(c) EXHIBITS
(11) Earnings per share calculation
(21) Subsidiaries
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, LEXINGTON HEALTHCARE GROUP, INC has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized:
LEXINGTON HEALTHCARE GROUP, INC.
(Registrant)
BY: /s/ HARRY DERMER
--------------------
Harry Dermer, President, Chief Operating Officer and Director
Date: September 29, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
S/JACK FRIEDLER Chief Executive Officer, Date: September 29, 1997
- -------------------- Chairman of the Board and Director
Jack Friedler
S/THOMAS E. DYBICK Chief Financial Officer Date: September 29, 1997
- --------------------
Thomas E. Dybick
S/JON MILLS Director Date: September 29, 1997
- --------------------
Jon Mills
S/ERIC D. MOSKOW, MD Director Date: September 29, 1997
- --------------------
Eric D. Moskow
S/MARY ARCHAMBAULT Executive Vice President and Date: September 29, 1997
- -------------------- Secretary
Mary Archambault
S/SUZANNE J. NETTLETON Executive Vice President Date: September 29, 1997
- ----------------------
Suzanne J. Nettleton
19
<PAGE>
DISANTO BERTOLINE & COMPANY, P.C.
628 Hebron Avenue
Building #3
Glastonbury, CT 06033
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Lexington Healthcare Group, Inc.
New Britain, Connecticut
We have audited the consolidated financial statements of Lexington Healthcare
Group, Inc. and subsidiaries as of June 30, 1997, and for the year then ended,
and have issued our report thereon dated September 24, 1997; such consolidated
financial statements and report are included elsewhere in this Form 10-K. Our
audit also included the financial statement schedule of Lexington Healthcare
Group, Inc. and subsidiaries, listed in Item 14. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audit. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DISANTO BERTOLINE & COMPANY, P.C.
Glastonbury, Connecticut
September 24, 1997
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Lexington Healthcare Group, Inc.
New Britain, Connecticut
We have audited the consolidated financial statements of Lexington Healthcare
Group, Inc. and subsidiary as of June 30, 1996, and for the period from July 1,
1995 (commencement of operations) through June 30, 1996, and have issued our
report thereon dated October 18, 1996 (November 5, 1996 and May 9, 1997 with
respect to Note J); such consolidated financial statements and report are
included elsewhere in this Form 10-K. Our audit also included the financial
statement schedule as of and for the period ended June 30, 1996 of Lexington
Healthcare Group, Inc. and subsidiary, listed in Item 14. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Richard A. Eisner & Company, LLP
New York, New York
October 18, 1996
21
<PAGE>
<TABLE>
<CAPTION>
LEXINGTON HEALTHCARE GROUP, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Additions
-----------------------------------------
Other
Charged Changes -
Balance at Charged to to other Add Balance at
Beginning Costs and Account - (Deduct)- End of
Year Description of Year Expenses Describe Describe Year
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 Allowance for
doubtful amounts $75,000 $ 105,000 $ 180,000
------------------------- --------------------------
------------------------- --------------------------
1996 Allowance for
doubtful amounts $ 0 $ 75,000 $ 75,000
------------------------- --------------------------
------------------------- --------------------------
</TABLE>
22
<PAGE>
DISANTO BERTOLINE & COMPANY, P.C.
628 HEBRON AVENUE
BUILDING #3
GLASTONBURY, CT 06033
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Lexington Healthcare Group, Inc.
New Britain, Connecticut
We have audited the accompanying consolidated balance sheet of Lexington
Healthcare Group, Inc. and subsidiaries as of June 30, 1997, and the related
consolidated statements of operations, changes in stockholders' equity and
cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The consolidated financial statements of Lexington Healthcare Group,
Inc. and subsidiary as of June 30, 1996, before the adjustment described in
Note B, were audited by other auditors whose report dated October 18, 1996,
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lexington
Healthcare Group, Inc. and subsidiaries as of June 30, 1997, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
We also audited the adjustment, to reflect the Company's reorganization
described in Note B, that was applied to the 1996 consolidated financial
statements. In our opinion, such adjustment is appropriate and has been
properly applied.
DISANTO BERTOLINE & COMPANY, P.C.
Glastonbury, Connecticut
September 24, 1997
Page F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Lexington Healthcare Group, Inc.
New Britain, Connecticut
We have audited the accompanying consolidated balance sheet of Lexington
Healthcare Group, Inc. and subsidiary as of June 30, 1996, prior to the
reorganization described in Note B, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the period from
July 1, 1995 (commencement of operations) through June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Lexington Healthcare
Group, Inc. and subsidiary at June 30, 1996, prior to the reorganization
described in Note B, and the consolidated results of their operations and their
consolidated cash flows for the period from July 1, 1995 (commencement of
operations) through June 30, 1996 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company had a net working capital
deficiency raising substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters included raising
additional equity such as that contemplated in the initial public offering (see
Note B).
Richard A. Eisner & Company, LLP
New York, New York
October 18, 1996
With respect to Note J
November 5, 1996 and May 9, 1997
Page F-2
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS......................................................
Cash and cash equivalents........................................... $ 1,000,000 $ 212,000
Accounts receivable--net of allowance for doubtful accounts of
$180,000 and $75,000 for 1997 and 1996, respectively.............. 6,421,000 5,585,000
Estimated third-party payor settlements-Medicaid.................... 278,000 --
Note receivable-related party....................................... 120,000 --
Due from related parties............................................ -- 73,000
Inventories......................................................... 403,000 94,000
Prepaid and other current assets.................................... 418,000 65,000
----------- ------------
Total current assets............................................... 8,640,000 6,029,000
EQUIPMENT & LEASEHOLD IMPROVEMENTS, net.............................. 814,000 462,000
OTHER ASSETS
Security deposit--related party..................................... 2,282,000 2,282,000
Residents' funds.................................................... 161,000 147,000
Deferred registration costs......................................... -- 198,000
Goodwill, net of accumulated amortization of $20,000................ 3,275,000 --
Deferred tax asset.................................................. 35,000 --
Other assets, net................................................... 55,000 102,000
Note receivable--related party...................................... 170,000 394,000
----------- ----------
5,978,000 3,123,000
----------- ----------
$15,432,000 $ 9,614,000
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable (current portion)..................................... $ 17,000 $ 2,267,000
Notes payable--officers/stockholders................................ 40,000 286,000
Accounts payable and accrued expenses............................... 7,737,000 5,568,000
Estimated third-party payor settlements--Medicare................... 323,000 --
Capital leases payable (current portion)............................ 32,000 27,000
Income taxes payable................................................ 204,000 --
Due to related party................................................ -- 262,000
----------- -----------
Total current liabilities.......................................... 8,353,000 8,410,000
OTHER LIABILITIES
Notes payable (less current portion)................................ 44,000 --
Capital leases payable (less current portion)....................... 63,000 102,000
Residents' funds payable............................................ 161,000 147,000
Deferred rent....................................................... 416,000 468,000
----------- -----------
684,000 717,000
---------- -----------
Total liabilities.................................................. 9,037,000 9,127,000
---------- -----------
---------- -----------
COMMITMENTS AND CONTINGENCIES (Note N)
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share,
authorized 15,000,000 shares....................................... 41,000 25,000
Additional paid-in capital.......................................... 6,168,000 1,000
Retained earnings................................................... 186,000 461,000
----------- -----------
Total stockholders' equity......................................... 6,395,000 487,000
----------- -----------
$15,432,000 $ 9,614,000
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page F-3
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
REVENUES
Net patient service revenue....................................................... $ 35,536,000 $ 33,536,000
Other revenue..................................................................... 364,000 105,000
------------- -------------
Total revenues.................................................................. 35,900,000 33,641,000
EXPENSES
Facility operating expenses:
Salaries and benefits............................................................ 26,979,000 24,839,000
Food, medical and other supplies................................................. 2,689,000 2,065,000
Other operating expenses......................................................... 5,113,000 4,896,000
Corporate, general and administrative expenses.................................... 1,282,000 1,126,000
Interest expense.................................................................. 178,000 254,000
------------- -------------
Total expenses.................................................................. 36,241,000 33,180,000
------------- -------------
Income (loss) before income taxes................................................. (341,000) 461,000
INCOME TAXES....................................................................... (66,000) --
------------- -------------
Net income (loss)................................................................. $ (275,000) $ 461,000
------------- -------------
------------- -------------
Net income (loss) per common share................................................ $ (0.10) $ 0.18
------------- -------------
------------- -------------
Weighted average number of common shares outstanding.............................. 2,724,000 2,592,000
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page F-4
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------- ADDITIONAL
MEMBERS NUMBER PAID-IN RETAINED
EQUITY OF SHARES AMOUNT CAPITAL EARNINGS TOTAL
------------ ------------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Capital contribution ....................... $ 26,000 -- $ $ -- $ -- $ 26,000
Adjustment for reorganization of entities
under common control (Note B)............. (26,000) 2,462,000 25,000 1,000 -- --
Net income.................................. -- -- -- -- 461,000 461,000
----------- ---------- --------- -------- --------- -----------
Balance, June 30, 1996...................... $ -- 2,462,000 25,000 1,000 461,000 487,000
-----------
-----------
Issuance of common stock for legal services
rendered.................................. 130,000 1,000 59,000 -- 60,000
Issuance of common stock in connection with
the acquisition of BALZ................... 300,000 3,000 1,497,000 -- 1,500,000
Issuance of common stock in connection with
the acquisition of PRN.................... 108,000 1,000 539,000 -- 540,000
Issuance of common stock and warrants in
connection with initial public offering,
net of issuance costs of $1,734,000....... 1,125,000 11,000 4,072,000 -- 4,083,000
Net loss.................................... -- -- -- (275,000) (275,000)
---------- ----------- ------------ ------------ ------------
Balance, June 30, 1997...................... 4,125,000 $ 41,000 $6,168,000 $186,000 $6,395,000
---------- ----------- ------------ ------------ ------------
---------- ----------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page F-5
<PAGE>
<TABLE>
<CAPTION>
LEXINGTON HEALTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
1997 1996
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (275,000) $ 461,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 110,000 47,000
Provision for doubtful accounts 105,000 75,000
(Decrease) increase in deferred rent (52,000) 468,000
Benefit from deferred taxes (97,000) -
Changes in operating assets and liabilities:
Increase in accounts payable and accrued expenses 1,303,000 5,814,000
Increase in estimated third-party settlements--Medicare 324,000 -
Decrease (increase) in accounts receivable 282,000 (5,660,000)
Decrease in other assets 85,000 -
Increase in organization costs - (70,000)
Increase in inventories (240,000) (94,000)
Increase in estimated third-party settlements--Medicaid (278,000) -
(Decrease) increase in due to related parties, net (291,000) 189,000
Increase in prepaid and other current assets (341,000) (65,000)
----------- -----------
Net cash provided by operating activities 635,000 1,165,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in note receivable - related party (162,000) (394,000)
Increase in security deposit - related party - (2,282,000)
Acquisition of fixed assets (285,000) (346,000)
Cash paid for businesses acquired (1,434,000) -
----------- -----------
Net cash used in investing activities (1,881,000) (3,022,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net 4,143,000 26,000
Proceeds of short term borrowings and Beverly receivables 500,000 3,527,000
Decrease (increase) in deferred registration costs 198,000 (131,000)
Proceeds of notes payable to officers 100,000 392,000
Financing costs - (47,000)
Repayments of capital lease obligations (34,000) (19,000)
Repayment of notes payable to officers (110,000) (106,000)
Repayment of short-term borrowing (2,763,000) (1,573,000)
----------- -----------
Net cash provided by financing activities 2,034,000 2,069,000
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 788,000 212,000
CASH AND CASH EQUIVALENTS, beginning of year 212,000 -
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 1,000,000 $ 212,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 176,000 $ 217,000
Income taxes - -
Non-cash investing and financing activities:
Equipment acquired by capital leases $ - $ 148,000
Accounts payable financed by short-term borrowings - 313,000
Deferred registration costs accrued - 67,000
Common stock issued in connection with legal services
recorded as cost of issuance 60,000 -
Offset of note payable - officers/stockholders against
note receivable - related party 265,693 -
Details of businesses acquired was as follows:
Fair value of assets acquired $ 4,788,000 $ -
Liabilities assumed 1,314,000 -
----------- -----------
Purchase price, net of cash received 3,474,000 -
Common stock issued for acquired businesses (2,040,000) -
----------- -----------
Net cash paid for acquired businesses $ 1,434,000 $ -
----------- -----------
----------- -----------
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
Page F-6
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
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"). All material intercompany balances and transactions have been
eliminated in consolidation.
NATURE OF OPERATIONS
The Company is a long-term and subacute care provider, which operates four
nursing home facilities at June 30, 1997 with 628 beds licensed by the State
of Connecticut. These facilities were previously operated by Beverly
Enterprises, Inc. ("Beverly"), through June 30, 1995. The Company also
provides medical supplies and durable medical equipment to nursing homes and
provides health care services in the homes of its patients. In addition, the
Company manages two other nursing homes pursuant to management agreements
(see Note K).
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
PATIENT SERVICE REVENUE
Revenues are recognized at the time the service is provided to the patient.
Substantially all 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.
Page F-7
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
MANAGEMENT FEES
The Company recognizes management fees as they are earned and accrues related
fees payable to subcontractors as they are incurred.
CASH EQUIVALENTS
For the purpose of the statement of cash flows, the Company defines cash
equivalents as highly liquid instruments with an original maturity of three
months or less. The Company had cash equivalents of $674,000 at June 30, 1997,
consisting of overnight investments. There were no cash equivalents at June 30,
1996.
INVENTORIES
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.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation is
provided on a straight-line basis over the estimated useful lives of the
equipment. Leasehold improvements are amortized over the remaining period of the
respective leases or the estimated useful lives of the improvement, whichever is
shorter.
Maintenance, repairs and minor renewals are charged to operations as incurred.
Expenditures which substantially increase the useful lives of the related assets
are capitalized.
RESIDENTS' FUNDS
Residents' funds represent cash balances which have been deposited into a
separate bank account and are restricted for the use of the residents.
INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the consolidated
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Page F-8
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES (CONTINUED)
Prior to the reorganization (see Note B), the Company was a limited liability
company ("LLC") and, as such, it was the obligation of the individual members of
the LLC to separately report their proportionate share of the LLC's taxable
income. Accordingly, the Company has not recognized a provision for income taxes
for the year ended June 30, 1996.
INCOME PER COMMON SHARE
Income per common share is computed using the weighted average number of shares
deemed outstanding as adjusted for the exchange of shares between entities under
common control. Weighted average number of shares outstanding includes common
stock equivalents when they have a dilutive effect. There are no material
differences between primary and fully diluted income per common share.
NOTE B - 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 this offering, the Company became the successor to
Lexington Health Care Group, LLC, a limited liability company ("LLC"), and the
members of LLC exchanged their membership interests in LLC for 2,462,000 shares
of the Company's common stock representing a combined 59.7% ownership of the
Company. LLC was formed on March 8, 1995 and commenced operations on July 1,
1995. 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 consolidated
financial statements for periods 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. Prior to acquisition, the
members of LLC owned 44% and 25% of BALZ and PRN, respectively.
The Company acquired all of the common stock of BALZ in exchange for 300,000
shares of common stock of the Company which were valued at $1,500,000 based on
the offering price of the public offering.
Page F-9
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
NOTE B - REORGANIZATION, PUBLIC STOCK OFFERING AND ACQUISITIONS
(CONTINUED)
The purchase price of PRN consisted of $1,620,000 payable in cash and the
exchange of 108,000 shares of common stock of the Company which were valued at
$540,000 based on the offering price of the public offering. Furthermore, prior
to the acquisition, PRN distributed 100% of its net book value to its former
stockholders; this book value was approximately $392,000.
The acquisitions of BALZ and PRN have been accounted for using the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the assets purchased and the liabilities assumed based upon their fair values at
date of acquisition. The excess of the purchase price over the fair value of the
net assets acquired was $3,295,000 and has been recorded as goodwill, which is
being amortized on a straight-line basis over 20 years. The amount of goodwill
amortization was $20,000 for the year ended June 30, 1997.
The purchase price was allocated as follows:
BALZ PRN
---- -----
Working capital, other than cash $516,000 $268,000
Property and equipment 80,000 71,000
Other assets - 38,000
Goodwill 1,135,000 2,160,000
Other liabilities (315,000) (479,000)
--------- ---------
Purchase price, net of cash received $1,416,000 $2,058,000
---------- ----------
---------- ----------
The operating results of these acquired entities have been included in the
consolidated statement of operations from the date of acquisition . On the basis
of a pro forma consolidation of the results of operations as if the acquisitions
had taken place at the beginning of fiscal year 1996, consolidated net revenues
would have been $41.3 million for fiscal 1997 and $38.1 million for fiscal 1996.
Consolidated pro forma net income would have been $241,000 and $658,000 in
fiscal 1997 and 1996, respectively, and pro forma income per share would have
been $.06 and $.19 for fiscal 1997 and 1996, respectively. Such pro forma
amounts are not necessarily indicative of what the actual consolidated results
of operations might have been had the acquisitions been effective at the
beginning of fiscal 1996.
Page F-10
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
NOTE C - FINANCIAL INSTRUMENTS
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents, residents' funds, accounts
receivable, estimated third-party payor settlements - Medicaid and note
receivable-related party.
CASH AND CASH EQUIVALENTS AND RESIDENTS' FUNDS
The Company places its cash deposits with high credit-quality institutions and
such deposits may, at times, exceed federal depository insurance limits.
However, the Company has not experienced any losses in this area and management
believes its cash deposits are not subject to significant credit risk.
ACCOUNTS RECEIVABLE
The Company grants credit without collateral to its patients, all of whom are
residents of local communities in the State of Connecticut in which the
Company's facilities are located, and most of whom are insured under
third-party payor agreements. Management provides ongoing credit evaluations
of its residents and has provided for potential credit losses through direct
write-offs and such write-offs have been within management's expectations.
Industry experience indicates that, after such direct write-offs have been
made, potential credit losses are considered minimal, therefore only a
negligible allowance for doubtful accounts is considered necessary by
management.
The mix of receivables from patients, third-party payors and others as of June
30, 1997 and 1996 is as follows:
1997 1996
Medicare and Medicaid 80% 89%
Private insurance and other nongovernment agencies 10 9
Other 10 2
--- -----
100% 100%
ESTIMATED THIRD-PARTY PAYOR SETTLEMENTS - MEDICAID
This amount represents a government obligation, and as such, management believes
it represents negligible credit risk.
NOTE RECEIVABLE-RELATED PARTY
This amount is controlled by an officer and director of the Company and,
accordingly, management believes it represents negligible credit risk.
Page F-11
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
NOTE C - FINANCIAL INSTRUMENTS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, FAIR VALUE OF
FINANCIAL INSTRUMENTS, requires disclosure of the fair value of financial
instruments for which the determination of fair value is practicable. SFAS No.
107 defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The following table sets forth the carrying amounts and estimated fair values of
financial instruments of the Company for which there is a difference between the
amounts.
Financial liabilities:
CARRYING FAIR
VALUE VALUE
------ --------
Obligations under capital leases $95,000 $127,000
The following methods and assumptions were used to estimate the fair value of
the above financial instrument:
OBLIGATIONS UNDER CAPITAL LEASES:
The fair value is estimated by discounting the expected cash flows of lease
obligations using the Company's current borrowing rate.
The carrying amounts of the Company's other financial instruments approximate
their fair values as outlined below:
CASH AND CASH EQUIVALENTS, RESIDENTS' FUNDS, ACCOUNTS RECEIVABLE AND
ACCOUNTS AND ACCRUED EXPENSES PAYABLE:
The carrying amounts approximate their fair values because of the short
maturity of those instruments.
NOTES PAYABLE:
The carrying amount approximates fair value because the interest rates on
the notes approximate the Company's current borrowing rate.
Management has determined that it is not practicable to estimate the fair value
of the note receivable - related party due to the lack of marketability of this
financial instrument.
The Company's financial instruments are held for other than trading purposes.
Page F-12
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
NOTE D - THIRD-PARTY REVENUE ADJUSTMENTS AND SETTLEMENTS
The Company has recorded a reduction in patient service revenue of $45,000
during the year ended June 30, 1997 in connection with estimated
Medicare/Medicaid settlements. Such amounts represent management's best
estimates of the amounts expected to be realized 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 realize could differ materially in the near term.
NOTE E - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
June 30, June 30,
1997 1996
-------------------------
Equipment $529,000 $231,000
Leasehold improvements 407,000 263,000
-------- --------
936,000 494,000
Less accumulated depreciation and amortization 122,000 32,000
-------- --------
$814,000 $462,000
-------- --------
-------- --------
Depreciation and amortization expense totaled $90,000 and $32,000 for the years
ended June 30, 1997 and 1996, respectively.
NOTE F - NOTE RECEIVABLE--RELATED PARTY
The note receivable is due from an entity in which an officer and director of
the Company has a controlling ownership interest. The Company has been granted a
security interest in real property to collateralize the note. The obligation
arose out of services performed, advances and payment of certain expenses on
behalf of this entity and bears interest at 8%, per annum. In May 1997, a
balance of $266,000 due from the Company to the officer and director was offset
against this note receivable and a payment plan of $10,000 per month was
established. As a result, $120,000 of this note is classified as a current
asset in the accompanying consolidated balance sheet.
Page F-13
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
NOTE G - NOTES PAYABLE
Notes payable consist of the following:
June 30, June 30,
1997 1996
10% note payable to a medical supplies vendor $ - $313,000
9.75% note payable to a noninstitutional lender - 852,000
12% note payable to Beverly - 702,000
15% demand note to unaffiliated lender - 350,000
Demand note payable, noninterest bearing 5,000 50,000
6.5% equipment note payable to bank, due in 2001
with monthly installments of approximately $1,000 56,000 -
-------- -----------
61,000 2,267,000
Less: current portion 17,000 -
-------- -----------
$44,000 $2,267,000
-------- -----------
-------- -----------
NOTE H - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30, June 30,
1997 1996
Accounts payable $5,481,000 $3,566,000
Accrued payroll and payroll taxes 1,474,000 1,466,000
Other accrued expenses 782,000 536,000
---------- ----------
$7,737,000 $5,568,000
---------- ----------
---------- ----------
NOTE I - LEASE COMMITMENTS
CAPITAL LEASES
The following is an analysis of leased property under capital leases by major
class at June 30, 1997:
Equipment $147,000
Less: accumulated amortization 44,000
--------
$103,000
--------
--------
Amortization expense relative to leased property under capital leases totaled
$29,000 and $14,000 for the years ended June 30, 1997 and 1996 respectively, and
is included in depreciation and amortization expense disclosed in Note E.
Page F-14
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
NOTE I - LEASE COMMITMENTS (CONTINUED)
CAPITAL LEASES (CONTINUED)
The following is a schedule by years of future minimum lease payments under
capital leases, together with the present value of the net minimum lease
payments:
Year ending June 30:
1998 $ 46,000
1999 39,000
2000 32,000
2001 3,000
--------
Total minimum lease payments 120,000
Less: amount representing interest 25,000
--------
$ 95,000
--------
--------
RELATED PARTY OPERATING LEASES
The Company leases its nursing homes facilities (including certain equipment)
under an operating lease with a partnership related through common ownership.
The Company is responsible for property taxes, maintenance, insurance, etc.
under the lease. The lease agreement, as amended, commenced on July 1, 1995 and
is for a ten-year period, with four five-year renewal options at specified
rents. In addition, the Company leases office space from a corporation related
through common ownership under an operating lease which expires June 30, 1998.
Further, the Company leases office and warehouse space from a limited liability
company related through common ownership under an operating lease which expires
January 31, 2002.
Future minimum lease payments required under these related party lease
obligations are as follows:
Year ending June 30:
1998 $ 2,579,000
1999 2,562,000
2000 2,562,000
2001 2,562,000
2002 2,541,000
Thereafter 7,560,000
---------
$20,366,000
-----------
-----------
Rent expense charged to operations under these related party operating leases
aggregated $2,488,000 and $2,481,000 for the years ended June 30, 1997 and 1996,
respectively.
Page F-15
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
NOTE I - LEASE COMMITMENTS (CONTINUED)
RELATED PARTY OPERATING LEASES (CONTINUED)
The Company has deposited with the related partnership, in connection with the
nursing home facilities lease, a non-interest bearing security deposit of
approximately $2.3 million as of June 30, 1997 and 1996. Such security deposit
is comprised of a payment of approximately $1.3 million made by the Company on
the related partnership's behalf and payments of $1 million representing excess
rent which was paid to the related partnership prior to the retroactive
reduction of periodic rent payments.
Deferred rent payable represents the excess of rent expense determined on a
straight-line basis over amounts paid to date pursuant to the lease with the
related partnership.
OTHER OPERATING LEASES
The Company's PRN subsidiary, which was purchased on May 15, 1997, has other
operating leases which expire in various years through 2001. Rent expense
charged to operations under such leases totaled approximately $9,000 for the
period ended June 30, 1997. Future minimum lease payments required under these
other operating leases are as follows:
Year ending June 30:
1998 $55,000
1999 55,000
2000 39,000
2001 3,000
--------
$152,000
--------
--------
NOTE J - STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of preferred stock, $.01 per
value, with such rights, preferences and designations and to be issued in such
series as determined by the Board of Directors. As of June 30, 1997, the Company
has issued no preferred stock.
RESCISSION OF PRIVATE PLACEMENT
In November 1996, the Company completed a Private Placement of 500,000 shares of
common stock at $.50 per share together with warrants to acquire an additional
500,000 shares of common stock at $6.00 per share, and realized net proceeds of
$215,000 therefrom.
Page F-16
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
NOTE J - STOCKHOLDERS' EQUITY (CONTINUED)
RESCISSION OF PRIVATE PLACEMENT (CONTINUED)
In May 1997, at the request of NASDAQ as a condition for the approval of the
Company's listing, the transaction was rescinded. The purchasers in the Private
Placement were not otherwise obligated to sell back their securities to the
Company, but nonetheless agreed to do so. The rescinding purchasers did not
receive consideration for their agreement to rescind, other than as described
herein. The Company purchased the above-noted shares and warrants for $250,000.
The Company has recorded the costs incurred in connection with the Private
Placement as an issuance cost associated with the public offering, but has not
reflected the issuance and repurchase of the 500,000 shares of common stock in
the accompanying consolidated statement of changes in stockholders' equity since
the transaction is deemed to have been undone'.
WARRANTS
In connection with the public offering, the Company has issued warrants to
purchase 1,940,625 shares of Company's common stock at $6 per share, subject to
adjustment in certain circumstances, which may be exercised at any time after
May 14, 1998 through May 13, 2003. The warrants are subject to redemption by the
Company at any time after May 14, 1998 at a price of $.05 per warrant provided
that the closing price of the Company's common stock has equaled or exceeded $10
per share for a period of twenty consecutive trading days.
STOCK OPTION PLAN
The Company has reserved 450,000 shares of its common stock for issuance
pursuant to stock options which may be granted pursuant to the Company's 1997
Stock Option Plan. The Plan provides for grants to employees, consultants and
directors of the Company. As of June 30, 1997, the Company has granted no stock
options.
Subject to the provisions of the Plan, the Board has the authority to determine
the individuals to whom the stock options are to be granted, the number of
shares to be covered by each option, the exercise price, the type of option, the
option period, the restrictions, if any, on the exercise of the option, the
terms for the payment of the option price and other terms and conditions.
NOTE K - MANAGEMENT FEE
The Company manages two nursing homes. One of the homes is owned by an entity in
which an officer and director of the Company has a controlling interest (see
Note F); revenues earned in connection with this agreement were $72,000 in each
of the years ended June 30, 1997 and 1996.
Page F-17
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
NOTE K - MANAGEMENT FEE (CONTINUED)
The second home is an unrelated entity whose contract extends through June 30,
1998 and generates an annual management fee of approximately $207,000. The
Company subcontracts the management of this facility at an annual cost of
approximately $188,000.
NOTE L - INCOME TAXES
The components of the provision for (benefit from) income taxes for the year
ended June 30, 1997 are as follows:
Current:
Federal $ (11,000)
State 42,000
----------
31,000
----------
Deferred:
Federal (97,000)
State -
----------
(97,000)
----------
$ (66,000)
----------
----------
Certain of the entities included in the consolidated financial statements were
separate taxpayers for tax purposes for the first ten months of the year. The
income tax expense for all prior periods was recorded on an entity by entity
basis as of May 14, 1997. Effective May 15, 1997, the entities became members
of a consolidated group for tax purposes.
The Company has recorded a valuation allowance of $459,000 at June 30, 1997 to
reflect the estimated amount of deferred tax assets. A valuation allowance is
required if it is more likely than not that some or all of the deferred tax
assets will not be realized in future years.
The significant components of the deferred tax provision for 1997 are as
follows:
Bad debt reserve $ (80,000)
Property and equipment (14,000)
Organizational costs (24,000)
Deferred rent (172,000)
Accrued expenses (266,000)
Valuation allowance 459,000
----------
$ (97,000)
----------
----------
The components of the net deferred tax asset and liability as of June 30, 1997
were as follows:
Deferred tax assets (liabilities)
Bad debt reserve $ 80,000
Property and equipment 14,000
Organizational costs 24,000
Deferred rent 172,000
Accrued expenses 266,000
Deferred revenue (62,000)
----------
Gross deferred tax asset 494,000
Valuation allowance (459,000)
----------
Net deferred tax asset $ 35,000
----------
----------
Page F-18
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
The net change in the valuation allowance for deferred tax assets was an
increase of $459,000.
The principal reasons for the difference between the statutory federal income
tax rate and the effective rate are as follows:
Statutory federal income tax rate (34.0%)
State taxes, net of federal benefits 8.8
Goodwill amortization 2.2
Purchase accounting adjustments and
change in tax status 3.6
------
(19.4%)
------
------
NOTE M - RISKS AND UNCERTAINTIES
LABOR CONCENTRATION/PENSION CONTRIBUTION
As of June 30, 1997, approximately 38% of the Company's employees were covered
by collective bargaining agreements with New England Health Care Employees
Union, District 1199/SEIU, AFL-CIO ("Union") which expire in October, 1998.
These employees participate in Union pension plans to which the Company
contributes an amount stipulated in each collective bargaining agreement. For
the year ended June 30, 1997 and 1996, contributions were approximately $572,000
and $397,000, respectively.
PATIENT SERVICE REVENUE
Approximately 86% and 89% of net patient service revenue was derived under
federal and state third-party reimbursement programs in 1997 and 1996,
respectively. These revenues are based, in part, on cost reimbursement
principles and are subject to audit and retroactive adjustment by the respective
third-party fiscal intermediaries. The general trend in the nursing home
industry is lower private pay utilization due to liberal asset transfer rules
and the degree of financial planning that takes place by the general public. The
Company's ability to maintain the current level of private pay utilization and
thereby reduce reliance on third-party reimbursement is uncertain due to the
economic and regulatory environment in which all Connecticut nursing homes
operate.
MALPRACTICE INSURANCE
The Company maintains malpractice insurance coverage on an occurrence basis. It
is the intention of the Company to maintain such coverage on the occurrence
basis in ensuing years. As of June 30, 1997, no known malpractice claims have
been asserted against the Company which, either individually or in the
aggregate, are in excess of insurance coverage.
Page F-19
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
NOTE N - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company has employment agreements with four of its executive officers which
became effective upon consummation of the public offering. The agreements
provide that such individuals shall devote substantially all of their working
time and attention to the business of the Company and contain certain
non-compete provisions.
The agreements with the CEO and President have an initial term of five years
and are automatically renewable for successive one-year periods unless either
the Company or the employee elects not to renew his employment. The
agreements with presidents of the acquired subsidiaries have an initial term
of three years and are automatically renewable for successive one-year
periods unless either the Company or the employee elects not to renew her
employment.
The CEO's agreement provides for a $250,000 annual salary, with cost of living
increases and a bonus equal to 1% of the Company's net income before taxes. The
President's employment agreement is identical except that the salary is $175,000
annually.
The agreement with the president of BALZ provides for a base annual salary of
$100,000, subject to five percent annual increases, plus a bonus of 3.75% of
BALZ's net profits before taxes. The agreement with the president of PRN
provides for an annual salary of $160,000, subject to five percent annual
increases.
CONTINGENCIES
The Company is involved in various 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 consolidated financial statements.
NOTE O - SUBSEQUENT EVENTS
ACQUISITION OF NURSING FACILITIES
On July 1, 1997, Lexington Highgreen Holding, Inc. (a new wholly-owned
subsidiary of Lexington Healthcare Group, Inc.) purchased substantially all of
the assets of two skilled nursing facilities, Greenwood Health Center and
Highland Acres Extend-a-Care Center from Beverly. These facilities are located
in Connecticut; Beverly had operated 240 and 75 licensed beds, respectively; the
Company intends to operate a total of 225 beds.
Page F-20
<PAGE>
LEXINGTON HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
NOTE O - SUBSEQUENT EVENTS (CONTINUED)
ACQUISITION OF NURSING FACILITIES (CONTINUED)
All real estate, property, fixed and operating assets of the nursing homes were
acquired (with the exception of certain proprietary computer hardware and
systems) for a purchase price of approximately $6.8 million which was financed
by a mortgage on the real estate from Nationwide Health Properties, Inc., the
previous lessor to Beverly.
Pursuant to the agreements, Lexington has also acquired certain accounts
receivable from Beverly and Beverly has agreed to reimburse Lexington for
certain costs and charges in connection with the operation of the facilities
during the next five years. In addition, the Company acquired the right to sell
the license to the unused beds.
FORMATION OF NEW BUSINESSES
The Company has signed letters of intent to form new joint venture operations
with unrelated companies in the pharmacy, respiratory, oxygen and rehab therapy
business. Services will be provided to patients in nursing facilities and in
their homes.
ACQUISITION OF MEDICAL SUPPLY COMPANY
The Company has signed a letter of intent to acquire a 49% ownership position in
a regional medical supply business in exchange for 100,000 shares of the
Company's common stock, subject to various terms and conditions yet to be
finalized. The Company has the option to acquire the remaining 51% of the
business within twelve months.
BANK LINE OF CREDIT
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. Through September 24, 1997 this line of credit has not been
accessed.
Page F-21
<PAGE>
EXHIBIT 11
LEXINGTON HEALTHCARE GROUP, INC.
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended June 30,
--------------------------
1997 1996
Net income (loss) $ (275,000) $ 461,000
------------ -----------
Net income (loss) for primary income per
common share $ (275,000) $ 461,000
------------ -----------
------------ -----------
Weighted average number of common shares
outstanding during the year 2,724,042 2,592,000
------------ -----------
Weighted average number of shares used in
calculation of primary income per share 2,724,042 2,592,000
------------ -----------
------------ -----------
Primary income (loss) per common share $ (0.10) $ 0.18
------------ -----------
------------ -----------
Income per common share is computed using the weighted average number of shares
deemed outstanding as adjusted for the exchange of shares between entities under
common control. Weighted average number of shares outstanding includes common
stock equivalents when they have a dilutive effect. There are no material
differences between primary and fully-diluted income per common share.
<PAGE>
EXHIBIT 21
LEXINGTON HEALTHCARE GROUP, INC.
SCHEDULE OF SUBSIDIARIES
PARENT (Registrant)
- -------------------
Lexington Healthcare Group, Inc.
Wholly-owned subsidiaries
- -------------------------
Balz Medical Services, Inc.
LEV Rehab Services, Inc.
Lexington Highgreen Holding, Inc
Professional Relief Nurses, Inc.